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 the business due to the coronavirus (COVID-19) pandemic, including store closures, decreased consumer demand and traffic, and supply chain disruptions; that our efforts to increase and maintain liquidity will be sufficient to operate during the disruption caused by COVID-19; our expectation that we will continue to open temporarily closed stores through the remainder of the second quarter and into the third quarter; planned strategic investments and growth strategies, including the continued enhancement of our digital capabilities and eCommerce platform, investments in our eCommerce fulfillment network and corporate information technology capabilities, improvements in the customer experience in both stores and online, and inventory investments in key growth categories; plans to remove hunt merchandise from additional DICK’S Sporting Goods stores and replace with merchandise that is more relevant to the local market; plans to reduce our store growth rate and leverage our real estate portfolio to capitalize on future opportunities in the near and intermediate term as our existing leases come up for renewal; projections of our future profitability and results of operations; plans to open new stores and remodel existing stores; investments in our teammates and their productivity; the impact of the issuance of the Convertible Senior Notes; eliminating non-essential expenses to fund our future strategic investments; the hunt industry remaining under significant pressure; capital expenditures; the temporary suspension of our dividend and share repurchase programs; 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 2020 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 on our business, operations and financial results due to the duration and scope of the COVID-19 pandemic, including whether there is a second wave or periods of increases in the number of COVID-19 cases in areas in which we operate, and the restrictions imposed by federal, state, and local governments in response to the pandemic;
▪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;
▪Store closures and other impacts to our business resulting from civil disturbances;
▪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;
▪The impact of the strategic review of our hunt business, 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;
•Our ability to manage the impact of new tariffs or increased rates on existing tariffs;
•Our vendor relationships, disruptions in our or our vendors’ supply chains (including those caused by COVID-19), 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, including changes due to COVID-19;
▪Lack of available retail store sites on terms acceptable to us, our ability to leverage the flexibility within our existing real estate portfolio to capitalize on future real estate opportunities over the near and intermediate term as our leases come up for renewal, and other costs and risks relating to a brick and mortar retail store model;
▪Unauthorized disclosure of sensitive or confidential customer information;
▪Risks associated with our private brand offerings, including product liability and product recalls, specialty concept stores, and GameChanger;
▪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, retirement, serious injury or scandal involving key athletes, and disruptions to or cancellations of sports leagues and major sporting events due to COVID-19;
▪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 Chairman and Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders;
▪Risks related to our indebtedness, including the Convertible Senior Notes;
▪Our current anti-takeover provisions, which could prevent or delay a change in control of the Company; and
▪The duration of the temporary suspension of our dividend and stock repurchase programs.
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 1, 2020, filed on March 20, 2020. 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 through our teammates, in-store services and unique specialty shop-in-shops. In addition to DICK’S Sporting Goods stores, we own and operate Golf Galaxy and Field & Stream stores as well as GameChanger, a youth sports mobile app for scheduling, communications and live scorekeeping. We also offer our products through a content-rich eCommerce platform that is integrated with our store network and provides athletes 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 our fiscal year.
Our profitability is primarily influenced by our number of store locations and selling square footage, the continued integration of eCommerce with brick and mortar stores, the growth in consolidated same store sales, which includes our eCommerce business, the strength of our gross profit margins, and our ability to manage expenses. We have grown from 612 DICK’S Sporting Goods stores as of May 2, 2015 to 726 DICK’S Sporting Goods stores as of May 2, 2020. In recent years, we have reduced the rate at which we open new stores, and we intend to continue this strategy over the next few years in an effort 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. We have transitioned to an insourced eCommerce platform, allowing 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. In response to the COVID-19 pandemic, we implemented curbside contactless pickup and return to store at our store locations as an additional alternative for our athletes.
Our eCommerce sales penetration to total net sales increased from approximately 9% in fiscal 2014 to approximately 16% in fiscal 2019. Following our temporary store closures through the end of the first quarter of 2020, eCommerce sales grew 210%, with our new curbside contactless pickup accounting for over 40% of our total online business during this time period. For the first fiscal quarter as a whole, eCommerce sales penetration was approximately 39%, and approximately 90% of our eCommerce sales were generated within brick and mortar store trade areas.
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. Vendors have broadened their distribution into department stores and family footwear channels while continuing to grow their direct to consumer business. We have responded to these challenges by reallocating 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, customer experience, private brands and teammates to support these efforts and have focused on increasing productivity, while eliminating non-essential expenses which has enabled us to fund our future strategic investments.
