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 address, among other things, current expectations; planned strategic investments and growth strategies, including the continued enhancement of our digital capabilities and eCommerce platform, investments in our eCommerce fulfillment network, improvements in the customer experience in both stores and online, and inventory investments in key growth categories; projections of our future profitability and results of operation; plans to open new stores and remodel existing stores; investments in our teammates and their productivity; eliminating non-essential expenses to fund our future strategic investments; the hunt industry remaining under significant pressure; the effect of changes in corporate income tax laws and tariffs; capital expenditures; the impact of the sale of Blue Sombrero and Affinity Sports; plans to return capital to stockholders through dividends or share repurchases; and borrowings under our credit facility.
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 2019 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:
|
|
▪
|
The dependence of our business on consumer discretionary spending;
|
|
|
▪
|
Intense competition in the sporting goods industry and in retail, including the level of competitive promotional activity;
|
|
|
▪
|
Disruptions to our eCommerce platform, including interruptions, delays or downtime caused by high volumes of users or transactions; deficiencies in design or implementation; or platform enhancements;
|
|
|
▪
|
Vendors continuing to sell or increasingly selling their products directly to customers or through broadened or alternative distribution channels;
|
|
|
▪
|
Negative reactions from our customers or vendors regarding changes to our policies related to the sale of firearms and accessories;
|
|
|
▪
|
Risks that our strategic plans and initiatives may initially result in a negative impact on our financial results, or that such plans and initiatives may not achieve the desired results within the anticipated time frame or at all;
|
|
|
•
|
Our ability to manage the impact of new tariffs or increased rates on existing tariffs;
|
|
|
•
|
Our relationships with our vendors, disruptions in our or our vendors' supply chains, and increasing product costs, which could be caused by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials, foreign political instability or other reasons;
|
|
|
•
|
Our ability to predict or effectively react to changes in consumer demand or shopping patterns;
|
|
|
▪
|
Lack of available retail store sites on terms acceptable to us, our ability to leverage the flexibility within our existing real estate portfolio to capitalize on future real estate opportunities over the near and intermediate term as our leases come up for renewal, and other costs and risks relating to a brick and mortar retail store model;
|
|
|
▪
|
Unauthorized disclosure of sensitive or confidential customer information;
|
|
|
▪
|
Risks associated with our private brand offerings, including product liability and product recalls, specialty concept stores, and GameChanger;
|
|
|
▪
|
The results of the strategic review of our hunt business, including Field & Stream;
|
|
|
▪
|
Disruptions or other problems with our information systems;
|
|
|
▪
|
Our ability to access adequate capital to operate and expand our business and to respond to changing business and economic conditions;
|
|
|
▪
|
Risks and costs relating to changing laws and regulations affecting our business, including consumer products, firearms and ammunition, tax, foreign trade, labor, data protection and privacy;
|
|
|
▪
|
Litigation risks for which we may not have sufficient insurance or other coverage;
|
|
|
▪
|
Our ability to secure and protect our trademarks and other intellectual property and defend claims of intellectual property infringement;
|
|
|
▪
|
Our ability to protect the reputation of our Company and our brands;
|
|
|
▪
|
Our ability to attract, train, engage and retain qualified leaders and associates or the loss of Mr. Edward Stack as our Chairman and Chief Executive Officer;
|
|
|
▪
|
Wage increases, which could adversely affect our financial results;
|
|
|
▪
|
Disruption at our supply chain facilities or customer support center;
|
|
|
▪
|
Poor performance of professional sports teams, professional team lockouts or strikes, or retirement, serious injury or scandal involving key athletes;
|
|
|
▪
|
Weather-related disruptions and the seasonality of our business, as well as the current geographic concentration of Dick's Sporting Goods stores;
|
|
|
▪
|
Our pursuit of strategic investments or acquisitions, including the timing and costs of such investments and acquisitions; the integration of acquired businesses or companies being more difficult, time-consuming, or costly than expected; or the investments or acquisitions failing to produce the anticipated benefits within the expected time frame or at all;
|
|
|
▪
|
We are controlled by our Chairman and Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders;
|
|
|
▪
|
Our current anti-takeover provisions, which could prevent or delay a change in control of the Company; and
|
|
|
▪
|
The issuance of quarterly cash dividends, and our repurchase activity, if any, pursuant to our share repurchase program.
