ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. These statements can be identified as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward-looking words such as
"believe", "anticipate", "expect", "estimate", "predict", "intend", "plan", "project", "goal", "will", "will be", "will continue", "will result", "could", "may", "might"
or any variations of such words or other words with similar meanings. Forward-looking statements include statements regarding, among other things, our expectations and growth strategies, including our plans to open new stores and relocate existing stores, develop our own eCommerce platform, and grow our private brand business; our efforts to increase profit margins and return on invested capital; the potential benefit and integration of strategic acquisitions; projections of our future profitability, results of operations, financial condition, growth, market opportunities, competition, capital expenditures, including continuing to invest in the improvement of our supply chain and corporate information technology infrastructure and beginning construction of our fifth distribution facility in fiscal 2016, and other expectations and targets for future periods; plans to return capital to stockholders through dividends and share repurchases; and outstanding borrowing in future periods.
The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results, and could cause actual results for fiscal
2016
and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by our management:
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▪
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The dependence of our business on consumer discretionary spending;
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▪
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Intense competition in the sporting goods industry and in retail;
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▪
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Our ability to predict or effectively react to changes in consumer demand or shopping patterns;
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▪
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Lack of available retail store sites on terms acceptable to us, rising real estate prices and other costs and risks relating to a brick and mortar retail store model;
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▪
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Omni-channel growth and the transition to our eCommerce platform producing the anticipated benefits within the expected time-frame or at all;
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▪
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Our pursuit of strategic investments or acquisitions, including the timing and costs of such investments and acquisitions and the integration of acquired businesses and / or companies being more difficult, time-consuming, or costly than expected;
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▪
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Unauthorized disclosure of sensitive or confidential customer information;
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▪
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Risks associated with our private brand offerings and new retail concept stores;
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▪
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Disruption of or other problems with the services provided by our current primary eCommerce services provider;
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▪
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Our ability to access adequate capital to operate and expand our business and to respond to changing business and economic conditions;
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▪
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Risks and costs relating to changing laws and regulations affecting our business, including consumer products, firearms and ammunition, data protection and privacy;
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▪
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Our relationships with our vendors or disruptions in our or our vendors' supply chains, which could be caused by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials or foreign political instability;
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▪
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Litigation risks for which we may not have sufficient insurance or other coverage;
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▪
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Product costs being adversely affected by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials, political instability or other reasons;
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▪
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Our ability to attract, train, engage and retain qualified leaders and associates and the loss of Mr. Edward Stack as our Chairman and Chief Executive Officer;
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▪
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Our ability to secure and protect our trademarks and other intellectual property and defend claims of intellectual property infringement;
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▪
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Disruption of or other problems with our information systems;
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▪
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Disruption at our distribution facilities;
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▪
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Wage increases, which could adversely affect our financial results;
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▪
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Performance of professional sports teams, professional team lockouts or strikes, retirement or scandal involving sports superstars;
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▪
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Weather-related disruptions and the seasonality of our business, as well as the current geographic concentration of Dick's Sporting Goods stores;
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▪
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We are controlled by our Chairman and Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders;
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▪
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Our current anti-takeover provisions, which could prevent or delay a change in control of the Company; and
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▪
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Our current intention to issue quarterly cash dividends, and our repurchase activity, if any, pursuant to our share repurchase program.
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The foregoing and additional risk factors are described in more detail in other reports or filings filed or furnished by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended
January 30, 2016
, filed on
March 25, 2016
. In addition, we operate in a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are made as of this date. We do not assume any obligation and do not intend to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise except as may be required by the securities laws.
OVERVIEW
The Company is a leading omni-channel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories through a blend of dedicated associates, in-store services and unique specialty shop-in-shops. The Company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores, Dick's Team Sports HQ as well as eCommerce websites at www.DICKS.com, www.golfgalaxy.com, www.fieldandstreamshop.com and www.caliastudio.com. When used in this Quarterly Report on Form 10-Q, unless the context otherwise requires or otherwise specifies, any reference to "year" is to the Company's fiscal year.
