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, the impact to consumer demand and our supply chain due to the coronavirus (“COVID-19”) pandemic, including store closures, changes to consumer demand and store traffic, and supply chain disruptions; investments to enhance the athlete experience, to improve our eCommerce fulfillment capabilities, and to implement technology solutions that improve the athlete experience and our teammates’ productivity; the continued improvements to the functionality and performance of our own eCommerce platform; plans to invest in our vertical brands with improved space in-store, increased marketing, and expansion into additional product categories; anticipated COVID-19 safety costs for the year; plans to leverage our real estate portfolio to capitalize on future opportunities in the near and intermediate term as our existing leases come up for renewal; the impact of the issuance of the Convertible Senior Notes, entering into the bond hedge and warrant transactions, and our intention to repay the principal outstanding amounts of the Convertible Senior Notes using excess cash, free cash flow and borrowings on our Credit Facility; projections of our future profitability; projected capital expenditures; anticipated store openings and relocations; plans to return capital to stockholders through dividends and a minimum of $200 million in share repurchases in fiscal 2021; and our future results of operations and financial condition.
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 2021 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 impact of the duration and scope of the COVID-19 pandemic on our business, operations and financial results, including additional waves of infections or periods of increases in the number of COVID-19 cases in areas in which we operate, and the measures that might be imposed by federal, state, or local governments in response to the pandemic, including restrictions impacting school closures and remote learning requirements, sporting events and local sports leagues and programs;
▪The impact an economic downturn resulting from the COVID-19 pandemic might have on our business and consumer demand for our products and the effectiveness of stimulus payments and other measures to mitigate the impact of the COVID-19 pandemic;
▪The dependence of our business on consumer discretionary spending and our ability to predict or effectively react to changes in consumer demand or shopping patterns, including the short-term and long-term impact due to the COVID-19 pandemic and related mitigation measures such as stimulus payments;
▪Store closures due to the COVID-19 pandemic or civil disturbances;
▪Intense competition in the sporting goods industry and in retail, including the level of competitive promotional activity;
▪Our vendor relationships, disruptions in our or our vendors’ supply chains (including those resulting from the COVID-19 pandemic), increasing direct competition from vendors, and increasing product costs, which could be caused by numerous reasons including foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials due to inflation or other reasons, or foreign political instability;
▪Lawsuits or other claims arising from our response to the COVID-19 pandemic;
▪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 or advocacy efforts related to the sale of firearms and accessories;
▪The impact of our hunt restructuring strategy, including Field & Stream;
▪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;
•The potential impact of an increase to corporate tax rates, such as those set forth in the proposed American Jobs Plan, or alternative legislation that increases income taxes on corporate profits;
•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 vertical brand offerings, including product liability and product recalls, specialty concept stores, and GameChanger;
▪Disruptions or other problems with our information systems;
▪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 an executive officer;
▪Wage increases, which could adversely affect our financial results;
▪Disruption at our supply chain facilities or customer support center;
▪Disruption or cancellation of organized youth and adult sports programs as a result of the COVID-19 pandemic;
▪Poor performance of professional sports teams, professional team lockouts or strikes, retirement, serious injury or scandal involving key athletes, and disruptions to or cancellations of sports leagues and major sporting events due to the COVID-19 pandemic or otherwise;
▪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;
▪We are controlled by our Executive Chairman and Chief Merchandising Officer and his relatives, whose interests may differ from those of our other stockholders;
▪Risks related to our indebtedness, including the Convertible Senior Notes and the related bond hedge and warrant transactions;
▪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 January 30, 2021, filed on March 24, 2021 (our “2020 Annual Report”). 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
We are a leading omni-channel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories. In addition to DICK’S Sporting Goods stores, we own and operate Golf Galaxy and Field & Stream specialty stores, as well as GameChanger, a youth sports mobile app for video streaming, scorekeeping, scheduling and communications. We also offer our products through an eCommerce platform that is integrated with our store network, providing our customers, referred to as our athletes, with expertise as well as the convenience 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 our fiscal year.