|
The foregoing and additional risk factors are described in more detail in Item 1A. "Risk Factors" of this Quarterly Report and 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 February 2, 2019, filed on March 29, 2019. 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 the date hereof. 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 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 our dedicated associates, in-store services and unique specialty shop-in-shops. The Company also owns and operates Golf Galaxy and Field & Stream stores, as well as GameChanger, a youth sports mobile app for scheduling, communications and live scorekeeping. The Company offers its products through a content-rich eCommerce platform that is integrated with its store network and provides customers with the convenience and expertise of a 24-hour storefront. When used in this Quarterly Report on Form 10-Q, unless the context otherwise requires or specifies, any reference to "year" is to the Company's fiscal year.
The primary factors that have historically influenced the Company's profitability include the growth in its number of stores and selling square footage, the continued integration of eCommerce with brick and mortar stores, growth in consolidated same store sales, which include the Company's eCommerce business, and its strong gross profit margins. The Company has grown from 574 Dick's Sporting Goods stores as of August 2, 2014 to 727 Dick's Sporting Goods stores as of August 3, 2019. The Company has reduced its rate of new store growth and intends to continue this strategy over the next few years in an effort to leverage the significant flexibility within its existing real estate portfolio to capitalize on future real estate opportunities over the near and intermediate term as those leases come up for renewal.
In recent years, the Company has transitioned to an insourced eCommerce platform, allowing for continued innovation of its eCommerce websites and applications with customer experience enhancements, new releases of its mobile and tablet apps, and the development of omni-channel 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. The Company's eCommerce sales penetration to total net sales has increased from approximately 7% to approximately 12% for the year-to-date periods ended August 2, 2014 and August 3, 2019, respectively. Approximately 80% of the Company's eCommerce sales are generated within brick and mortar store trade areas.
The retail industry as a whole is dynamic, and the sporting goods category has faced significant disruption in recent years, as several sporting goods retailers have gone out of business. Vendors have broadened their distribution into department stores and family footwear channels while continuing to grow their direct to consumer business. Weak customer demand for firearms and other hunting merchandise across the industry has resulted in slower growth. We have responded to these challenges by focusing on driving profitable sales, emphasizing a refined merchandise assortment that delivers newness, innovation and exclusivity. We have made strategic investments in our supply chain, digital capabilities, customer experience, private brands and teammates to support these efforts. We are also focused on increasing productivity and eliminating non-essential expenses to fund our future strategic investments.
Effective May 10, 2019, tariff rates on certain products imported from China increased from 10% to 25%. Also, a 10% tariff rate on substantially all remaining Chinese imports is scheduled to go into effect on September 1, 2019 and December 15, 2019. We have incorporated the anticipated impact of the tariff changes announced as of August 22, 2019 into our financial expectations for fiscal 2019. We are assessing the impact of new and increased tariff rates and other potential limitations on our ability to do business in China that were announced after August 22, 2019.
As we look to the future, we are focused on continuing to invest in our business to meet the changing needs of our athletes and increasing their level of engagement with the Company. We plan to further enhance the store experience by optimizing our merchandise assortment, reallocating floor space to regionally relevant and growing merchandise categories and making our stores more experiential. Our primary areas of investment during fiscal 2019 continue to be 1) enhancing the athlete experience in our stores; 2) improving our eCommerce fulfillment capabilities and 3) implementing technology solutions that improve the athlete experience and our teammates’ productivity. We also plan to continue to focus on increasing productivity across the business to help fund these investments.
On August 22, 2019, the Company sold two of its technology subsidiaries, Blue Sombrero and Affinity Sports, to Stack Sports for $45 million. Stack Sports has no affiliation with Edward W. Stack, the Company's Chairman and Chief Executive Officer. The Company expects to record a pre-tax gain from the sale in the third fiscal quarter of 2019. As part of the sale, the Company also entered into a long-term strategic partnership agreement where we will serve as the official retailer of Stack Sports. This transaction will allow the Company to continue to serve young athletes and their families, without owning and operating the underlying registration and league management platform.