COVID-19 Update
In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a pandemic, which continued to spread globally and throughout the United States. Through March 10, 2020, our consolidated same store sales had increased 7.9% compared to the same period of fiscal 2019. Our stores subsequently experienced a significant reduction in customer traffic and demand resulting from the spread of COVID-19. In response to the public health crisis posed by COVID-19, we prioritized the health and safety of our teammates and athletes and temporarily closed our stores to the public after the close of business on March 18, 2020. We also closed our corporate office to comply with mandatory shelter-in-place orders and meet the recommended social distancing guidance, using our business continuity plans to operate our corporate support functions under remote work arrangements.
We continued to serve our athletes through our content-rich eCommerce platform, which experienced accelerated sales growth in the days and weeks following our temporary store closures, and leveraged our store network for ship-from-store and curbside contactless pickup capabilities, which allowed us to sell through inventory in stores and provide service to our athletes who preferred to pick up their merchandise via a contactless process at our store locations. Although our eCommerce sales growth partially offset the sales loss from our temporary store closures, these closures, reduced customer traffic and adjustments to our operations had a material impact on our first quarter financial results.
In response to the impact of COVID-19, we adjusted our operations and took a number of precautionary measures, including, among other things:
•Significantly reducing operating expenses and inventory receipts;
•Modifying our capital allocation plan for fiscal 2020, including a reduction in planned capital expenditures and temporary suspension of our share repurchase and dividend programs;
•Extending payment terms with our vendors;
•Negotiating rent deferrals and abatements with our landlords for certain store locations, neither of which had a significant impact on our earnings for the quarter;
•Temporarily deferring salaries for our executives, senior leadership, and certain other teammates;
•Temporarily suspending for Ed Stack, Chairman and Chief Executive Officer, Lauren Hobart, President and Lee Belitsky, Chief Financial Officer other than to cover benefits;
•Suspending payment of cash retainers for members of our Board of Directors;
•Furloughing a significant number of our teammates at our stores, distribution centers and corporate headquarters effective April 12, 2020;
•Drawing $1.4 billion from our revolving credit facility, which was amended to increase our borrowing capacity by $255.0 million; and
•Issuing $575.0 million par value convertible senior notes due 2025, which added over $500 million of net proceeds to our cash position.
As disclosed in the “Liquidity and Capital Resources” section herein, as of May 2, 2020, we had total cash and cash equivalents of $1.5 billion and remaining borrowing availability of $213.8 million under our Credit Facility. In addition, there are no debt maturities until fiscal 2024. We believe that the measures we have taken to increase and maintain our liquidity have provided us with sufficient cash flows to operate our business for at least the next 12 months. As a result of actions taken to support our teammates as well as impacts from our temporary store closures, we incurred approximately $34 million of incremental compensation and safety costs and $28 million of inventory write-downs during the quarter ended May 2, 2020.
Beginning in late April 2020, we reopened a number of our stores where permitted by federal, state and local directives. As of the end of May, approximately 80% of our stores were open to the public, and we expect to continue to reopen our temporarily closed stores through the remainder of the second quarter and into the third quarter. Through the first four weeks of the second quarter, our consolidated same store sales have decreased approximately 4.0% compared to the same period of fiscal 2019, and we continue to see higher eCommerce sales, even in those markets where stores have reopened. Additionally, we have added safety and cleaning protocols at our stores, distribution centers and corporate offices. We have recently permitted a small number of teammates to return to our corporate office while maintaining compliance with current social distancing guidelines. Concurrent with the reopening of our stores, we recently restored previously reduced salaries for our teammates, except for our Chief Executive Officer and our President, and we have begun to bring teammates back from furlough.
The ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, including the duration and severity of the COVID-19 outbreak, actions taken to contain its spread as well as its impact to consumer discretionary spending and the pace of economic recovery when the pandemic subsides. Therefore, we currently are not able to estimate the full impact of COVID-19 on our financial condition and future results of operations. In the near term, we expect that this situation will have an adverse effect on our reported results for second fiscal quarter of 2020 and possibly beyond, as we continue to reopen our stores. We will continue to actively monitor the effects that COVID-19 has on our business. A prolonged period of store closures, changes in customer behaviors and reductions of consumer discretionary spending would require us to continue to evaluate our business assumptions and estimates. Such conditions would likely result in lower future net sales and cash flow, which could lead to impairment of our store and other assets, as well as increase the risks associated with excess inventory.
