Quarterly Report (10-q)

Date : 08/29/2019 @ 2:01PM
Source : Edgar (US Regulatory)
Stock : Dicks Sporting Goods Inc (DKS)
Quote : 40.86  0.0 (0.00%) @ 12:00AM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 3, 2019
 OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    .
 
Commission File No. 001-31463
 
 DICK'S SPORTING GOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
16-1241537
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
345 Court Street, Coraopolis, PA 15108
(Address of Principal Executive Offices)
 
(724) 273-3400
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of Each Exchange on which Registered
Common Stock, $0.01 par value
 
DKS
 
The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  No
 
The number of shares of common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, outstanding as of August 23, 2019, was 65,887,606 and 24,491,123, respectively.



INDEX TO FORM 10-Q

2


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS 

DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(Amounts in thousands, except per share data)
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Net sales
 
 
$
2,259,212

 
$
2,177,488

 
$
4,179,889

 
$
4,087,207

Cost of goods sold, including occupancy and distribution costs
 
 
1,582,141

 
1,518,207

 
2,939,009

 
2,867,557

 
 
 
 
 
 
 
 
 
 
GROSS PROFIT
 
 
677,071

 
659,281

 
1,240,880

 
1,219,650

 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 
521,072

 
495,325

 
1,008,230

 
965,653

Pre-opening expenses
 
 
996

 
1,429

 
1,574

 
4,138

 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
 
 
155,003

 
162,527

 
231,076

 
249,859

 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
5,550

 
3,050

 
8,631

 
5,706

Other income
 
 
(1,582
)
 
(2,187
)
 
(8,320
)
 
(1,301
)
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
151,035

 
161,664

 
230,765

 
245,454

 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
 
38,501

 
42,267

 
60,706

 
65,972

 
 
 
 
 
 
 
 
 
 
NET INCOME
 
 
$
112,534

 
$
119,397

 
$
170,059

 
$
179,482

 
 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE:
 
 
 

 
 

 
 

 
 
Basic
 
 
$
1.28

 
$
1.21

 
$
1.88

 
$
1.79

Diluted
 
 
$
1.26

 
$
1.20

 
$
1.85

 
$
1.78

 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 

 
 

 
 

 
 

Basic
 
 
88,080

 
98,716

 
90,483

 
100,050

Diluted
 
 
89,400

 
99,591

 
91,894

 
100,872

 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited consolidated financial statements.

3


DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(Dollars in thousands)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
NET INCOME
 
$
112,534

 
$
119,397

 
$
170,059

 
$
179,482

OTHER COMPREHENSIVE INCOME (LOSS):
 
 

 
 

 
 
 
 
Foreign currency translation adjustment, net of tax
 
17

 
(20
)
 
(2
)
 
(42
)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
 
17

 
(20
)
 
(2
)
 
(42
)
COMPREHENSIVE INCOME
 
$
112,551

 
$
119,377

 
$
170,057

 
$
179,440

 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.



4


DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands) 
 
August 3,
2019
 
February 2,
2019
 
August 4,
2018
ASSETS
 

 
 

 
 
CURRENT ASSETS:
 

 
 

 
 
Cash and cash equivalents
$
116,733

 
$
113,653

 
$
124,270

Accounts receivable, net
64,096

 
37,970

 
63,977

Income taxes receivable
4,389

 
6,135

 
3,578

Inventories, net
2,136,797

 
1,824,696

 
1,795,794

Prepaid expenses and other current assets
144,002

 
139,944

 
137,323

Total current assets
2,466,017

 
2,122,398

 
2,124,942

 
 
 
 
 
 
Property and equipment, net
1,479,855

 
1,565,271

 
1,611,532

Operating lease assets
2,454,929

 

 

Intangible assets, net
127,079

 
130,166

 
133,373

Goodwill
250,476

 
250,476

 
250,476

Other assets:
 

 
 

 
 
Deferred income taxes
14,600

 
13,243

 
10,894

Other
122,259

 
105,595

 
113,941

Total other assets
136,859

 
118,838

 
124,835

TOTAL ASSETS
$
6,915,215

 
$
4,187,149

 
$
4,245,158

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
CURRENT LIABILITIES:
 

 
 

 
 