The Company's senior management focuses on certain key indicators to monitor the Company's performance, including:
|
|
▪
|
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, net income, cash and working capital. A store is included in the same store sales calculation during the same fiscal period that it commences its 14th full month of operations. Stores that were closed or relocated during the applicable period have been excluded from same store sales results. Each relocated store is returned to the same store sales base during the fiscal period that it commences its 14th 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.
|
|
|
▪
|
Earnings before taxes and the related operating margin – Our management views earnings before taxes and operating margin as key indicators of our performance. The key drivers of earnings before taxes are same store sales, gross profit, and our ability to control selling, general and administrative expenses.
|
|
|
▪
|
Cash flows from operating activities – Cash flow generation supports the general liquidity needs of the Company and funds capital expenditures for our omni-channel platform, distribution and administrative facilities, costs associated with continued improvement of information technology tools, 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 cash flows from operating activities and proportionately higher net income levels in our fourth fiscal quarter in connection with the holiday selling season and 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.
|
|
|
▪
|
Quality of merchandise offerings – To measure acceptance of its merchandise offerings, the Company monitors sell-throughs, inventory turns, gross margins and markdown rates at the department and style level. This analysis helps the Company manage inventory levels to reduce working capital requirements and deliver optimal gross margins by improving merchandise flow and establishing appropriate price points to minimize markdowns.
|
|
|
▪
|
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.
|
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 February 2, 2019, filed with the Securities and Exchange Commission on March 29, 2019, 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 and stock-based compensation to be the most critical in understanding the judgments that are involved in preparing the Company's consolidated financial statements. Other than the adoption of ASU 2016-02, "Leases (Topic 842)", on February 3, 2019 as discussed in Note 1 of our unaudited Consolidated Financial Statements, there were no significant changes to our critical accounting policies.
RESULTS OF OPERATIONS AND OTHER SELECTED DATA
Executive Summary
|
|
▪
|
Earnings per diluted share of $1.26 in the current quarter increased 5.0% compared to earnings per diluted share of $1.20 during the second quarter of 2018. Net income in the current quarter totaled $112.5 million compared to $119.4 million during the second quarter of 2018.
|
|
|
▪
|
Net sales increased 3.8% to $2,259.2 million in the current quarter from $2,177.5 million during the second quarter of 2018.
|
|
|
▪
|
Consolidated same store sales increased 3.2%, which included an increase of approximately 21% in eCommerce sales.
|
|
|
▪
|
eCommerce sales penetration increased to approximately 12% of total net sales during the current quarter compared to approximately 11% of total net sales during the second quarter of 2018.
|
|
|
▪
|
In the second quarter of 2019, the Company:
|
|
|
▪
|
Declared and paid a quarterly cash dividend in the amount of $0.275 per share on the Company's common stock and Class B common stock.
|
|
|
▪
|
Repurchased 4.5 million shares of common stock for a total of $159.3 million under the Company's previously announced five-year $1 billion share repurchase program and authorized a new share repurchase program of up to $1 billion of the Company's common stock over the next five years.
|
|
|
▪
|
Amended its existing credit facility to increase lender commitments from $1.25 billion to $1.6 billion, extend the maturity date to June 28, 2024 and provide for a $500 million accordion feature.
|
|
|
▪
|
The following table summarizes store openings and closings for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
August 3, 2019
|
|
26 Weeks Ended
August 4, 2018
|
|
Dick's Sporting Goods
|
|
Specialty Concept Stores (1)
|
|
Total
|
|
Dick's Sporting Goods
|
|
Specialty Concept Stores (1)
|
|
Total
|
Beginning stores
|
729
|
|
|
129
|
|
|
858
|
|
|
716
|
|
|
129
|
|
|
845
|
|
Q1 New stores
|
—
|
|
|
1
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Q2 New stores
|
2
|
|
|
—
|
|
|
2
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Closed stores
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending stores
|
727
|
|
|
130
|
|
|
857
|
|
|
729
|
|
|
129
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocated stores
|
1
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
|
(1)
|
Includes the Company's Golf Galaxy and Field & Stream stores. In some markets, we operate Dick's Sporting Goods stores adjacent to our specialty concept 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 concept store reconciliations, as applicable.