The primary factors that have historically influenced the Company's profitability and success have been the growth in its number of stores and selling square footage, the integration of eCommerce with its brick and mortar stores, positive consolidated same store sales, which include the Company's eCommerce business, and its strong gross profit margins. For example, in the last five years the Company has grown from
474
Dick's Sporting Goods stores as of
October 29, 2011
to
676
Dick's Sporting Goods stores as of
October 29, 2016
. Additionally, the Company's eCommerce sales penetration to total net sales has increased from 2.6% to
9.1%
for the year-to-date period ended
October 29, 2011
and
October 29, 2016
, respectively.
In recent years, the Company has innovated its eCommerce sites with enhancements in the customer experience, new releases of its mobile and tablet sites, and development of capabilities that integrate the Company's online presence with its brick and mortar stores, including ship-from-store; buy-online, pick-up in-store; return-to-store and multi-faceted marketing campaigns that are consistent across the stores and eCommerce websites. On average, approximately 80% of the Company's eCommerce sales are generated within brick and mortar store trade areas.
The Company's senior management focuses on certain key indicators to monitor the Company's performance including:
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▪
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Consolidated same store sales performance – Our management considers same store sales, which consists of both brick and mortar and eCommerce sales, to be an important indicator of our current performance. Same store sales results are important to leverage our costs, which include occupancy costs, store payroll and other store expenses. Same store sales also have a direct impact on our total net sales, cash and working capital. A store is included in the same store sales calculation during the same fiscal period that it commences its 14
th
full month of operations. Stores that were closed or relocated during the applicable period have been excluded from same store sales. Each relocated store is returned to the same store sales base during the fiscal period that it commences its 14
th
full month of operations at the new location. See further discussion of our consolidated same store sales in the "Results of Operations and Other Selected Data" section herein.
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▪
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Operating cash flow – Cash flow generation supports the general operating needs of the Company and funds capital expenditures related to its omni-channel platform, distribution and administrative facilities, costs associated with continued improvement of information technology tools, costs associated with potential strategic acquisitions or investments that may arise from time to time and stockholder return initiatives, including cash dividends and share repurchases. We typically generate significant positive operating cash flows and proportionately higher net income levels in our fiscal fourth quarter in connection with the holiday selling season and in part to sales of cold weather sporting goods and apparel. See further discussion of the Company's cash flows in the "Liquidity and Capital Resources and Changes in Financial Condition" section herein.
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▪
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Quality of merchandise offerings – To measure acceptance of its merchandise offerings, the Company monitors sell-throughs, inventory turns, gross margins and markdown rates on a department and style level. This analysis helps the Company manage inventory levels to reduce cash flow requirements and deliver optimal gross margins by improving merchandise flow and establishing appropriate price points to minimize markdowns.
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▪
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Store productivity – To assess store-level performance, the Company monitors various indicators, including new store productivity, sales per square foot, store operating contribution margin and store cash flow.
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CRITICAL ACCOUNTING POLICIES
As discussed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 2016
, filed with the Securities and Exchange Commission on
March 25, 2016
, the Company considers its policies on inventory valuation, vendor allowances, goodwill and intangible assets, impairment of long-lived assets and closed store reserves, self-insurance reserves, stock-based compensation and uncertain tax positions to be the most critical in understanding the judgments that are involved in preparing the Company's consolidated financial statements. There have been no changes in the Company's critical accounting policies during the quarter ended
October 29, 2016
.
RESULTS OF OPERATIONS AND OTHER SELECTED DATA
Executive Summary
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▪
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Earnings per diluted share of
$0.44
in the current quarter increased compared to earnings per diluted share of
$0.41
during the third quarter of 2015.
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▪
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Net income in the current quarter includes $4.7 million, net of tax, or $0.04 per diluted share, of costs incurred by the Company to convert 22 The Sports Authority ("TSA") stores to Dick's Sporting Goods stores.
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▪
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Net income in the third quarter of 2015 included $4.7 million, net of tax, or $0.04 per diluted share, related to a litigation settlement charge.