Accounts payable
$
906,721

 
$
889,908

 
$
835,098

Accrued expenses
391,555

 
364,342

 
349,701

Operating lease liabilities
410,477

 

 

Income taxes payable
21,490

 
20,142

 
21,568

Deferred revenue and other liabilities
195,148

 
230,247

 
182,364

Total current liabilities
1,925,391

 
1,504,639

 
1,388,731

LONG-TERM LIABILITIES:
 

 
 

 
 
Revolving credit borrowings
441,500

 

 
108,400

Long-term operating lease liabilities
2,604,897

 

 

Deferred income taxes
5,926

 
11,776

 
19,102

Other long-term liabilities
172,415

 
766,573

 
797,699

Total long-term liabilities
3,224,738

 
778,349

 
925,201

COMMITMENTS AND CONTINGENCIES


 


 


STOCKHOLDERS' EQUITY:
 

 
 

 
 
Common stock
623

 
693

 
732

Class B common stock
245

 
245

 
245

Additional paid-in capital
1,231,325

 
1,214,287

 
1,195,875

Retained earnings
2,565,700

 
2,455,192

 
2,359,024

Accumulated other comprehensive loss
(122
)
 
(120
)
 
(120
)
Treasury stock, at cost
(2,032,685
)
 
(1,766,136
)
 
(1,624,530
)
Total stockholders' equity
1,765,086

 
1,904,161

 
1,931,226

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
6,915,215

 
$
4,187,149

 
$
4,245,158

 
 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

5


DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Class B
 
Additional
 
 
 
Other
 
 
 
 
 
Common Stock
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Capital
 
Earnings
 
Loss
 
Stock
 
Total
BALANCE, February 2, 2019
69,304,874

 
$
693

 
24,541,123

 
$
245

 
$
1,214,287

 
$
2,455,192

 
$
(120
)
 
$
(1,766,136
)
 
$
1,904,161

Adjustment for cumulative effect from change in accounting principle (ASU 2016-02)

 

 

 

 

 
(7,953
)
 

 

 
(7,953
)
Exchange of Class B common stock for common stock
50,000

 

 
(50,000
)
 

 

 

 

 

 

Exercise of stock options
6,388

 

 

 

 
213

 

 

 

 
213

Restricted stock vested
520,095

 
6

 

 

 
(6
)
 

 

 

 

Minimum tax withholding requirements
(158,021
)
 
(1
)
 

 

 
(5,858
)
 

 

 

 
(5,859
)
Net income

 

 

 

 

 
57,525

 

 

 
57,525

Stock-based compensation

 

 

 

 
11,907

 

 

 

 
11,907

Foreign currency translation adjustment, net of taxes of $6

 

 

 

 

 

 
(19
)
 

 
(19
)
Purchase of shares for treasury
(2,968,198
)
 
(30
)
 

 

 

 

 

 
(107,275
)
 
(107,305
)
Cash dividend declared, $0.275 per common share

 

 

 

 

 
(26,635
)
 

 

 
(26,635
)
BALANCE, May 4, 2019
66,755,138

 
$
668

 
24,491,123

 
$
245

 
$
1,220,543

 
$
2,478,129

 
$
(139
)
 
$
(1,873,411
)
 
$
1,826,035

Exercise of stock options
2,001

 

 

 

 
60

 

 

 

 
60

Restricted stock vested
20,920

 

 

 

 

 

 

 

 

Minimum tax withholding requirements
(6,809
)
 

 

 

 
(453
)
 

 

 

 
(453
)
Net income

 

 

 

 

 
112,534

 

 

 
112,534

Stock-based compensation

 

 

 

 
11,175

 

 

 

 
11,175

Foreign currency translation adjustment, net of taxes of ($5)

 

 

 

 

 

 
17

 

 
17

Purchase of shares for treasury
(4,485,903
)
 
(45
)
 

 

 

 

 

 
(159,274
)
 
(159,319
)
Cash dividend declared, $0.275 per common share

 

 

 

 

 
(24,963
)
 

 

 
(24,963
)
BALANCE, August 3, 2019
62,285,347

 
$
623

 
24,491,123

 
$
245

 
$
1,231,325

 
$
2,565,700

 
$
(122
)
 
$
(2,032,685
)
 
$
1,765,086

 


See accompanying notes to unaudited consolidated financial statements.













