DICK's SPORTING GOODS, INC. quarterly report, Q2 FY2017

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

Metric13 weeks ended July 29, 201713 weeks ended July 30, 201626 weeks ended July 29, 201726 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

  1. 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.
  2. 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.
  3. Inventory growth, seasonal borrowing needs and the company’s ability to fund planned capital expenditures, dividends and repurchases while maintaining adequate liquidity.
  4. Terms, governance review and total cost of the related-party aircraft acquisition and its financing.
  5. 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.