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▪
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Net sales
increased
10%
to
$1.8 billion
in the current quarter compared to the third quarter of
2015
, due primarily to the growth of our store network and a
5.2%
increase
in consolidated same store sales.
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▪
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eCommerce sales penetration in the current quarter increased to
9.6%
of total net sales compared to
8.0%
in the
third
quarter of
2015
.
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▪
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Gross profit
increased
to
30.54%
as a percentage of net sales in the current quarter from
29.73%
during the third quarter of 2015.
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▪
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Selling, general and administrative expenses increased 16% to $459.8 million in the current quarter compared to the third quarter of 2015.
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▪
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Other income increased to $3.8 million in the current quarter compared to $1.2 million of expense during the third quarter of 2015. The Company recorded a $2.9 million benefit related to a multi-year sales tax refund in the current quarter.
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▪
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In the
third
quarter of
2016
, the Company:
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▪
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Declared and paid a quarterly cash dividend in the amount of
$0.15125
per share of common stock and Class B common stock.
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▪
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Repurchased approximately
0.2 million
shares of common stock for
$9.0 million
.
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▪
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The following table summarizes store openings and closings for the periods indicated:
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39 Weeks Ended
October 29, 2016
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39 Weeks Ended
October 31, 2015
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Dick's Sporting Goods
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Specialty Store Concepts
(1)
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Total
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Dick's Sporting Goods
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Specialty Store Concepts
(1)
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Total
|
Beginning stores
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644
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|
97
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741
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603
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|
91
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694
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|
Q1 New stores
|
3
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|
2
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|
5
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|
9
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|
1
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|
10
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|
Q2 New stores
|
5
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|
—
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|
5
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|
7
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|
1
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|
8
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|
Q3 New stores
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27
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|
9
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|
36
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|
27
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|
9
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|
36
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Ending stores
|
679
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|
108
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|
787
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|
|
646
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|
102
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748
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|
|
|
|
|
|
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|
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Closed stores
|
3
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|
2
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|
5
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|
1
|
|
|
3
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|
4
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|
Ending stores
|
676
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|
|
106
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|
782
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|
645
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|
99
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|
|
744
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|
|
|
|
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|
|
|
|
|
|
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|
Relocated stores
|
9
|
|
|
—
|
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|
9
|
|
|
6
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|
1
|
|
|
7
|
|
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(1)
|
Includes the Company's Golf Galaxy, Field & Stream and other specialty concept stores. In some markets we operate adjacent stores on the same property with a pass-through for customers. We refer to this format as a "combo store" and include combo store openings within both the Dick's Sporting Goods and specialty store concept reconciliations, as applicable. As of
October 29, 2016
, the Company operated
74
Golf Galaxy stores and
27
Field & Stream stores.
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The following tables present for the periods indicated selected items in the unaudited Consolidated Statements of Income as a percentage of the Company's net sales, as well as the basis point change in the percentage of net sales from the prior year's period. In addition, other data is provided to facilitate a further understanding of our business. These tables should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying unaudited Consolidated Financial Statements and related notes thereto.