6



DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED (Continued)
(Dollars in thousands)

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Class B
 
Additional
 
 
 
Other
 
 
 
 
 
Common Stock
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Capital
 
Earnings
 
Loss
 
Stock
 
Total
BALANCE, February 3, 2018
78,317,898

 
$
783

 
24,710,870

 
$
247

 
$
1,177,778

 
$
2,205,651

 
$
(78
)
 
$
(1,442,880
)
 
$
1,941,501

Adjustment for cumulative effect from change in accounting principle (ASU 2014-09)

 

 

 

 

 
20,488

 

 

 
20,488

Exchange of Class B common stock for common stock
119,912

 
1

 
(119,912
)
 
(1
)
 

 

 

 

 

Restricted stock vested
399,604

 
4

 

 

 
(4
)
 

 

 

 

Minimum tax withholding requirements
(118,707
)
 
(1
)
 

 

 
(3,918
)
 

 

 

 
(3,919
)
Net income

 

 

 

 

 
60,085

 

 

 
60,085

Stock-based compensation

 

 

 

 
11,666

 

 

 

 
11,666

Foreign currency translation adjustment, net of taxes of $7

 

 

 

 

 

 
(22
)
 

 
(22
)
Purchase of shares for treasury
(3,338,000
)
 
(33
)
 

 

 

 

 

 
(107,884
)
 
(107,917
)
Cash dividend declared, $0.225 per common share

 

 

 

 

 
(23,672
)
 

 

 
(23,672
)
BALANCE, May 5, 2018
75,380,707

 
$
754

 
24,590,958

 
$
246

 
$
1,185,522

 
$
2,262,552

 
$
(100
)
 
$
(1,550,764
)
 
$
1,898,210

Exchange of Class B common stock for common stock
49,835

 
1

 
(49,835
)
 
(1
)
 

 

 

 

 

Restricted stock vested
8,398

 

 

 

 

 

 

 

 

Minimum tax withholding requirements
(2,437
)
 

 

 

 
(87
)
 

 

 

 
(87
)
Net income

 

 

 

 

 
119,397

 

 

 
119,397

Stock-based compensation

 

 

 

 
10,440

 

 

 

 
10,440

Foreign currency translation adjustment, net of taxes of $6

 

 

 

 

 

 
(20
)
 

 
(20
)
Purchase of shares for treasury
(2,218,200
)
 
(23
)
 

 

 

 

 

 
(73,766
)
 
(73,789
)
Cash dividend declared, $0.225 per common share

 

 

 

 

 
(22,925
)
 

 

 
(22,925
)
BALANCE, August 4, 2018
73,218,303

 
$
732

 
24,541,123

 
$
245

 
$
1,195,875

 
$
2,359,024

 
$
(120
)
 
$
(1,624,530
)
 
$
1,931,226

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


See accompanying notes to unaudited consolidated financial statements.

7


DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
 
26 Weeks Ended
 
August 3,
2019
 
August 4,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
170,059

 
$
179,482

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 

 
 

Depreciation, amortization, and other
128,711

 
120,525

Deferred income taxes
(4,609
)
 
4,417

Stock-based compensation
23,082

 
22,106

Changes in assets and liabilities:
 

 
 

Accounts receivable
(26,859
)
 
(7,315
)
Inventories
(312,101
)
 
(65,229
)
Prepaid expenses and other assets
(5,169
)
 
10,447

Accounts payable
(10,550
)
 
62,357

Accrued expenses
17,909

 
9,556

Income taxes payable / receivable
3,094

 
11,947

Deferred construction allowances
21,961

 
13,146

Deferred revenue and other liabilities
(32,752
)
 
(45,550
)
Net cash (used in) provided by operating activities
(27,224
)
 
315,889

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(110,992
)
 
(96,515
)
Deposits and purchases of other assets
(1,000
)
 

Net cash used in investing activities
(111,992
)
 
(96,515
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Revolving credit borrowings
1,185,850

 
1,162,800

Revolving credit repayments
(744,350
)
 
(1,054,400
)
Payments on other long-term debt and finance lease obligations
(2,644
)
 
(2,629
)
Construction allowance receipts

 

Proceeds from exercise of stock options
273

 

Minimum tax withholding requirements
(6,312
)
 
(4,006
)
Cash paid for treasury stock
(266,624
)
 
(181,706
)
Cash dividends paid to stockholders
(51,258
)
 
(46,040
)
Increase (decrease) in bank overdraft
27,363

 
(70,334
)
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

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
113,653

 
101,253

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
116,733

 
$
124,270

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Accrued property and equipment
$
28,255

 
$
14,402

Cash paid for interest
$
7,865

 
$
5,064

Cash paid for income taxes
$
62,780

 
$
53,056

 
See accompanying notes to unaudited consolidated financial statements.