Our profitability is primarily influenced by the growth in consolidated same store sales, our number of store locations and selling square footage, the continued integration of eCommerce with brick and mortar stores, the strength of our gross profit margins and our ability to manage expenses. We have grown from 647 DICK’S Sporting Goods stores as of April 30, 2016 to 730 DICK’S Sporting Goods stores as of May 1, 2021. Our current real estate strategy has resulted in a reduction in the rate at which we open new stores in recent years. We intend to continue this strategy over the next few years, which will allow us to continue to leverage the significant flexibility within our existing real estate portfolio to capitalize on future real estate opportunities as leases come up for renewal. We deploy an in-house eCommerce platform, which allows for continued innovation and enhancements to our eCommerce websites and applications, new releases of our mobile and tablet apps, and the development of omni-channel capabilities that integrate our online presence with our brick and mortar stores, including ship-from-store; buy-online, pick-up in store and multi-channel marketing campaigns. We also implemented curbside pickup and returns as additional alternatives for our athletes in response to the COVID-19 pandemic in fiscal 2020, which continue today.
Our eCommerce sales penetration to total net sales increased from approximately 10% in fiscal 2015 to approximately 16% in fiscal 2019. Our eCommerce sales growth further accelerated since the COVID-19 pandemic began in March 2020, resulting in a 100% increase compared to fiscal 2019 and accounting for approximately 30% of total net sales in fiscal 2020. During the first quarter of 2021, eCommerce sales increased 14%, while sales penetration decreased to approximately 20%, as brick and mortar store sales and traffic normalized. Approximately 70% of online sales during the first quarter of 2021 were fulfilled directly by our stores, which serve as localized points of distribution, and our stores enabled 90% of our current quarter sales through online fulfillment and in-person sales.
Industry Challenges
The retail industry as a whole is dynamic, and sporting goods retail in particular has faced significant disruption in recent years, as several sporting goods retailers have gone out of business. Recently, we have reallocated floor space to growing categories while focusing on driving profitable sales, emphasizing a refined merchandise assortment that delivers newness, innovation and exclusivity. We have also made strategic investments in our supply chain, digital capabilities, athlete experience, vertical brands and employees, referred to as teammates, to support these efforts and have focused on increasing productivity, while eliminating non-essential expenses.
COVID-19 Update
Following temporary store closures in March, April and May of 2020 due to the COVID-19 pandemic, our diverse category portfolio, supply chain, technological capabilities and omni-channel platform have enabled us to capitalize on strong consumer demand across golf, outdoor activities, home fitness and active lifestyle categories, which resulted in a consolidated same store sales increase of 9.9% in fiscal 2020. These positive trends continued into fiscal 2021, which, coupled with a resurgence in our team sports business due to the return of many youth sports leagues across the country and recent government stimulus payments, resulted in a 52% increase in net sales compared to the first quarter of 2019, or a consolidated same store sales increase of 115% compared to the first quarter of fiscal 2020, which included the impact of last year’s temporary store closures.
In response to the COVID-19 pandemic, we closed our customer support center, using our business continuity plans to operate our corporate support functions under remote work arrangements. We also implemented additional safety and cleaning protocols at our stores, distribution centers and corporate offices, and provided a 15% pay premium to our store and distribution center teammates through the end of fiscal 2020. We incurred pre-tax COVID-related costs of approximately $13 million in the first quarter of fiscal 2021, and in consideration of the latest guidance from the Centers for Disease Control and Prevention, we expect such costs to decline significantly in the second quarter. We incurred approximately $62 million of COVID-related costs in the first quarter of fiscal 2020, which included $28 million of inventory write-downs that were subsequently recovered in the second quarter of fiscal 2020 due to better than anticipated sales. Following the conclusion of our temporary 15% pay premium program, we transitioned store and distribution center teammates to compensation programs with a longer-term focus in fiscal 2021, including an accelerated annual merit increase and higher wage minimums.
The future impact of the COVID-19 pandemic on our business remains uncertain, including the longer-term economic recovery and what consumer discretionary spending behavior patterns may emerge when the pandemic subsides. Our current year outlook contemplates this uncertainty and we will continue to actively manage any impact to our business.