|
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 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying unaudited Consolidated Financial Statements and related notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2018-2019 (A)
|
|
13 Weeks Ended
|
|
|
August 3, 2019 (A)
|
|
August 4,
2018
|
|
Net sales (1)
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
Cost of goods sold, including occupancy and distribution costs (2)
|
70.03
|
|
|
69.72
|
|
|
31
|
Gross profit
|
29.97
|
|
|
30.28
|
|
|
(31)
|
Selling, general and administrative expenses (3)
|
23.06
|
|
|
22.75
|
|
|
31
|
Pre-opening expenses (4)
|
0.04
|
|
|
0.07
|
|
|
(3)
|
Income from operations
|
6.86
|
|
|
7.46
|
|
|
(60)
|
Interest expense
|
0.25
|
|
|
0.14
|
|
|
11
|
Other income
|
(0.07
|
)
|
|
(0.10
|
)
|
|
3
|
Income before income taxes
|
6.69
|
|
|
7.42
|
|
|
(73)
|
Provision for income taxes
|
1.70
|
|
|
1.94
|
|
|
(24)
|
Net income
|
4.98
|
%
|
|
5.48
|
%
|
|
(50)
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
Consolidated same store sales increase (decrease)
|
3.2
|
%
|
|
(1.9
|
%)
|
|
|
Number of stores at end of period (5)
|
857
|
|
|
858
|
|
|
|
Total square feet at end of period (5)
|
42,195,720
|
|
|
42,348,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2018-2019 (A)
|
|
26 Weeks Ended
|
|
|
August 3,
2019
|
|
August 4,
2018 (A)
|
|
Net sales (1)
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
Cost of goods sold, including occupancy and distribution costs (2)
|
70.31
|
|
|
70.16
|
|
|
15
|
Gross profit
|
29.69
|
|
|
29.84
|
|
|
(15)
|
Selling, general and administrative expenses (3)
|
24.12
|
|
|
23.63
|
|
|
49
|
Pre-opening expenses (4)
|
0.04
|
|
|
0.10
|
|
|
(6)
|
Income from operations
|
5.53
|
|
|
6.11
|
|
|
(58)
|
Interest expense
|
0.21
|
|
|
0.14
|
|
|
7
|
Other income
|
(0.20
|
)
|
|
(0.03
|
)
|
|
(17)
|
Income before income taxes
|
5.52
|
|
|
6.01
|
|
|
(49)
|
Provision for income taxes
|
1.45
|
|
|
1.61
|
|
|
(16)
|
Net income
|
4.07
|
%
|
|
4.39
|
%
|
|
(32)
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
Consolidated same store sales increase (decrease)
|
1.7
|
%
|
|
(1.4
|
%)
|
|
|
Number of stores at end of period (5)
|
857
|
|
|
858
|
|
|
|
Total square feet at end of period (5)
|
42,195,720
|
|
|
42,348,124
|
|
|
|
|
|
(A)
|
Column does not add due to rounding.
|
|
|
(1)
|
Revenue from retail sales is recognized at the point of sale, net of sales tax. Revenue from eCommerce sales, including vendor-direct sales arrangements, is recognized upon shipment of merchandise. 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. The cards have no expiration date.
|
|
|
(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 and net realizable value); 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 and certain insurance expenses.
|
|
|
(3)
|
Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, operating costs associated with the Company's internal eCommerce platform, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company's Customer Support Center.
|
|
|
(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 the Company takes possession of a site through the date of store opening.
|
|
|
(5)
|
Includes Dick's Sporting Goods, Golf Galaxy, and Field & Stream stores.
|
13 Weeks Ended August 3, 2019 Compared to the 13 Weeks Ended August 4, 2018
Net Sales
Net sales increased 3.8% in the current quarter to $2,259.2 million from $2,177.5 million for the quarter ended August 4, 2018, due primarily to a 3.2% increase in consolidated same store sales. The 3.2% increase in consolidated same store sales increased net sales for the quarter ended August 3, 2019 by $68.9 million. The remaining $12.8 million increase in the Company's sales is primarily attributable to new stores. The 3.2% increase in consolidated same store sales included an increase of approximately 21% in eCommerce sales. eCommerce sales penetration increased to approximately 12% of total net sales during the current quarter compared to approximately 11% of total net sales during the quarter ended August 4, 2018.