8


DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

Dick's Sporting Goods, Inc. (together with its subsidiaries, referred to as "the Company", "we", "us" and "our" unless specified otherwise) 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 otherwise specifies, any reference to "year" is to the Company's fiscal year.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements for Quarterly Reports on Form 10-Q and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The interim consolidated financial statements are unaudited and have been prepared on the same basis as the annual audited consolidated financial statements. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information. This unaudited interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 2, 2019 as filed with the Securities and Exchange Commission on March 29, 2019. Operating results for the 13 and 26 weeks ended August 3, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2020 or any other period.

Reclassifications – Certain reclassifications have been made to prior year amounts within the unaudited Consolidated Balance Sheets and Statements of Cash Flows to conform to current year presentation.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)." This update requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018, with early application permitted. A modified retrospective approach is required. In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases," and ASU 2018-11, "Leases (Topic 842), Targeted Improvements," which affect certain aspects of the previously issued guidance. Amendments included an additional transition option that allowed entities to apply the new standard on the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings, as well as a new practical expedient for lessors. The effective date and transition requirements for ASU 2018-10 and ASU 2018-11 are the same as ASU 2016-02.

The Company adopted these ASU’s during the first quarter of fiscal 2019 using the optional transition method. We elected the package of practical expedients permitted under the transition guidance within the new standard, which allows us to not reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, and not to reassess initial direct costs for any existing leases. We also elected the practical expedient related to land easements. We did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.
We have lease agreements with non-lease components that relate to the lease components. We elected the practical expedient to account for non-lease components and the lease components to which they relate, as a single lease component for all classes of underlying assets. We also elected to keep short-term leases with an initial term of twelve months or less off the Consolidated Balance Sheet.


9

 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Adoption of these standards resulted in recognition of lease assets and lease liabilities of $2.5 billion and $3.1 billion, respectively, as of February 3, 2019. As part of adopting the standard, pre-existing liabilities for deferred rent and various lease incentives were reclassified as a component of the lease assets. Additionally, the Company recorded an $8.0 million adjustment to opening retained earnings, primarily resulting from the impairment of lease assets recognized at adoption. The adoption of these standards did not materially affect our consolidated net income or cash flows. Refer to Note 5 to the unaudited Consolidated Financial Statements for additional information.

2.  Earnings Per Common Share
 
Basic earnings per common share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed based on the weighted average number of shares of common stock outstanding, plus the effect of dilutive potential common shares outstanding during the period, using the treasury stock method. Dilutive potential common shares are stock-based awards, which include outstanding stock options, restricted stock and warrants.

The computations for basic and diluted earnings per common share are as follows (in thousands, except per share data): 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Net income
 
$
112,534

 
$
119,397

 
$
170,059

 
$
179,482

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
88,080

 
98,716

 
90,483

 
100,050

Dilutive effect of stock-based awards
 
1,320

 
875

 
1,411

 
822

Weighted average common shares outstanding - diluted
 
89,400

 
99,591

 
91,894

 
100,872

 
 
 
 
 
 
 
 
 
Earnings per common share - basic
 
$
1.28

 
$
1.21

 
$
1.88

 
$
1.79

Earnings per common share - diluted
 
$
1.26

 
$
1.20

 
$
1.85

 
$
1.78

 
 
 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded from diluted calculation
 
3,201

 
3,379

 
3,195

 
3,976



3.  Fair Value Measurements
 
Accounting Standard Codification ("ASC") 820, "Fair Value Measurement and Disclosures", outlines a valuation framework and creates a fair value hierarchy for assets and liabilities as follows:

Level 1:
Observable inputs such as quoted prices in active markets;
 
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 

10

 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Assets measured at fair value on a recurring basis as of August 3, 2019 and February 2, 2019 are set forth in the table below (in thousands):
 
Level 1
Description
August 3,
2019
 
February 2,
2019
Assets:
 
 
 
Deferred compensation plan assets held in trust (1)
$
93,174

 
$
77,324

Total assets
$
93,174

 
$
77,324

 
 
 
 


(1) 
Consists of investments in various mutual funds made by eligible individuals as part of the Company's deferred compensation plans.