How We Evaluate Our Operations
Senior management focuses on certain key indicators to monitor our 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 permanently 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 our general liquidity needs 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. See further discussion of our cash flows in the “Liquidity and Capital Resources” section herein.
▪Quality of merchandise offerings – To measure acceptance of our merchandise offerings, we monitor sell-throughs, inventory turns, gross margins and markdown rates at the department and style level. This analysis helps us manage inventory levels to reduce working capital requirements and deliver optimal gross margins by improving merchandise flow, ensuring our in-stock positions are strong for key high demand items, and establishing appropriate price points to minimize markdowns.
▪Store productivity – To assess store-level performance, we monitor 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 2020 Annual Report, we consider our policies on inventory valuation, business development allowances, goodwill and intangible assets, impairment of long-lived assets, self-insurance reserves and stock-based compensation to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
RESULTS OF OPERATIONS AND OTHER SELECTED DATA
Due to temporary store closures and other unusual actions taken in fiscal 2020 in response to the COVID-19 pandemic, our operating plan for fiscal 2021 is based on results from fiscal 2019. Accordingly, we have incorporated results from the first quarter of fiscal 2019 throughout our discussion of results of operations.
Executive Summary
▪In the current quarter, we reported net income of $361.8 million, or $3.41 per diluted share, compared to a net loss of $143.4 million, or $1.71 per diluted share, during the first quarter of 2020. First quarter 2019 net income was $57.5 million, or $0.61 per diluted share.
•Current quarter net income included approximately $13 million of pre-tax COVID-related safety costs, or $0.09 per diluted share, net of tax, compared to $62 million of pre-tax COVID-related expenses and inventory write-downs, or $0.50 per diluted share, net of tax, in the first quarter of fiscal 2020.
•Net income in the current quarter also included $5.4 million of non-cash interest expense, net of tax, and earnings per diluted share included 9.2 million shares related to our Convertible Senior Notes that will be offset at conversion by our bond hedge. Together, these decreased current quarter earnings per diluted share by $0.38.
•Net income in the first quarter of 2019 included $5.6 million, net of tax, or $0.06 per diluted share, of a non-cash asset impairment charge and an increase to net income of $4.7 million, net of tax, or $0.05 per diluted share, resulting from the settlement of a litigation contingency previously accrued during fiscal 2017.
•Net sales increased 119% to $2,918.7 million in the current quarter from $1,333.2 million during the first quarter of 2020, and increased 52% from $1,920.7 million during the first quarter of 2019.
▪Consolidated same store sales increased 115% from the first quarter of 2020. First quarter 2020 consolidated same store sales decreased 29.5% from the 2019 quarter, driven by temporary store closures that started on March 18, 2020 to help prevent the spread of COVID-19. First quarter 2019 consolidated same store sales were flat compared to the 2018 quarter.
▪Since the COVID-19 pandemic began, eCommerce sales growth has accelerated, increasing approximately 14% in the current quarter compared to the first quarter of 2020. eCommerce penetration has grown from 13% of total net sales in the first quarter of 2019 to 20% for the first quarter of 2021.
•In the first quarter of 2021, we:
◦Declared and paid a quarterly cash dividend in the amount of $0.3625 per share on our common stock and Class B common stock.
◦Repurchased 1.03 million shares of common stock for a total of $76.8 million.
•The following table summarizes store openings and permanent store closures for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
May 1, 2021
|
|
13 Weeks Ended
May 2, 2020
|
|
DICK’S Sporting Goods (1)
|
|
Specialty Concept Stores (2)
|
|
Total
|
|
DICK’S Sporting Goods
|
|
Specialty Concept Stores (2)
|
|
Total
|
Beginning stores
|
728
|
|
|
126
|
|
|
854
|
|
|
726
|
|
|
124
|
|
|
850
|
|
Q1 New stores
|
2
|
|
|
—
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed stores
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Ending stores
|
730
|
|
|
125
|
|
|
855
|
|
|
726
|
|
|
125
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocated stores
|
3
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
1
|
|
|
4
|
|
(1)Includes one new DICK'S House of Sport store which was a relocation of a former DICK'S Sporting Goods store.