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Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2015-2016
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13 Weeks Ended
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|
October 29,
2016
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|
October 31,
2015
|
|
Net sales
(1)
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
Cost of goods sold, including occupancy and distribution costs
(2)
|
69.46
|
|
|
70.27
|
|
|
(81)
|
Gross profit
|
30.54
|
|
|
29.73
|
|
|
81
|
Selling, general and administrative expenses
(3)
|
25.40
|
|
|
24.05
|
|
|
135
|
Pre-opening expenses
(4)
|
1.07
|
|
|
0.99
|
|
|
8
|
Income from operations
|
4.07
|
|
|
4.69
|
|
|
(62)
|
Interest expense
|
0.07
|
|
|
0.07
|
|
|
—
|
Other (income) expense
|
(0.21
|
)
|
|
0.07
|
|
|
(28)
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Income before income taxes
|
4.21
|
|
|
4.55
|
|
|
(34)
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Provision for income taxes
|
1.51
|
|
|
1.68
|
|
|
(17)
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Net income
|
2.70
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%
|
|
2.87
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%
|
|
(17)
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|
|
|
|
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|
Other Data:
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|
|
|
|
|
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|
Consolidated same store sales increase
|
5.2
|
%
|
|
0.4
|
%
|
|
|
Number of stores at end of period
(5)
|
782
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|
|
744
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|
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Total square feet at end of period
(5)
|
38,788,672
|
|
|
36,775,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2015-2016
(A)
|
|
39 Weeks Ended
|
|
|
October 29,
2016
(A)
|
|
October 31,
2015
(A)
|
|
Net sales
(1)
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
Cost of goods sold, including occupancy and distribution costs
(2)
|
69.73
|
|
|
69.97
|
|
|
(24)
|
Gross profit
|
30.27
|
|
|
30.03
|
|
|
24
|
Selling, general and administrative expenses
(3)
|
23.90
|
|
|
22.89
|
|
|
101
|
Pre-opening expenses
(4)
|
0.63
|
|
|
0.63
|
|
|
—
|
Income from operations
|
5.73
|
|
|
6.51
|
|
|
(78)
|
Interest expense
|
0.07
|
|
|
0.05
|
|
|
2
|
Other income
|
(0.14
|
)
|
|
(0.02
|
)
|
|
(12)
|
Income before income taxes
|
5.80
|
|
|
6.47
|
|
|
(67)
|
Provision for income taxes
|
2.17
|
|
|
2.47
|
|
|
(30)
|
Net income
|
3.63
|
%
|
|
4.00
|
%
|
|
(37)
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
Consolidated same store sales increase
|
2.9
|
%
|
|
0.9
|
%
|
|
|
Number of stores at end of period
(5)
|
782
|
|
|
744
|
|
|
|
Total square feet at end of period
(5)
|
38,788,672
|
|
|
36,775,761
|
|
|
|
|
|
(A)
|
Column does not add due to rounding.
|
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(1)
|
Revenue from retail sales is recognized at the point of sale, net of sales tax. Revenue from eCommerce sales is recognized upon shipment of merchandise. Service-related revenue is recognized as the services are performed. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. Revenue from gift cards and returned merchandise credits (collectively the "cards") is deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized on the unaudited Consolidated Statements of Income within selling, general and administrative expenses at the point at which redemption becomes remote. The Company performs an evaluation of the aging of the unredeemed cards, based on the elapsed time from the date of original issuance, to determine when redemption becomes remote.
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|
(2)
|
Cost of goods sold includes: the cost of merchandise (inclusive of vendor allowances, inventory shrinkage and inventory write-downs for the lower of cost or market); freight; distribution; shipping; and store occupancy costs. The Company defines merchandise margin as net sales less the cost of merchandise sold. Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation, fixture lease expenses and certain insurance expenses.
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|
(3)
|
Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company's corporate headquarters.
|
|
|
(4)
|
Pre-opening expenses, which consist primarily of rent, marketing, payroll and recruiting costs, are expensed as incurred. Rent is recognized within pre-opening expense from the date of building turnover to the Company through the date of store opening.
|
|
|
(5)
|
Includes Dick's Sporting Goods, Golf Galaxy, Field & Stream and other specialty concept stores.
|
13 Weeks Ended October 29, 2016
Compared to the
13 Weeks Ended October 31, 2015
Net Sales
Net sales
increased
10%
in the current quarter to
$1.8 billion
from
$1.6 billion
for the
quarter ended October 31, 2015
, due primarily to the growth of our store network and a
5.2%
increase
in consolidated same store sales. The
5.2%
increase
in consolidated same store sales contributed $80.6 million of the
increase
in net sales for the
quarter ended October 29, 2016
. The remaining $87.1 million
increase
in net sales was attributable to new stores. The
5.2%
increase
in consolidated same store sales consisted of a
5.5%
increase
at Dick's Sporting Goods and a
3.3%
decrease
at Golf Galaxy. eCommerce sales penetration increased to
9.6%
of total net sales during the current quarter compared to
8.0%
of total net sales during the
quarter ended October 31, 2015
, representing an approximate increase of 33% in eCommerce sales.