The fair value of cash and cash equivalents, accounts receivable, accounts payable, revolving credit borrowings and certain other liabilities approximated book value due to the short-term nature of these instruments at both August 3, 2019 and February 2, 2019.
 
The Company uses quoted prices in active markets to determine the fair value of the aforementioned assets determined to be Level 1 instruments. The Company's policy for recognition of transfers between levels of the fair value hierarchy is to recognize any transfer at the end of the fiscal quarter in which the determination to transfer was made.

4. Revenue Recognition

Revenue is recognized upon satisfaction of all contractual performance obligations and transfer of control to the customer. Revenue is measured as the amount of consideration to which the Company expects to be entitled in exchange for corresponding goods or services. Substantially all of the Company's sales are single performance obligation arrangements for retail sale transactions for which the transaction price is equivalent to the stated price of the product or service, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product or service at the point of sale. Revenue from retail sales is recognized at the point of sale, net of sales tax. Sales tax amounts collected from customers that are assessed by a governmental authority are excluded from revenue. The Company has elected to treat shipping and handling activities occurring subsequent to the transfer of control to the customer to be accounted for as fulfillment costs. 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.

Deferred gift card revenue - Revenue from gift cards and returned merchandise credits (collectively the "cards") is deferred and recognized upon the redemption of the cards. Our gift card liability was $126.6 million and $156.5 million as of August 3, 2019 and February 2, 2019, respectively. During the 26 weeks ended August 3, 2019 and August 4, 2018, we recognized $4.3 million and $3.5 million of gift card breakage revenue, respectively, and experienced approximately $61.5 million and $62.2 million of gift card redemptions that were included in our gift card liability as of February 2, 2019 and February 3, 2018, respectively. Based on the Company's historical experience, the vast majority of gift card revenue is recognized within twelve months of deferral.

Customer loyalty program - Loyalty program points are accrued at the estimated retail value per point, net of estimated breakage. We estimate the breakage of loyalty points based on historical redemption rates experienced within the loyalty program. Our customer loyalty program liability was $30.7 million and $32.4 million, as of August 3, 2019 and February 2, 2019, respectively. During the 26 weeks ended August 3, 2019 and August 4, 2018, we recognized approximately $20.8 million and $23.6 million, respectively, of revenue that was included in our customer loyalty program liability as of February 2, 2019 and February 3, 2018, respectively. Based on the Company's customer loyalty program policies, the vast majority of program points earned are redeemed or expire within twelve months.


11

 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Net Sales by Category - The following table disaggregates the amount of net sales attributable to hardlines, apparel and footwear for the periods presented (in thousands):
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Hardlines (1)
 
$
1,091,149

 
$
1,073,727

 
$
1,965,808

 
$
1,971,134

Apparel
 
679,785

 
641,393

 
1,252,854

 
1,192,543

Footwear
 
451,880

 
433,275

 
881,337

 
854,096

Other (2)
 
36,398

 
29,093

 
79,890

 
69,434

Total net sales
 
$
2,259,212

 
$
2,177,488

 
$
4,179,889

 
$
4,087,207


(1) 
Includes items such as sporting goods equipment, fitness equipment, golf equipment and hunting and fishing gear.

(2) 
Includes the Company's non-merchandise sales categories, including in-store services, shipping revenues and credit card processing revenues.