The increase in consolidated same store sales was broad-based across hardlines, apparel and footwear, partially offset by a continued decline in the hunt category. Although the broader hunt industry also remains challenged, we believe that our firearms policy changes have contributed to a continuing decline in our hunt business. We are continuing to evaluate our strategy for the hunt business, including Field & Stream. As part of the initial steps of this review, we removed hunt category merchandise from approximately 125 Dick's Sporting Goods stores during the current quarter, where the category underperformed and was less relevant in the local market. We reallocated space in these stores to a more compelling localized assortment of categories and products in an effort to drive growth. Consolidated same store sales results for the current quarter reflected an increase in transactions of approximately 1.1% and an increase in sales per transaction of 2.1%.
Income from Operations
Income from operations decreased to $155.0 million in the current quarter from $162.5 million for the quarter ended August 4, 2018.
Gross profit increased 2.7% to $677.1 million in the current quarter from $659.3 million for the quarter ended August 4, 2018, but decreased as a percentage of net sales by 31 basis points compared to the same period last year. This decline was driven by a 65 basis point decline in merchandise margins, which were influenced by the clearance of hunt merchandise from the 125 stores that were reset, coupled with the sell-through of inventory that is being replaced by a new private brand. In addition, eCommerce shipping fulfillment costs increased as a result of the growth and increased penetration of eCommerce sales as compared to the Company's total net sales. These costs were partially offset by occupancy leverage of 41 basis points in the current quarter. Occupancy costs increased $0.5 million in the current quarter from the quarter ended August 4, 2018. 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.
Selling, general and administrative expenses increased 5.2% to $521.1 million in the current quarter from $495.3 million for the quarter ended August 4, 2018, and increased as a percentage of net sales by 31 basis points. The increase was primarily driven by strategic growth investments and higher store payroll from wage inflation.
Pre-opening expenses decreased to $1.0 million in the current quarter from $1.4 million for the quarter ended August 4, 2018. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. We opened two new stores in the current quarter compared to five new stores during the quarter ended August 4, 2018.
Other Income
Other income totaled $1.6 million in the current quarter compared to $2.2 million for the quarter ended August 4, 2018. The Company recognizes investment income / expense to reflect changes in its 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 $1.5 million in the current quarter compared to investment income totaling $2.1 million for the quarter ended August 4, 2018, primarily driven by an overall decline in the equity markets, which impacted its deferred compensation plan investment values.
Income Taxes
The Company's effective tax rate decreased to 25.5% for the current quarter from 26.1% for the quarter ended August 4, 2018.
26 Weeks Ended August 3, 2019 Compared to the 26 Weeks Ended August 4, 2018
Net Sales
Net sales increased 2.3% in the current period to $4,179.9 million from $4,087.2 million for the period ended August 4, 2018, due primarily to a 1.7% increase in consolidated same store sales. The 1.7% increase in consolidated same store sales increased net sales for the period ended August 3, 2019 by $68.5 million. The remaining $24.2 million increase in the Company's sales is primarily attributable to new stores. The 1.7% increase in consolidated same store sales included an increase of approximately 18% in eCommerce sales. eCommerce sales penetration increased to approximately 12% of total net sales during the current period compared to approximately 11% of total net sales during the period ended August 4, 2018.
The increase in consolidated same store sales was driven by gains in the athletic and outdoor apparel, footwear, and team sports categories, slightly offset by a continued decline in the hunt category. Although the broader hunt industry also remains challenged, we believe that our firearms policy changes have contributed to a continuing decline in our hunt business. We are continuing to evaluate our strategy for the hunt business, including Field & Stream. As part of the initial steps of this review, we removed hunt category merchandise from approximately 125 Dick's Sporting Goods stores during the current quarter, where the category underperformed and was less relevant in the local market. We reallocated space in these stores to a more compelling localized assortment of categories and products in an effort to drive growth. Consolidated same store sales results for the current period reflect an increase in transactions of approximately 0.1% and an increase in sales per transaction of 1.6%.
