DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 2, 2019, with comparisons to the periods ended November 3, 2018. The request labels this “2018 Q3,” but the filing is for the third quarter of fiscal 2019.
Business: Omnichannel sporting-goods retailer operating Dick’s Sporting Goods, Golf Galaxy and Field & Stream stores, plus the GameChanger app and eCommerce business. All figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions for readability.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2019 | 13 weeks ended Nov. 3, 2018 | 39 weeks ended Nov. 2, 2019 | 39 weeks ended Nov. 3, 2018 |
|---|---|---|---|---|
| Net sales | $1,962.2 million | $1,857.3 million | $6,142.1 million | $5,944.5 million |
| Gross profit | $580.6 million | $523.6 million | $1,821.5 million | $1,743.2 million |
| Income from operations | $45.6 million | $52.9 million | $276.7 million | $302.7 million |
| Net income | $57.6 million | $37.8 million | $227.6 million | $217.3 million |
| Diluted EPS | $0.66 | $0.39 | $2.53 | $2.18 |
| Gross margin | 29.59% | 28.19% | 29.66% | 29.32% |
| Operating margin | 2.33% | 2.85% | 4.50% | 5.09% |
| Net margin | 2.93% | 2.04% | 3.71% | 3.66% |
- Sales and comparable sales: Quarterly sales rose 5.6%; same-store sales increased 6.0%, reflecting transactions up 3.3% and average sales per transaction up 2.7%. Year-to-date sales rose 3.3%, and same-store sales increased 3.1%.
- Category and digital trends: Quarterly same-store sales growth was broad-based across hardlines, apparel and footwear, while hunting continued to decline. eCommerce sales grew approximately 13% in the quarter and 16% year to date; eCommerce was approximately 13% of sales in both current periods.
- Margins and expenses: Quarterly gross margin improved 140 basis points, helped by occupancy leverage and improved merchandise margins, partly offset by eCommerce fulfillment costs. SG&A rose 13.4% in the quarter and increased 186 basis points as a share of sales, including specified unusual charges and higher incentive compensation. Operating income declined despite higher sales and gross profit.
- Cash flow: Operating cash flow was a use of $212.8 million for the 39 weeks, versus a source of $160.5 million a year earlier. The company attributed the deterioration primarily to inventory and accounts-payable changes associated with strategic inventory investments. Investing cash outflow was $122.2 million; financing cash inflow was $309.0 million. Cash decreased $26.0 million to $87.6 million.
Balance sheet, debt and liquidity
- At November 2, 2019, cash was $87.6 million, inventory was $2,573.3 million and total assets were $7,207.0 million.
- Revolving credit borrowings were $719.3 million, compared with no balance at February 2, 2019 and $382.3 million a year earlier. Remaining availability under the facility was $864.6 million, after letters of credit. The facility has $1.6 billion of capacity and matures June 28, 2024.
- Operating lease liabilities totaled $2,927.8 million, including $417.9 million current and $2,509.9 million long-term. The company adopted the new lease standard in fiscal 2019; this materially increased reported assets and liabilities and makes balance-sheet comparisons with periods before adoption less comparable.
- Management stated that operating cash flows and credit-facility availability should be sufficient for capital requirements over the next 12 months, including inventory, capital expenditures, repurchases and dividends.
Material changes, outlook and risks
- Unusual items: The sale of Blue Sombrero and Affinity Sports generated a $33.8 million pretax gain ($25.0 million after tax, or $0.29 per diluted share in the quarter). Quarterly results also included an $8.9 million pretax charge for exiting eight Field & Stream stores and a $7.6 million noncash aircraft impairment charge. Year-to-date SG&A included a $15.3 million aircraft impairment, the store-exit charge, a $9.1 million deferred-compensation-related expense and a favorable $6.4 million litigation settlement.
- Portfolio and strategy: The company sold the two technology subsidiaries for $45.0 million, or $40.4 million net of cash sold, and entered a strategic partnership with buyer Stack Sports. It exited eight Field & Stream locations, subleasing them to Sportsman’s Warehouse, and removed hunting merchandise from approximately 135 Dick’s stores as part of a strategic review of the hunt business.
- Capital allocation and spending: Fiscal 2019 capital expenditures were expected to be approximately $230 million gross and $200 million net of tenant allowances. The company repurchased approximately 10.3 million shares for $366.1 million year to date; $67.3 million remained under the 2016 repurchase authorization, and a further $1 billion authorization had been approved in June 2019. A quarterly dividend of $0.275 per share was declared for payment December 31, 2019.
- Management priorities: Continued investment in stores, eCommerce fulfillment, digital and information technology capabilities, customer experience and key growth categories, alongside efforts to improve productivity and reduce non-essential costs. No specific full-year earnings or sales guidance is provided in the supplied filing text.
- Risks: Key disclosed exposures include discretionary consumer demand, competitive promotions, eCommerce and information-system disruptions, vendor direct-to-consumer competition, continued weakness in hunting, tariffs and trade tensions with China, supply-chain and product-cost pressures, and the execution and cost of strategic investments. The company cautions that interim results are not necessarily indicative of full-year results and that the business is seasonal.
- Other disclosures: Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The company did not expect pending ordinary-course legal proceedings to have a material adverse effect; it reported no material change in market-risk exposures.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied request says 2018 Q3, while the filing reports the quarter ended November 2, 2019.
- Assess how much of quarterly earnings and EPS growth depended on the subsidiary-sale gain, and distinguish that gain from recurring operating performance.
- Monitor inventory levels, working-capital needs, operating cash flow and seasonal borrowing under the revolving facility.
- Evaluate the sustainability of same-store sales growth and gross-margin improvement against higher SG&A, eCommerce fulfillment costs and ongoing hunting-category weakness.
- Review lease obligations, tariff and sourcing exposure, and the outcomes of the hunt-business review and planned strategic investments.