(2)Includes our Golf Galaxy and Field & Stream stores, as well as our outlet stores, excluding temporary locations. In some markets we operate DICK'S Sporting Goods stores adjacent to specialty concept stores on the same property with a pass-through for athletes. The Company refers to this format as a "combo store" and includes combo store openings within both the DICK'S Sporting Goods and specialty concept store reconciliations, as applicable.
The following table presents selected information from the unaudited consolidated statements of operations as a percentage of net sales and the changes in the percentage of net sales from the comparable 2020 and 2019 periods, and other data, and is provided to facilitate a further understanding of our business. This table 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 Change in Percentage of Net Sales from Prior Year 2020-2021 (A)
|
|
Basis Point Change in Percentage of Net Sales from Two Years Ago 2019-2021 (A)
|
|
13 Weeks Ended
|
|
|
|
May 1,
2021 (A)
|
|
May 2,
2020 (A)
|
|
May 4,
2019 (A)
|
|
|
Net sales (1)
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
N/A
|
|
N/A
|
Cost of goods sold, including occupancy and distribution costs (2)
|
62.70
|
|
|
83.55
|
|
|
70.65
|
|
|
(2,085)
|
|
(795)
|
Gross profit
|
37.30
|
|
|
16.45
|
|
|
29.35
|
|
|
2,085
|
|
795
|
Selling, general and administrative expenses (3)
|
20.84
|
|
|
30.24
|
|
|
25.36
|
|
|
(940)
|
|
(452)
|
Pre-opening expenses (4)
|
0.15
|
|
|
0.17
|
|
|
0.03
|
|
|
(2)
|
|
12
|
Income (loss) from operations
|
16.30
|
|
|
(13.96)
|
|
|
3.96
|
|
|
3,026
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
0.46
|
|
|
0.60
|
|
|
0.16
|
|
|
(14)
|
|
30
|
Other (income) expense
|
(0.25)
|
|
|
1.01
|
|
|
(0.35)
|
|
|
(126)
|
|
10
|
Income (loss) before income taxes
|
16.10
|
|
|
(15.58)
|
|
|
4.15
|
|
|
3,168
|
|
1,195
|
Provision for (benefit from) income taxes
|
3.70
|
|
|
(4.82)
|
|
|
1.16
|
|
|
852
|
|
254
|
Net income (loss)
|
12.39
|
%
|
|
(10.76
|
%)
|
|
3.00
|
%
|
|
2,315
|
|
939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
Consolidated same store sales change (5)
|
115.2
|
%
|
|
(29.5
|
%)
|
|
—
|
%
|
|
|
|
|
Number of stores at end of period (6)
|
855
|
|
|
851
|
|
|
858
|
|
|
|
|
|
Total square feet at end of period (6)
|
42,096,539
|
|
41,809,138
|
|
42,236,261
|
|
|
|
|
(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 or net realizable value); freight; distribution; shipping; and store occupancy costs. We define 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 our internal eCommerce platform, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating our 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 we take possession of a site through the date the store opens.
(5)Consolidated same store sales include stores that were temporarily closed during fiscal 2020 as a result of the COVID-19 pandemic. The method of calculating consolidated same store sales varies across the retail industry, including as to the treatment of temporary store closures as a result of the COVID-19 pandemic. Accordingly, our method of calculating this metric may not be the same as other retailers’ methods.
(6)Includes our DICK’S Sporting Goods, Golf Galaxy, Field & Stream and outlet stores. Excludes temporary locations.
13 Weeks Ended May 1, 2021 Compared to the 13 Weeks Ended May 2, 2020
Net Sales
Net sales increased approximately 119% to $2,918.7 million in the current quarter from $1,333.2 million in the quarter ended May 2, 2020. Consolidated same store sales increased by $1,484.0 million, or 115% after giving effect to last year’s temporary store closures and reduced customer traffic resulting from the COVID-19 pandemic. The increase in consolidated same store sales was broad-based across hardlines, apparel and footwear, and included a 90% increase in transactions and a 25% increase in sales per transaction. Additionally, our consolidated same store sales increase included an increase in brick and mortar sales of nearly 190%, while eCommerce sales increased approximately 14%.
