DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 29, 2011, compared with the periods ended October 30, 2010. Although the request metadata says 2010 Q3, the filing is for fiscal 2011 Q3. DICK’S operated 474 DICK’S stores and 81 Golf Galaxy stores, as well as e-commerce businesses. Results are unaudited; the company notes that interim results are seasonal and not necessarily indicative of the full year.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Net sales | $1,179.7 million | $1,079.0 million | $3,600.2 million | $3,352.6 million |
| Gross profit / margin | $350.6 million / 29.72% | $307.1 million / 28.46% | $1,082.1 million / 30.06% | $969.4 million / 28.92% |
| Operating income / margin | $71.6 million / 6.07% | $28.2 million / 2.61% | $247.7 million / 6.88% | $163.3 million / 4.87% |
| Net income | $41.5 million | $16.9 million | $152.8 million | $94.6 million |
| Diluted EPS | $0.33 | $0.14 | $1.22 | $0.78 |
| Operating cash flow | Not presented by quarter | $36.2 million | $(17.5) million |
Q3 net sales increased 9.3%; comparable-store sales rose 4.1% (DICK’S 3.8%, Golf Galaxy 2.4%, e-commerce 16.8%). For the 39-week period, sales rose 7.6% and comparable-store sales rose 2.9%. YTD diluted EPS includes an $8.7 million after-tax gain on sale of an investment and a $1.3 million after-tax benefit from a litigation accrual reversal.
At October 29, 2011, cash and cash equivalents were $483.4 million, current assets $1,902.8 million, and current liabilities $1,016.5 million. Inventory was $1,243.2 million, up from $896.9 million at January 29, 2011, reflecting seasonal purchasing. Total debt and leasing obligations were approximately $140.1 million, including $1.0 million current; there were no borrowings under the revolving credit agreement. Remaining borrowing capacity after letters of credit was $419.9 million. The credit agreement expires July 27, 2012. Total assets were $2,974.6 million and stockholders’ equity was $1,562.3 million.
YTD investing cash outflow was $142.9 million, including $148.0 million of capital expenditures. Cash declined $62.7 million to $483.4 million. Management cited higher seasonal inventory purchases as a use of operating cash; it also expects significant operating cash generation in the holiday quarter.
Material changes and unusual items
- Gross margin increased 126 basis points in Q3 and 114 basis points year to date, primarily from improved merchandise margins, less clearance activity, sales mix, and occupancy-cost leverage.
- Q3 SG&A was nearly flat in dollars but declined as a share of sales. The prior-year quarter included $16.4 million of expenses related to closing 12 Golf Galaxy stores; current-quarter results included a $2.1 million lower-than-estimated wage-settlement payment, contributing to a $1.3 million after-tax benefit.
- The company recognized a $13.9 million pretax gain from selling its GSI Commerce investment following eBay’s acquisition of GSI.
- Operating cash flow improved to $36.2 million from a use of $17.5 million, while capital expenditures increased to $148.0 million from $117.5 million.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said it expected fiscal 2011 capital expenditures, net of construction allowances and sale-leaseback proceeds, of approximately $197 million. The company completed its plan to open 36 DICK’S stores in fiscal 2011 and planned to begin construction of a 600,000-square-foot Arizona distribution center in December 2011, with an expected opening in 2013. Management believed operating cash flow and available credit would meet current capital needs over the next 12 months.
The board declared a first annual cash dividend of $0.50 per share, payable December 28, 2011 to holders of record December 7. The company intends to begin regular quarterly dividends in fiscal 2012, subject to future board approval, financial performance, cash flows, requirements, and applicable credit-agreement limits. A purchase option for the corporate headquarters becomes exercisable in March 2012; management had not stated that it would exercise it.
Risks highlighted include weak consumer spending and economic conditions, competition, sales and seasonal volatility, inventory and vendor/supply-chain issues, store expansion and real-estate availability, cybersecurity and systems disruption, product liability and regulation, regional concentration, and legal claims. The Barrus wage-and-hour settlement became effective and was funded in October 2011. Other ordinary-course claims remained pending; management did not expect them to materially adversely affect financial position, liquidity, or results. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the earnings improvement reflects sustainable merchandise-margin and expense performance versus the prior-year store-closure costs, litigation accrual reversal, and YTD investment-sale gain.
- Whether holiday sales and inventory conversion produce the operating cash flow management expects, given the seasonal inventory build and higher capital spending.
- Progress, cost, and funding of the Arizona distribution center and the company’s store-opening and remodeling plans.
- Revolving-credit availability and compliance, especially as the facility approaches its July 2012 expiration.
- Whether future quarterly dividends are declared and remain affordable under operating, investment, and financing needs.