The increase in consolidated same store sales was driven by broad-based increases across our hardlines, apparel and footwear categories, most notably the outdoor business and licensed apparel, which benefited from favorable teams participating in the Major League Baseball playoffs in the current quarter. These gains were partially offset by declines in sales of cold-weather merchandise due to unseasonably warm temperatures later in the quarter. The same store sales increase at Dick's Sporting Goods was driven by
an increase
in transactions of approximately
4.2%
and
an increase
in sales per transaction of approximately
1.3%
.
Income from Operations
Income from operations
decreased
to
$73.8 million
in the current quarter from
$77.1 million
for the
quarter ended October 31, 2015
.
Gross profit
increased
13%
to
$552.8 million
in the current quarter from
$488.4 million
for the
quarter ended October 31, 2015
, and
increased
as a percentage of net sales by
81
basis points compared to the same period last year. Merchandise margins and occupancy costs improved during the quarter and were partially offset by increased shipping expenses. Merchandise margins were favorably impacted by lower promotional activity in the current quarter. Occupancy costs
increased
$17.7 million
in the current quarter from the
quarter ended October 31, 2015
. Our occupancy costs, which after the cost of merchandise represent our largest expense within cost of goods sold, are generally fixed in nature and fluctuate based on the number of stores that we operate. As a percentage of net sales, occupancy costs increased at a lower rate than the
10%
increase in net sales during the current quarter. The increase in shipping expenses during the current quarter was primarily due to the growth and increased penetration of eCommerce sales as compared to the Company's total net sales.
Selling, general and administrative expenses
increased
16%
to
$459.8 million
in the current quarter from
$395.0 million
for the
quarter ended October 31, 2015
, and
increased
as a percentage of net sales by
135
basis points. The current quarter includes costs incurred by the Company to convert TSA stores to Dick's Sporting Goods stores totaling $6.5 million. The
quarter ended October 31, 2015
included a litigation settlement charge of $7.9 million. Apart from the enumerated items, selling, general and administrative expenses increased as a percentage of net sales by 147 basis points, due primarily to higher administrative, payroll, incentive compensation and benefit costs, investments in our Olympics marketing campaign and higher store payroll costs as the Company continued to invest to enhance the shopping experience within its stores compared to the same period last year.
Pre-opening expenses
increased
to
$19.3 million
in the current quarter from
$16.3 million
for the
quarter ended October 31, 2015
. Pre-opening expenses in any period fluctuate depending on the timing and number of new store openings and relocations. The current quarter includes costs incurred by the Company to convert TSA stores to Dick's Sporting Goods stores totaling $1.1 million. Pre-opening rent expenses for our self-developed store sites will generally exceed those for sites built to our specifications by our landlords as we commence recognition of rent expense when we take possession of a site.
Other (Income) Expense
Other income increased to $3.8 million in the current quarter compared to $1.2 million of expense for the quarter ended October 31, 2015. The Company recognizes investment income / expense to reflect changes in deferred compensation plan investment values with a corresponding charge / reduction to selling, general and administrative costs for the same amount. The Company recognized investment income totaling $0.8 million in the current quarter compared to an investment loss of $2.2 million for the quarter ended October 31, 2015, primarily driven by an overall improvement in the equity markets, which impacted the deferred compensation plan investment values. Additionally, during the current quarter, the Company recorded a $2.9 million benefit from a multi-year sales tax refund.
Income Taxes
The Company's effective tax rate decreased to
35.9%
for the current quarter from
36.9%
for the quarter ended October 31, 2015 primarily due to the partial reversal of a valuation allowance as a result of realizing capital gains in the current quarter.