Compared to the quarter ended May 4, 2019, net sales in the current quarter increased approximately 52%. This included a 40% increase in brick and mortar sales and a 139% increase in eCommerce sales. eCommerce sales penetration as a percentage of net sales increased to approximately 20% during the current quarter compared to approximately 13% during the first quarter of 2019. As expected, eCommerce sales penetration decreased from 39% of net sales in last year’s quarter due to last year’s temporary store closures.
Income (Loss) from Operations
Income from operations increased to $475.8 million in the current quarter compared to a loss of $186.2 million for the quarter ended May 2, 2020 and $76.1 million of income for the quarter ended May 4, 2019.
Gross profit increased to $1,088.6 million in the current quarter from $219.3 million for the quarter ended May 2, 2020 and increased as a percentage of net sales by approximately 2,100 basis points due primarily to occupancy leverage and higher merchandise margin. Occupancy costs, which after the cost of merchandise represents the largest item within our cost of goods sold, are generally fixed in nature and fluctuate based on the number of stores that we operate. Due to the increase in sales our occupancy costs leveraged by approximately 1,000 basis points while increasing $3.9 million compared to the quarter ended May 2, 2020. Merchandise margin increased 787 basis points, primarily driven by fewer promotions and a favorable sales mix. Additionally, last year’s quarter included $28 million of inventory write-downs resulting from our temporary store closures, which were subsequently recovered in the second quarter of 2020 due to better than anticipated sales and margin on merchandise nearing end of life. The remaining increase in gross profit as a percentage of net sales was driven by lower eCommerce shipping expense due primarily to a lower penetration of eCommerce sales.
Compared to the quarter ended May 4, 2019, gross profit increased approximately 795 basis points as a percentage of net sales, driven by occupancy leverage of 475 basis points and merchandise margin expansion of 312 basis points due to fewer promotions.
Selling, general and administrative expenses increased 51% to $608.3 million in the current quarter from $403.2 million for the 2020 quarter, but decreased as a percentage of net sales by 940 basis points due primarily to leverage from the increase in sales. The current quarter included an increase of $21.9 million of expense associated with changes in our deferred compensation plan investment values, for which the corresponding investment income was recognized in other income. The remaining $183.2 million net increase to support the increase in sales was due primarily to the normalization of last year’s operating expense reductions following our temporary store closures and higher incentive compensation expense. Selling, general and administrative expense included $13 million and $31 million of COVID-related costs in the current quarter and prior year quarter, respectively. The prior year COVID-related costs were net of a $16.6 million benefit from employee retention tax credits provided by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
Compared to the 2019 quarter, selling, general and administrative expenses decreased as a percentage of net sales by 452 basis points, while increasing 25% from $487.2 million for the 2019 quarter. The $121.1 million increase in selling, general and administrative expenses was due primarily to higher store payroll and operating expenses incurred to support the increase in net sales, higher incentive compensation expense and COVID-related safety costs.
Pre-opening expenses increased to $4.5 million in the current quarter from $2.3 million for the quarter ended May 2, 2020. Pre-opening expenses in any period typically fluctuate depending on the timing and number of store openings and relocations.
Interest Expense
Interest expense was $13.4 million in the current quarter compared to $8.0 million in the prior year quarter. The increase was primarily due to a full quarter of interest expense on the convertible debt issued in mid-April 2020 and included non-cash debt discount amortization of $7.3 million in the current quarter. The increase in interest expense was partially offset by a reduction in interest expense incurred on borrowings on our revolving credit facility, which we drew down for precautionary reasons in response to the COVID-19 pandemic in the prior year.