Income from Operations
Income from operations decreased to $231.1 million in the current period from $249.9 million for the period ended August 4, 2018.
Gross profit increased 1.7% to $1,240.9 million for the current period from $1,219.7 million for the period ended August 4, 2018, and decreased as a percentage of net sales by 15 basis points compared to the same period last year. This decline was driven by a 26 basis point decline in merchandise margins, which were influenced by the clearance of hunt merchandise from the 125 stores that were reset, coupled with the sell-through of inventory that is being replaced by a new private brand. In addition, eCommerce shipping fulfillment costs increased as a result of the growth and increased penetration of eCommerce sales as compared to the Company's total net sales. These costs were partially offset by occupancy leverage of 29 basis points in the current period. Occupancy costs decreased $0.4 million in the current period from the period ended August 4, 2018. 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.
Selling, general and administrative expenses increased 4.4% to $1,008.2 million in the current period from $965.7 million for the period ended August 4, 2018, and increased as a percentage of net sales by 49 basis points. The period ended August 3, 2019 included $7.6 million for a non-cash impairment charge to reduce the carrying value of a corporate aircraft held for sale to its fair market value and $8.1 million of expenses associated with changes in the Company's deferred compensation plan investment values, for which the corresponding investment income was recognized in other income. These expenses were offset by a $6.4 million settlement of a previously accrued litigation contingency. The increase was primarily driven by strategic growth investments and higher store payroll from wage inflation.
Pre-opening expenses decreased to $1.6 million in the current period from $4.1 million for the period ended August 4, 2018. Pre-opening expenses in any period fluctuate depending on the timing and number of new store openings and relocations. We opened three new stores in the current period compared to 13 new stores during the period ended August 4, 2018.
Other Income
Other income totaled $8.3 million in the current period compared to $1.3 million for the period ended August 4, 2018. 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 $8.1 million in the current period compared to investment income of $1.1 million for the period ended August 4, 2018, primarily driven by overall improvement in the equity markets, which impacted the deferred compensation plan investment values.
Income Taxes
The Company's effective tax rate decreased to 26.3% for the current period from 26.9% for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Overview
The Company has a $1.6 billion senior secured revolving credit facility (the "Credit Facility"), including up to $150 million in the form of letters of credit. Under the Credit Facility, which is further described within Note 6 to the unaudited Consolidated Financial Statements, subject to satisfaction of certain conditions, the Company may request an increase of up to $500 million in additional borrowing availability.
The Company's liquidity and capital needs have generally been met by cash from operating activities supplemented by borrowings under the Company's Credit Facility as seasonally necessary. The Company generally utilizes its Credit Facility for working capital needs based primarily on the seasonal nature of its operating cash flows, with the Company's peak borrowing level occurring early in the fourth quarter as the Company increases inventory in advance of the holiday selling season.
Liquidity information for the periods ended (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
Funds drawn on Credit Facility
|
$
|
1,185,850
|
|
|
$
|
1,162,800
|
|
Number of business days with outstanding balance on Credit Facility
|
125 days
|
|
|
127 days
|
|
Maximum daily amount outstanding under Credit Facility
|
$
|
561,200
|
|
|
$
|
324,100
|
|
Liquidity information as of the periods ended (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
Outstanding borrowings under Credit Facility
|
$
|
441,500
|
|
|
$
|
108,400
|
|
Cash and cash equivalents
|
$
|
116,733
|
|
|
$
|
124,270
|
|
Remaining borrowing capacity under Credit Facility
|
$
|
1,142,369
|
|
|
$
|
1,125,469
|
|
Outstanding letters of credit under Credit Facility
|
$
|
16,131
|
|
|
$
|
16,131
|
|
|
|
|
|
The Company intends to allocate capital to invest in its future growth, specifically growing and remodeling its store network and eCommerce business together to deliver an omni-channel shopping experience, as well as other long-term strategic investments while returning capital to stockholders through share repurchases and dividends.