39 Weeks Ended October 29, 2016
Compared to the
39 Weeks Ended October 31, 2015
Net Sales
Net sales
increased
8%
in the current period to
$5.4 billion
from $5.0 billion for the period ended October 31, 2015, due primarily to the growth of our store network and a
2.9%
increase
in consolidated same store sales. The
2.9%
increase
in consolidated same store sales contributed $137.5 million of the
increase
in net sales for the
period ended October 29, 2016
. The remaining $270.1 million
increase
in net sales was attributable to new stores. The
2.9%
increase
in consolidated same store sales consisted of a
3.0%
increase
at Dick's Sporting Goods and a
2.2%
decrease
at Golf Galaxy. eCommerce sales penetration was
9.1%
of total net sales during the current period compared to
7.9%
of total net sales during the
period ended October 31, 2015
, representing
an approximate increase
of
24%
in eCommerce sales.
The
increase
in consolidated same store sales was driven by broad-based increases across our hardlines, apparel and footwear categories. The same store sales
increase
at Dick's Sporting Goods was driven by
an increase
in transactions of approximately 1.8% and
an increase
in sales per transaction of approximately 1.2%.
Income from Operations
Income from operations
decreased
to
$311.6 million
in the current period from
$327.4 million
for the
period ended October 31, 2015
.
Gross profit
increased
9%
to
$1,646.0 million
for the current period from
$1,510.9 million
for the
period ended October 31, 2015
, and
increased
as a percentage of net sales by
24
basis points compared to the same period last year. Merchandise margins and occupancy costs improved during the period and were partially offset by increased shipping expenses. Occupancy costs increased
$47.4 million
in the current period from the
period ended October 31, 2015
. Our occupancy costs, which after the cost of merchandise represent our largest expense within cost of goods sold, are generally fixed in nature and fluctuate based on the number of stores that we operate. As a percentage of net sales, occupancy costs increased at a lower rate than the
8%
increase
in net sales during the current period. The increase in shipping expenses during the current period was primarily due to the growth and increased penetration of eCommerce sales as compared to the Company's total net sales.
Selling, general and administrative expenses
increased
13%
to
$1,300.1 million
in the current period from
$1,151.7 million
for the
period ended October 31, 2015
, and
increased
as a percentage of net sales by
101
basis points. The current period includes costs incurred by the Company to convert TSA stores to Dick's Sporting Goods stores totaling $6.5 million. The period ended October 31, 2015 included a litigation settlement charge of $7.9 million. Apart from the enumerated items, selling, general and administrative expenses increased as a percentage of net sales by 105 basis points, due primarily to higher administrative, payroll, incentive compensation and benefit costs and higher store payroll costs as the Company continued to invest to enhance the shopping experience within its stores compared to the same period last year.
Pre-opening expenses
increased
to
$34.3 million
in the current period from
$31.8 million
for the
period ended October 31, 2015
. Pre-opening expenses in any period fluctuate depending on the timing and number of new store openings and relocations. The current period includes costs incurred by the Company to convert TSA stores to Dick's Sporting Goods stores totaling $1.1 million. Pre-opening rent expenses for our self-developed store sites will generally exceed those for sites built to our specifications by our landlords as we commence recognition of rent expense when we take possession of a site.
Other Income
Other income increased to $7.8 million in the current period compared to $0.8 million of income for the period ended October 31, 2015. The Company recognizes investment income / expense to reflect changes in deferred compensation plan investment values with a corresponding charge / reduction to selling, general and administrative costs for the same amount. The Company recognized investment income totaling $4.6 million in the current period compared to an investment loss of $0.4 million for the period ended October 31, 2015, primarily driven by an overall improvement in the equity markets, which impacted the deferred compensation plan investment values. Additionally, during the current period, the Company recorded a $2.9 million benefit from a multi-year sales tax refund.
Income Taxes
The Company's effective tax rate decreased to
37.5%
for the current period from
38.2%
for the same period last year primarily due to the partial reversal of a valuation allowance as a result of realizing capital gains in the current period.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Overview
The Company's liquidity and capital needs have generally been met by cash from operating activities with additional liquidity from the Company's revolving credit facility. Cash flow from operations is seasonal in our business. Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, with the pre-holiday inventory increase being the largest. In the fourth quarter, inventory levels are reduced in connection with sales during the holiday season and this inventory reduction, combined with proportionately higher net income, typically produces significant positive cash flow.