Other (Income) Expense
Other income totaled $7.4 million in the current quarter compared to expense of approximately $13.5 million in the prior year quarter. Substantially all of the change was due to changes in our deferred compensation plan investment values, which we account for by recognizing investment income or expense and recording an offsetting charge or reduction to selling, general and administrative costs.
Income Taxes
Our effective tax rate was 23.0% in the current quarter and 31.0% in the quarter ended May 2, 2020. The current quarter effective tax rate was favorably impacted by the vesting of employee equity awards at a higher share price than awards that vested in the prior year quarter. The rate for the prior year quarter was higher than our blended statutory rate due to our anticipated net operating loss for fiscal 2020 and included an estimated benefit resulting from the CARES Act, which allows for the carry-back of net operating losses to periods prior to the Tax Cuts and Jobs Act, when the federal statutory tax rate was 35%. We subsequently adjusted our effective tax rate in the second quarter of 2020, as we no longer anticipated a full year net operating loss following the reopening of our stores.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital needs have generally been met by net cash provided by operating activities, supplemented by borrowings under our senior secured revolving credit facility (the “Credit Facility”) as necessary. We generally utilize our Credit Facility for working capital needs based primarily on the seasonal nature of our operating cash flows, as well as to fund share buybacks, dividends and capital expenditures. Historically, our peak borrowing level has occurred early in the fourth quarter as we increase inventory in advance of the holiday selling season.
We believe that we have sufficient cash flows from operations to operate our business for at least the next twelve months, supplemented by funds available under our Credit Facility, if necessary. We may require additional funding should we pursue strategic acquisitions or undertake share repurchases, other investments or store expansion rates in excess of historical levels.
Credit Facility
Our Credit Facility has a limit of $1.855 billion, which includes a maximum amount of $150 million to be issued in the form of letters of credit. Under the terms of the Credit Facility, subject to satisfaction of certain conditions, we may request an increase of up to $245 million in additional borrowing availability. Interest on outstanding borrowings is payable on a monthly basis and accrues, at our option, at a rate equal to a variable base rate or an adjusted LIBOR rate plus, in each case, an applicable margin percentage. As of May 1, 2021, we have total remaining borrowing capacity, after adjusting for letters of credit, of $1.6 billion.
Credit Facility information for the year-to-date periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
May 1,
2021
|
|
May 2,
2020
|
Funds drawn on Credit Facility
|
$
|
—
|
|
|
$
|
1,291.7
|
|
Number of business days with outstanding balance on Credit Facility
|
—
|
|
|
64 days
|
Maximum daily amount outstanding under Credit Facility
|
$
|
—
|
|
|
$
|
1,429.0
|
|
|
|
|
|
Liquidity information as of the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
May 1,
2021
|
|
May 2,
2020
|
Outstanding borrowings under Credit Facility
|
$
|
—
|
|
|
$
|
1,429.0
|
|
Cash and cash equivalents
|
$
|
1,858.7
|
|
|
$
|
1,484.0
|
|
Remaining borrowing capacity under Credit Facility
|
$
|
1,600.9
|
|
|
$
|
213.8
|
|
Outstanding letters of credit under Credit Facility
|
$
|
16.1
|
|
|
$
|
16.1
|
|
|
|
|
|
Convertible Senior Notes due 2025
We have an aggregate principal amount of $575 million of Convertible Senior Notes outstanding. Cash interest accrues at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15. We currently anticipate that we will repay the principal amount of the Convertible Senior Notes in cash, whether in connection with an early conversion of such notes or repayment at maturity, using excess cash, free cash flow and borrowings on our Credit Facility to minimize dilution. However, we may need to pursue additional sources of liquidity to repay the Convertible Senior Notes in cash at their maturity date or upon early conversion, as applicable. On May 1, 2021, the stock price conditions under which the Convertible Senior Notes could be convertible at the holders’ option were met. However, we have not received any conversion requests through the filing date of this Form 10-Q.
There can be no assurance that capital required to repay our Convertible Senior Notes will be available on terms that are favorable to us, or at all.
Capital Expenditures
Capital expenditures are primarily allocated toward the development of our omni-channel platform, including investments in new and existing stores and eCommerce technology, while we have strived to continuously improve our supply chain and corporate technology capabilities.