Capital expenditures – We expect fiscal 2019 capital expenditures to be approximately $230 million on a gross basis and approximately $200 million on a net basis, which includes tenant allowances provided by landlords. Normal capital requirements primarily relate to the development of our omni-channel platform, including investments in new and existing stores and eCommerce technology. We reduced our new stores growth rate in fiscal 2019 to an anticipated eight new Dick's Sporting Goods stores, which represents a significant reduction from fiscal 2018. Approximately two-thirds of our Dick’s Sporting Goods stores will be up for lease renewal at our option over the next five years. We plan to leverage the significant flexibility within our existing real estate portfolio to capitalize on future real estate opportunities over the near and intermediate term as those leases come up for renewal. The Company also plans to continue to invest in improving its eCommerce fulfillment network and corporate information technology capabilities.
Share repurchases – On March 16, 2016, the Company's Board of Directors authorized a five-year share repurchase program of up to $1 billion of the Company's common stock. During the 26 weeks ended August 3, 2019, the Company repurchased approximately 7.5 million shares of its common stock for $266.6 million. Under the 2016 program, we have repurchased $833.2 million of common stock and have $166.8 million remaining under this authorization. On June 12, 2019, 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. The Company intends to repurchase shares from time-to-time to offset dilution and also may pursue additional repurchases of shares under favorable market conditions. Any future share repurchase programs are subject to authorization by our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
Dividends – During the 26 weeks ended August 3, 2019, the Company paid $51.3 million of dividends to its stockholders. On August 19, 2019, the Company's Board of Directors authorized and declared a quarterly cash dividend in the amount of $0.275 per share of common stock and Class B common stock payable on September 27, 2019 to stockholders of record as of the close of business on September 13, 2019. 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 multiple factors including future earnings, cash flows, financial requirements and other considerations.
The Company believes cash flows generated by operations and funds available under its Credit Facility will be sufficient to satisfy capital requirements through 2019, including planned inventory investments in key growth categories, capital expenditures, share repurchases, and quarterly dividend payments to its stockholders. 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 historical levels.
Changes in cash and cash equivalents are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
|
|
August 3,
2019
|
|
August 4,
2018
|
Net cash (used in) provided by operating activities
|
$
|
(27,224
|
)
|
|
$
|
315,889
|
|
Net cash used in investing activities
|
(111,992
|
)
|
|
(96,515
|
)
|
Net cash provided by (used in) financing activities
|
142,298
|
|
|
(196,315
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(2
|
)
|
|
(42
|
)
|
Net increase in cash and cash equivalents
|
$
|
3,080
|
|
|
$
|
23,017
|
|
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 and stock-based compensation expense, 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 used in operating activities increased $343.1 million for the 26 weeks ended August 3, 2019 compared to the same period last year due primarily to the following:
|
|
•
|
Changes in inventory levels and accounts payable at the end of the current fiscal period decreased operating cash flows by $319.8 million compared to the same period last year, primarily due to strategic investments in key growth categories including footwear, apparel, baseball and golf.
|
|
|
•
|
Changes in accounts receivable at the end of the current fiscal period decreased operating cash flows by $19.5 million compared to the same period last year, primarily due to the timing of collections for vendor receivables year-over-year.
|
Investing Activities
Cash used in investing activities increased $15.5 million for the 26 weeks ended August 3, 2019 compared to the same period last year, due to an increase in gross capital expenditures. The increase in gross capital expenditures was primarily driven by additional store enhancements and technology investments in the current year.
Financing Activities
Financing activities consist primarily of the Company's capital return initiatives, including its share repurchase program and cash dividend payments, cash flows generated from stock option exercises and cash activity associated with our Credit Facility. Cash provided by financing activities for the 26 weeks ended August 3, 2019 totaled $142.3 million compared to cash used in financing activities of $196.3 million for the comparable period of the prior year. The Company had higher net Credit Facility borrowings during the 26 weeks ended August 3, 2019 compared to the same period last year, to fund strategic inventory investments in key categories.
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements as of August 3, 2019 primarily relate to purchase obligations for marketing commitments, including naming rights, licenses for trademarks, minimum requirements with its third-party eCommerce fulfillment provider and technology-related and other ordinary course commitments. The Company has excluded these items from the unaudited Consolidated Balance Sheets in accordance with U.S. GAAP. 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 February 2, 2019, see the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019, filed with the Securities and Exchange Commission on March 29, 2019. 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.