The Company has a
$1 billion
revolving senior secured credit facility, including up to
$150 million
in the form of letters of credit, (the "Credit Agreement") in the event further liquidity is needed. Under the Credit Agreement, subject to the satisfaction of certain conditions, the Company may request an increase of up to
$250 million
in borrowing availability.
The Company generally utilizes its Credit Agreement for working capital needs based primarily on the seasonal nature of its operating cash flows, with the Company's peak borrowings occurring during its third quarter as the Company increases inventory in advance of the holiday selling season.
Liquidity information for the periods ended (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Funds drawn on Credit Agreement
|
$
|
1,738,200
|
|
|
$
|
1,019,100
|
|
Number of days with outstanding balance on Credit Agreement
|
163 days
|
|
|
94 days
|
|
Maximum daily amount outstanding under Credit Agreement
|
$
|
298,700
|
|
|
$
|
342,400
|
|
|
|
|
|
In the table above, the increase in funds drawn on our Credit Agreement during the 39 weeks ended October 29, 2016 compared to the same period in fiscal 2015 was driven by continued capital return to stockholders and investments in the Company's growth.
Liquidity information as of (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Outstanding borrowings under Credit Agreement
|
$
|
260,900
|
|
|
$
|
342,400
|
|
Cash and cash equivalents
|
$
|
85,408
|
|
|
$
|
73,799
|
|
Remaining borrowing capacity under Credit Agreement
|
$
|
724,469
|
|
|
$
|
643,569
|
|
Outstanding letters of credit under Credit Agreement
|
$
|
14,631
|
|
|
$
|
14,031
|
|
|
|
|
|
The Company intends to allocate capital to invest in its future growth, specifically the development of its omni-channel platform and specialty store concepts, as well as to return capital to stockholders through dividends and share repurchases.
Capital expenditures
– We expect capital expenditures to be approximately $275 million on a net basis, which includes tenant allowances provided by landlords, and approximately $450 million on a gross basis in fiscal 2016. Normal capital requirements primarily relate to the development of our omni-channel platform, including investments in new and existing stores and eCommerce technology. The Company also plans to continue to invest in the improvement of its supply chain and corporate information technology infrastructure. We plan to open 49 new stores and begin construction of our 5
th
distribution facility in fiscal 2016. We expect our new stores, as well as investments in our existing stores, to represent the majority of our total capital expenditures during fiscal 2016. The Company has a capital appropriations committee that approves all capital expenditures in excess of certain amounts and groups and prioritizes all capital projects among required, discretionary and strategic categories.
Share repurchases
– On March 7, 2013, the Company's Board of Directors authorized a five-year share repurchase program of up to $1 billion of the Company's common stock. Since the beginning of 2013, we have repurchased $928.9 million of common stock and have $71.1 million remaining under this authorization. On March 16, 2016, the Company's Board of Directors authorized an additional five-year share repurchase program of up to $1 billion of the Company's common stock. During the
39 weeks ended October 29, 2016
, the Company repurchased approximately
2.6 million
shares of its common stock for
$116.0 million
. Any future share repurchase programs are subject to the final determination of our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
Dividends
– During the
39 weeks ended October 29, 2016
, the Company paid
$51.2 million
of dividends to its stockholders. The declaration of future dividends and the establishment of the per share amount, record dates and payment dates for any such future dividends are subject to authorization by our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
The Company currently believes cash flows generated by operations and funds available under its Credit Agreement will be sufficient to satisfy capital requirements, including planned capital expenditures, share repurchases and quarterly dividend payments to its stockholders through fiscal 2016. The Company may require additional funding should the Company pursue strategic acquisitions or undertake share repurchases, other investments or store expansion rates in excess of those presently planned.
