DICK’S Sporting Goods, Inc. — Form 10-K Summary
Reporting period: The filing covers fiscal 2018, the 52 weeks ended February 2, 2019, compared with fiscal 2017, which included 53 weeks and ended February 3, 2018. The request metadata says “2017 Q4,” but that does not match the annual reporting period in the filing.
Business context
DICK’S is an omnichannel sporting-goods retailer operating DICK’S Sporting Goods, Golf Galaxy and Field & Stream stores, along with eCommerce and Dick’s Team Sports HQ. At year-end it operated 858 stores in 47 states. eCommerce represented approximately 15% of fiscal 2018 net sales; private brands represented approximately 14%.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net sales | $8.437 billion | $8.590 billion |
| Gross profit / margin | $2.438 billion / 28.9% | $2.489 billion / 29.0% |
| Operating income / margin | $444.7 million / 5.3% | $477.6 million / 5.6% |
| Net income | $319.9 million | $323.4 million |
| Diluted EPS | $3.24 | $3.01 |
| Operating cash flow | $712.8 million | $746.3 million |
| Capital expenditures | $198.2 million | $474.3 million |
- Consolidated same-store sales fell 3.2%; on a shifted-calendar, 52-week comparison they fell 3.1%, despite eCommerce sales growth of approximately 17%. Transactions declined about 4.3%, partly offset by a 1.2% increase in sales per transaction.
- Fiscal 2018 gross margin slipped 7 basis points. Higher merchandise margins, supported by fewer promotions and favorable mix, were offset by eCommerce fulfillment and freight costs and occupancy deleverage. SG&A rose 0.2% in dollars and increased 47 basis points as a share of sales.
- Cash and cash equivalents were $113.7 million; working capital was $617.8 million. There were no revolver borrowings at year-end and $1.234 billion of stated remaining borrowing capacity. The company also had $60.0 million of total debt, including the aircraft term loan and lease obligations.
- Inventory was $1.825 billion, up from $1.711 billion; inventory turnover was 3.19x in both years. Operating cash flow less capital expenditures was approximately $514.5 million in fiscal 2018.
- Fiscal 2018 dividends were $0.90 per share; the company repurchased 9.6 million shares for $323.4 million. Diluted weighted-average shares fell to 98.8 million from 107.6 million.
Changes and unusual items
- Sales declined 1.8%, reflecting the comparable-sales decrease and the extra week in fiscal 2017, which contributed $105.4 million of sales. Newer stores added $106.4 million in fiscal 2018.
- Net income declined slightly, while diluted EPS increased 7.6%, aided by a lower share count and a lower effective tax rate: 25.9% versus 35.5%. The tax-rate decline primarily reflected the Tax Cuts and Jobs Act.
- Fiscal 2017 included a $12.0 million contract termination payment and an $8.1 million sales-tax refund, as well as restructuring, loyalty-program transition, store-conversion and litigation-contingency costs. These items affect year-over-year comparability.
- Fiscal 2018 capital expenditures fell substantially following slower store expansion and completion of a distribution facility in fiscal 2017. The company opened 19 stores in fiscal 2018 versus 59 in fiscal 2017.
Outlook, management commentary and risks
- Management planned approximately $230 million of gross capital expenditures ($200 million net) for fiscal 2019; about seven new DICK’S stores and two Golf Galaxy stores; and relocations of three DICK’S stores and one Golf Galaxy store. No new Field & Stream stores were planned.
- Two fulfillment facilities were planned to open in the third quarter of fiscal 2019, with a goal of delivering most online orders within two business days by year-end. Management also planned to remove hunt merchandise from approximately 125 stores and reallocate space to locally relevant categories.
- The company believed operating cash flow and available revolver capacity would fund fiscal 2019 capital needs and planned dividends and repurchases. This is management’s expectation, not a guarantee. The filing provides no specific fiscal 2019 earnings or sales guidance.
- Key risks include intense competition and promotional pressure; weak discretionary spending; vendor direct-to-consumer expansion and supplier concentration (Nike was about 19% of merchandise purchases); execution and cost risks in eCommerce and fulfillment; inventory and markdown exposure; weather and seasonality; tariff and import-cost uncertainty; and cybersecurity, regulatory and litigation risks.
- Management said firearm-policy changes announced in 2018 contributed to an accelerated decline in the hunt business. Legal proceedings were described as ordinary-course matters not expected to materially adversely affect financial position or results.
- Operating lease commitments totaled $3.735 billion. Adoption of the new lease standard in fiscal 2019 was expected to add approximately $2.3 billion of lease assets and liabilities to the balance sheet, without significant income-statement impact.
- The CEO and relatives controlled a majority of combined voting power through the high-vote Class B shares. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the period being analyzed: this is a fiscal 2018 annual filing, not a fiscal 2017 fourth-quarter filing.
- Assess whether eCommerce growth and planned fulfillment investments can offset declining comparable sales, store traffic and pressure in hunt and other categories.
- Review the sustainability of margins and cash generation, including shipping, freight, occupancy, promotional activity and inventory levels.
- Evaluate the effects of share repurchases and the lower tax rate on EPS, and distinguish recurring performance from fiscal 2017 one-time items.
- Examine lease obligations and the balance-sheet effect of lease-standard adoption, alongside the company’s capital-return plans and revolver availability.