DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended October 30, 2010, compared with periods ended October 31, 2009. Although the request metadata identifies “2009 Q3,” the filing itself is for fiscal 2010 Q3. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context and operating results
The company operated 437 DICK’S Sporting Goods stores and 79 Golf Galaxy stores at October 30, 2010, as well as e-commerce operations. The business is seasonal, with its largest sales and earnings typically in the fiscal fourth quarter.
| Metric | 13 weeks ended Oct. 30, 2010 | 13 weeks ended Oct. 31, 2009 | 39 weeks ended Oct. 30, 2010 | 39 weeks ended Oct. 31, 2009 |
|---|---|---|---|---|
| Net sales | $1,079.0 | $989.8 | $3,352.6 | $3,076.2 |
| Gross profit | $307.1 | $266.8 | $969.4 | $827.2 |
| Income from operations | $28.2 | $31.8 | $163.3 | $112.5 |
| Net income | $16.9 | $18.9 | $94.6 | $68.0 |
| Diluted EPS | $0.14 | $0.16 | $0.78 | $0.58 |
| Gross margin | 28.46% | 26.96% | 28.92% | 26.89% |
| Operating margin | 2.61% | 3.21% | 4.87% | 3.66% |
| Net margin | 1.56% | 1.90% | 2.82% | 2.21% |
Material changes and management commentary
- Quarterly sales grew 9.0%, driven by 5.1% consolidated comparable-store sales growth and new stores. Comparables included e-commerce in 2010 but not 2009; e-commerce grew 82.4% in the quarter. DICK’S store comps rose 3.8% and Golf Galaxy comps 2.4%.
- Quarterly gross margin expanded 150 basis points, reflecting improved merchandise margins, lower clearance inventory and fixed-occupancy cost leverage. Despite this, operating income and net income declined year over year: SG&A rose 18.3%, including costs of closing 12 underperforming Golf Galaxy stores.
- The closures generated $16.4 million of pretax expenses and approximately $9.8 million after tax, or $0.08 per diluted share. Management expects the closures to benefit future operating results and continues to see long-term potential in golf.
- For the 39-week period, sales increased 9.0%, comparable sales rose 6.2%, and net income increased to $94.6 million from $68.0 million. Improved gross margin and the absence of prior-year Chick’s merger and integration costs contributed to the improvement. Prior-year comparables were also affected by Chick’s inventory liquidation before store conversions.
- Year-to-date SG&A increased 14.6%, including store-closure costs and increased spending on advertising, technology, infrastructure and the relocated headquarters. Year-to-date interest expense rose to $10.5 million, including $8.0 million related to rent under the headquarters financing lease.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was negative $17.5 million, versus positive $95.9 million a year earlier. The company attributed the decline largely to inventory and accounts-payable cash-flow differences and higher income tax payments. It noted that pre-holiday inventory investment typically makes third-quarter operating cash flow negative, with inventory reductions usually generating cash in Q4.
- Investing cash outflow was $106.7 million, including $117.5 million of capital expenditures, partly offset by $10.7 million of sale-leaseback proceeds. Capital expenditures were primarily for stores, remodeling, information systems and administrative facilities.
- Financing activities provided $58.1 million, largely from bank overdrafts, stock-option exercises and related tax benefits. Cash decreased $66.2 million to $159.4 million during the period.
- No revolving-credit borrowings were outstanding at October 30, 2010; remaining borrowing capacity, net of letters of credit, was $416.1 million. The company reported compliance with its credit agreement. Balance-sheet other long-term debt and leasing obligations were $145.9 million, plus a $1.0 million current portion; this includes obligations beyond revolving borrowings.
- Current assets were $1,488.5 million and current liabilities were $941.5 million at October 30, 2010. Inventory was $1,162.2 million, up from $895.8 million at fiscal year-end.
Outlook, risks and contingencies
- Management expected cash flows from operations and available credit to meet capital needs through fiscal 2010. It forecast approximately $145 million of capital expenditures, net of landlord allowances and sale-leaseback proceeds; planned fiscal 2010 activity included 26 new DICK’S stores, two relocations, two new Golf Galaxy stores and 12 DICK’S remodels. These are filing-era expectations, not current guidance.
- The company cited consumer-spending and economic weakness, competition, store-site availability, supply-chain risks, seasonal cash needs, regional concentration, e-commerce and information-system risks, labor and regulatory matters, and reliance on key executives, among other forward-looking risks.
- Multiple wage-and-hour lawsuits were pending, including the Barrus matter and state class-action complaints. The company said it was vigorously defending the cases and believed they should not proceed as class actions. It stated that other routine claims were not expected to materially affect its financial position, liquidity or results, based on information then available.
- Management reported effective disclosure controls as of October 30, 2010 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended period: this filing is for Q3 fiscal 2010, not Q3 2009.
- Assess the comparability impact of adding e-commerce to the 2010 comparable-sales calculation.
- Track the realized costs and expected savings from the 12 Golf Galaxy closures, and the effects on margins.
- Review holiday-season inventory, operating cash generation and capital spending against the filing’s seasonal expectations and fiscal 2010 plans.
- Monitor credit availability and covenants, lease obligations, and developments in the wage-and-hour litigation.