Changes in cash and cash equivalents are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
Net cash provided by operating activities
|
$
|
184,462
|
|
|
$
|
115,869
|
|
Net cash used in investing activities
|
(349,248
|
)
|
|
(276,368
|
)
|
Net cash provided by financing activities
|
131,226
|
|
|
12,671
|
|
Effect of exchange rate changes on cash and cash equivalents
|
32
|
|
|
(52
|
)
|
Net decrease in cash and cash equivalents
|
$
|
(33,528
|
)
|
|
$
|
(147,880
|
)
|
Operating Activities
Operating activities consist primarily of net income, adjusted for certain non-cash items and changes in operating assets and liabilities. Adjustments to net income for non-cash items include depreciation and amortization, deferred income taxes, stock-based compensation expense and tax benefits on stock options, as well as non-cash gains and losses on the disposal of the Company's assets. Changes in operating assets and liabilities primarily reflect changes in inventories, accounts payable and income taxes payable / receivable, as well as other working capital changes.
Cash
provided by
operating activities
increased
$68.6 million
for the
39 weeks ended October 29, 2016
compared to the same period last year. The
increase
in cash
provided by
operating activities was due primarily to a $45.8 million increase in operating assets and liabilities and a $27.0 million increase in non-cash items, partially offset by a $4.2 million decrease in net income period-over-period.
The
increase
in operating assets and liabilities was due primarily to the following:
|
|
▪
|
Changes in inventory and accounts payable increased operating cash flows by $58.7 million compared to the prior year, primarily due to timing of inventory receipts.
|
|
|
▪
|
Changes in accrued expenses increased operating cash flows by $29.2 million compared to the prior year, primarily due to lower incentive compensation accruals in fiscal 2015 that were subsequently paid during the first quarter of fiscal 2016, compared to those balances accrued at the end of fiscal 2014 and subsequently paid during the first quarter of fiscal 2015.
|
|
|
▪
|
Changes in accounts receivable decreased operating cash flows by $15.4 million compared to the prior year, primarily due to timing of collections associated with vendor funded store initiatives.
|
Investing Activities
Cash used in investing activities
increased
$72.9 million
for the
39 weeks ended October 29, 2016
compared to the same period last year primarily due to a $39.5 million increase in deposits and other assets coupled with a $33.4 million increase in gross capital expenditures. The increase in deposits and other assets was primarily driven by the Company's acquisition of TSA intellectual property and lease designation rights in the current period as well as Affinity Sports, a sports management technology company. The increase in gross capital expenditures was primarily driven by incremental investments related to the Company's full-service footwear store initiative.
Financing Activities
Cash
provided by
financing activities consists primarily of the Company's capital return initiatives, including its share repurchase program and cash dividend payments, and cash flows generated from stock option exercises. Cash
provided by
financing activities for the
39 weeks ended October 29, 2016
totaled
$131.2 million
compared to
$12.7 million
for the comparable period of the prior year. The Company repurchased $184.0 million fewer shares which was partially offset by lower net Credit Agreement borrowings during the period ended October 29, 2016 compared to the prior year period.
Events Subsequent to Quarter-end
On November 2, 2016, the Company completed its purchase of certain assets of Golfsmith International Holdings, Inc. ("Golfsmith"), including intellectual property and rights to acquire store leases, together with inventory for 30 stores. The purchase price was approximately $43 million, of which $32 million is related to inventory. Intellectual property includes the name "Golfsmith", as well as Golfsmith's domain names, owned trademarks and customer information.
On
November 10, 2016
, the Company's Board of Directors authorized and declared a quarterly cash dividend in the amount of
$0.15125
per share of common stock and Class B common stock payable on
December 30, 2016
to stockholders of record as of the close of business on
December 9, 2016
.
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements as of
October 29, 2016
primarily relate to store operating leases and purchase obligations for marketing commitments, including naming rights, licenses for trademarks, corporate aircraft and technology-related and other commitments. The Company has excluded these items from the unaudited Consolidated Balance Sheets in accordance with generally accepted accounting principles. The Company does not believe that any of these arrangements have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or resources.
Contractual Obligations and Other Commercial Commitments
The Company is party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of the Company's contractual obligations and other commercial commitments as of
January 30, 2016
, see the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 2016
, filed with the Securities and Exchange Commission on
March 25, 2016
. During the current quarter, there were no material changes with respect to these contractual obligations and other commercial commitments outside the ordinary course of business.