We anticipate that fiscal 2021 capital expenditures will be in a range of $300 to $325 million, net of construction allowances provided by landlords. We expect our investments to be focused on enhancing the athlete experience in our existing and new stores, including merchandise presentation, space optimization and improving the golf club fitting and lesson experience in our golf business. Additionally, we will continue to invest in technology that supports the athlete experience and teammate productivity, as well as in new store development. In the first quarter of 2021, capital expenditures totaled $71.1 million on a gross basis, and tenant allowances provided by landlords were $13.9 million.
Share Repurchases
From time-to-time, we may opportunistically repurchase shares of our common stock under favorable market conditions. On March 16, 2016, our Board of Directors authorized a five-year share repurchase program of up to $1.0 billion of our common stock. On June 12, 2019, our Board of Directors authorized an additional five-year share repurchase program of up to $1.0 billion of our common stock. During the 13 weeks ended May 1, 2021, we repurchased approximately 1.03 million shares of our common stock for $76.8 million, which exhausted the remaining authorization from 2016, and have $954 million remaining under the 2019 authorization.
Any future share repurchase programs are subject to the authorization by our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
Dividends
During the 13 weeks ended May 1, 2021 and May 2, 2020, we paid $33.3 million and $28.1 million, respectively, of dividends to our stockholders. The declaration of future dividends and the establishment of the per share amount, record dates and payment dates for any such future dividends are subject to authorization by our Board of Directors and are dependent upon multiple factors including future earnings, cash flows, financial requirements and other considerations.
Cash Flows
Changes in cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
(in millions)
|
May 1,
2021
|
|
May 2,
2020
|
Net cash provided by (used in) operating activities
|
$
|
447.4
|
|
|
$
|
(214.8)
|
|
Net cash used in investing activities
|
(73.4)
|
|
|
(59.6)
|
|
Net cash (used in) provided by financing activities
|
(173.3)
|
|
|
1,689.2
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
(0.1)
|
|
Net increase in cash and cash equivalents
|
$
|
200.7
|
|
|
$
|
1,414.7
|
|
Operating Activities
Cash flows from operating activities increased $662.2 million for the 13 weeks ended May 1, 2021 compared to the same period in the prior year. The increase was due primarily to higher earnings in the current period as compared to the net loss we recorded in the prior year quarter due to the COVID-19 pandemic. The remaining increase in operating cash flows was primarily due to the timing of cash payments for income taxes, partially offset by precautionary liquidity measures we took in response to the COVID-19 pandemic, including deferrals of rent and qualified payroll tax payments as permitted by the CARES Act in last year’s first quarter. We anticipate that future operating cash flows will include comparably higher cash payments for income taxes and inventory replenishment over the next 12 months.
Investing Activities
Cash used in investing activities increased $13.8 million for the 13 weeks ended May 1, 2021 compared to the prior year period. The increase in gross capital expenditures was primarily driven by investments to enhance the athlete experience in our existing stores, including merchandise presentation, space optimization and investments to enhance the fitting and lesson experience in our golf business.
Financing Activities
Financing activities have historically consisted of capital return initiatives, including share repurchases and cash dividend payments, cash flows generated from stock option exercises and cash activity associated with our Credit Facility. Cash provided by financing activities decreased $1,862.5 million for the 13 weeks ended May 1, 2021 compared to the prior year period. The decrease is primarily driven by the precautionary measures we took in response to the COVID-19 pandemic during the prior year period, which included a significant draw down on the Credit Facility and activities related to the issuance of the Convertible Senior Notes.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of May 1, 2021 primarily relate to purchase obligations for marketing commitments, including naming rights, licenses for trademarks, minimum requirements with our third-party eCommerce fulfillment provider and technology-related and other ordinary course commitments. We have excluded these items from the unaudited Consolidated Balance Sheets in accordance with U.S. GAAP. We do 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
We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of our contractual obligations and other commercial commitments as of January 30, 2021, see our 2020 Annual Report. 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.