5. Leases
The Company leases all of its stores, three of its distribution centers and certain equipment under non-cancellable operating leases that expire at various dates through 2033. Initial lease terms are generally for 10 to 15 years and most store leases contain multiple five-year renewal options and rent escalation provisions. The lease agreements provide primarily for the payment of minimum annual rentals, costs of utilities, property taxes, maintenance, common areas and insurance.
We determine whether a contract is or contains a lease at contract inception. Beginning in fiscal 2019, operating lease assets and operating lease liabilities are recognized at commencement date based on the present value of remaining fixed lease payments over the lease term. As the rate implicit in the lease is not readily determinable in most of our leases, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The operating lease asset also includes any fixed lease payments made and includes lease incentives and incurred initial direct costs. Operating lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred and may include certain index-based changes in rent and other non-fixed payments for services provided by the lessor. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Additionally, our leases do not contain any material residual guarantees or material restrictive covenants.
The components of lease cost for the 13 and 26 weeks ended August 3, 2019 were as follows (in thousands):
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 3,
2019
 
August 3,
2019
Operating lease cost
 
$
147,231

 
$
295,271

Short-term lease cost
 
1,812

 
3,004

Variable lease cost
 
29,604

 
59,430

Sublease income
 
(812
)
 
(1,629
)
Total lease cost
 
$
177,835

 
$
356,076






12

 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Supplemental cash flow information related to operating leases for the 26 weeks ended August 3, 2019 is as follows (dollars in thousands):
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
327,912

Non-cash operating lease assets and liabilities obtained in exchange for new or modified leases

 
$
140,381


Supplemental balance sheet information related to operating leases as of August 3, 2019, is as follows:          
Weighted average remaining lease term for operating leases
 
6.94 years

Weighted average discount rate for operating leases
 
6.72
%


Future maturities of operating lease liabilities as of August 3, 2019 are as follows (in thousands):
Fiscal Year
 
 
2019 (excluding the six-month period ended August 3, 2019)
 
$
328,494

2020
 
648,378

2021
 
614,395

2022
 
555,764

2023
 
475,857

2024
 
379,591

Thereafter
 
778,697

Total future undiscounted lease payments
 
3,781,176

Less imputed interest
 
(765,802
)
      Total reported lease liability
 
$
3,015,374

 
 
 


As of August 3, 2019, we have entered into operating leases of approximately $142.5 million that have not yet commenced, primarily related to future store locations.

Disclosures related to periods prior to adoption of Leases (Topic 842)

Future minimum payments determined under the previous accounting standards for operating lease obligations, including committed leases that had not yet commenced, as of February 2, 2019, were as follows (in thousands):
Fiscal Year
 
 
2019
 
$
655,516

2020
 
619,189

2021
 
558,633

2022
 
475,830

2023
 
392,826

Thereafter
 
1,033,034

Total
 
$
3,735,028

 
 
 


Rent expense under these operating leases totaled $132.4 million and $264.7 million for the 13 and 26 weeks ended, August 4, 2018, respectively.


13

 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



6. Debt

Revolving Credit Facility – On June 28, 2019, the Company amended its existing $1.25 billion senior secured revolving credit facility to increase the facility to $1.6 billion, including up to $150 million in the form of letters of credit, and extended the maturity date to June 28, 2024 (the "Credit Facility"). The Credit Facility allows the Company, subject to the satisfaction of certain conditions, to request an increase of up to $500 million in borrowing availability subject to existing or new lenders agreeing to provide such additional revolving commitments.

The Credit Facility is secured by a first priority security interest in certain property and assets, including receivables, inventory, deposit accounts, securities accounts and other personal property of the Company and is guaranteed by the Company's domestic subsidiaries.

The annual interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin percentage. The applicable margin percentage for base rate loans is 0.125% to 0.375% and for adjusted LIBOR rate loans is 1.125% to 1.375%, depending on the borrowing availability of the Company.

The Credit Facility contains a covenant that requires the Company to maintain a minimum adjusted availability of 7.5% of its borrowing base. The Credit Facility also contains certain covenants that could, within specific predefined circumstances, limit the Company's ability to, among other things: incur or guarantee additional indebtedness; pay distributions on, redeem or repurchase capital stock; redeem or repurchase subordinated debt; make certain investments; sell assets; or consolidate, merge or transfer all or substantially all of the Company's assets. Other than in certain limited conditions, the Company is permitted under the Credit Facility to continue to pay dividends and repurchase shares pursuant to its stock repurchase program.

7.  Subsequent Events
 
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 on the Company's 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.

On August 22, 2019, the Company sold two of its technology subsidiaries, Blue Sombrero and Affinity Sports, to Stack Sports for $45 million. 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. 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.

14



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;


15


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.


16


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.





17


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.

18


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.


19


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

 
 


20


(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.

21



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.


22


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

 
 
 
 


23


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