Business context and reporting period
DICK’S Sporting Goods, Inc. is an omni-channel sporting goods retailer, including Golf Galaxy, Field & Stream and Dick’s Team Sports HQ. This 10-Q covers the 13 and 26 weeks ended July 29, 2017. Although the request metadata says 2016 Q2, the filing itself reports 2017 Q2 results.
Financial performance
| Metric | 13 weeks ended July 29, 2017 | 13 weeks ended July 30, 2016 | 26 weeks ended July 29, 2017 | 26 weeks ended July 30, 2016 |
|---|---|---|---|---|
| Net sales | $2,156.9 million | $1,967.9 million | $3,982.2 million | $3,628.2 million |
| Gross profit / margin | $637.2 million / 29.54% | $597.4 million / 30.36% | $1,179.1 million / 29.61% | $1,093.2 million / 30.13% |
| Operating income / margin | $159.2 million / 7.38% | $147.2 million / 7.48% | $249.3 million / 6.26% | $237.9 million / 6.56% |
| Net income | $112.4 million | $91.4 million | $170.6 million | $148.3 million |
| Diluted EPS | $1.03 | $0.82 | $1.55 | $1.32 |
- Quarterly sales rose 9.6%; comparable sales increased 0.1%. Year-to-date sales rose 9.8%, with comparable sales up 1.1%. Store growth accounted for most of the sales increase.
- Quarter eCommerce sales grew approximately 19% and represented 9.2% of sales, versus 8.5% a year earlier. Year-to-date eCommerce sales grew approximately 15%.
- Quarter gross margin declined 82 basis points; year-to-date gross margin declined 52 basis points. Management cited promotional pressure, occupancy deleverage, and higher shipping and fulfillment costs.
- For the 26 weeks, operating cash flow was $244.5 million, versus $230.6 million; capital expenditures were $235.7 million, versus $208.4 million. Operating cash flow less capital expenditures was approximately $8.8 million, compared with $22.2 million.
- Cash and equivalents were $131.6 million at July 29, 2017. Revolver borrowings were $186.8 million, with $790.4 million of remaining borrowing capacity and $22.8 million of letters of credit outstanding. Total current liabilities were $1,509.5 million and current assets were $2,277.3 million.
- Inventory was $1,917.9 million, up from $1,638.6 million at January 28, 2017. The company reported $4.3 million of other long-term debt and leasing obligations, in addition to revolver borrowings.
Changes, outlook and other material items
- Quarter net income included $12.0 million after tax, or $0.11 per diluted share, from a contract termination payment, partly offset by $4.4 million after-tax restructuring charges, or $0.04 per diluted share. The contract payment was included in other income.
- Management expected heightened promotional activity and declining hunting-category sales to continue through at least the rest of fiscal 2017, with promotions expected to pressure gross margin. No specific earnings or sales guidance was provided in the filing.
- Fiscal 2017 capital expenditure expectations were approximately $400 million net of landlord allowances and $515 million gross. The company planned approximately 49 new store sites, excluding seven former Golfsmith locations, and completion of its fifth distribution facility.
- Management said cash from operations and credit-facility availability were expected to cover planned fiscal 2017 capital spending, repurchases and dividends; additional funding might be needed for acquisitions or spending beyond current plans.
- On August 9, 2017, the revolving credit facility was expanded from $1.0 billion to $1.25 billion, extended to August 2022 and given a conditional $350 million accordion. The facility is secured and includes a minimum availability covenant.
- In the 26 weeks, the company repurchased approximately 3.9 million shares for $166.2 million and paid $37.5 million in dividends. A $0.17-per-share quarterly dividend was declared after quarter-end.
- On August 18, the company agreed to acquire an aircraft from an entity owned by its CEO and chairman: $62.8 million reimbursement plus a $4.0 million final payment. The purchase was financed with a fixed-rate 3.41% loan, payable through December 2024 with a $29.3 million balloon payment. This is a related-party transaction.
- Key risks cited include discretionary consumer spending, intense retail competition and promotions, eCommerce execution and system disruption, changing demand, supply-chain and vendor issues, wage and product-cost pressures, weather and seasonality, and dependence on senior leadership. Management reported no material change in market-risk exposures, effective disclosure controls, and no legal proceeding expected to materially harm financial position or results.
Important facts for investors to verify
- How comparable sales, traffic and transactions develop: quarter comparable sales were only 0.1%, with transactions down approximately 2.0% despite higher sales per transaction.
- Whether promotional competition and fulfillment costs continue to reduce gross margin, and how much reported earnings depended on the one-time contract termination payment and lower tax rate.
- Inventory growth, seasonal borrowing needs and the company’s ability to fund planned capital expenditures, dividends and repurchases while maintaining adequate liquidity.
- Terms, governance review and total cost of the related-party aircraft acquisition and its financing.
- The impact of planned store expansion and distribution-center investment, and management’s continued assessment of the revenue-recognition standard and its expected effects on returns, loyalty programs and gift-card breakage.