Hunt Restructuring Update
In connection with our previously disclosed strategic review of our hunt business, we removed hunt category merchandise from approximately 135 DICK’S Sporting Goods stores through the end of fiscal 2019 and reallocated the space in these stores to a localized assortment in an effort to drive growth. In the fourth quarter of fiscal 2019, we announced a plan to remove the hunt department from approximately 440 additional DICK’S Sporting Goods stores in fiscal 2020, which would have left the hunt department in approximately 12% of our remaining stores. During the first quarter of fiscal 2020, we removed the hunt department from approximately 170 DICK’S Sporting Goods stores. However, we have delayed our plans to remove the hunt department from other stores in fiscal 2020, as part of our reduction in our planned capital expenditures in response to the COVID-19 pandemic.
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 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. We typically generate significant cash flows from operating activities 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 our cash flows in the “Liquidity and Capital Resources” section herein.
▪Quality of merchandise offerings – To measure acceptance of its 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 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 Annual Report on Form 10-K for the fiscal year ended February 1, 2020, filed with the Securities and Exchange Commission on March 20, 2020, 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
The decreases in earnings per share, net income and sales for the current quarter as compared to the first quarter of fiscal 2019 were primarily due to the COVID-19 pandemic, which resulted in temporary store closures and reduced customer traffic from March 11, 2020 through the end of the quarter.
Executive Summary
▪In the current quarter, we reported a net loss of $143.4 million, or $1.71 per diluted share, compared to net income of $57.5 million, or $0.61 per diluted share, during the first quarter of 2019.
•The current quarter net loss included $41.8 million of expenses, net of tax, or $0.50 per diluted share, for teammate compensation and safety costs and inventory write-downs related to COVID-19.
•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 decreased 30.6% to $1,333.2 million in the current quarter from $1,920.7 million during the first quarter of 2019.
◦Consolidated same store sales decreased 29.5% from the first quarter of 2019, which included an increase of approximately 110% in eCommerce sales. Through March 10, 2020, our consolidated same store sales had increased 7.9% compared to the same period of fiscal 2019.
◦Following our store closures due to COVID-19, eCommerce sales grew 210%, with our new curbside contactless pickup service accounting for over 40% of our total online business during this time period. As a result, eCommerce sales penetration increased to approximately 39% of total net sales during the current quarter compared to approximately 13% of total net sales during the first quarter of 2019.
•In addition, during the current quarter we:
◦Issued $575.0 million par value convertible senior notes due 2025, which added over $500.0 million of net proceeds to our cash position;
◦Drew $1.4 billion from our Credit Facility, which was amended to increase our borrowing capacity by $255.0 million; and
◦Declared and paid a quarterly cash dividend in the amount of $0.3125 per share on our common stock and Class B common stock. We subsequently temporarily suspended our dividend program.
•The following table summarizes store openings and permanent store closures for the periods indicated:
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13 Weeks Ended
May 2, 2020
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13 Weeks Ended
May 4, 2019
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Dick’s Sporting Goods
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Specialty Concept Stores (1)
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Total
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Dick’s Sporting Goods
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Specialty Concept Stores (1)
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Total
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Beginning stores
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726
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124
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850
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729
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130
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|
|
859
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Q1 New stores
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1
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2
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|
|
3
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—
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1
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1
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Closed stores
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1
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1
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|
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2
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|
|
2
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|
|
—
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2
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Ending stores
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726
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|
125
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|
|
851
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727
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|
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131
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|
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858
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Relocated stores
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3
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1
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|
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4
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|
|
1
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|
|
—
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1
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(1) Includes our Golf Galaxy, Field & Stream and clearance stores. In some markets, we operate DICK’S Sporting Goods stores adjacent to our specialty concept stores on the same property with a pass-through for customers. We refer to this format as a “combo store” and include combo store openings within both the DICK’S Sporting Goods and specialty concept store reconciliations, as applicable.
The following 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 prior year period, and other data, which 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.
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Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2019-2020 (A)
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13 Weeks Ended
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May 2, 2020 (A)
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May 4,
2019 (A)
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Net sales (1)
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100.00
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%
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100.00
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%
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N/A
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Cost of goods sold, including occupancy and distribution costs (2)
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83.55
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|
|
70.65
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|
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1,290
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Gross profit
|
16.45
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|
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29.35
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|
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(1,290)
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Selling, general and administrative expenses (3)
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30.24
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|
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25.36
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|
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488
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Pre-opening expenses (4)
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0.17
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0.03
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14
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(Loss) income from operations
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(13.96)
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3.96
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(1,792)
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Interest expense
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0.60
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0.16
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|
|
44
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Other expense (income)
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1.01
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|
|
(0.35)
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|
|
136
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(Loss) income before income taxes
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(15.58)
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|
|
4.15
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|
|
(1,973)
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(Benefit from) provision for income taxes
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(4.82)
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|
|
1.16
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|
|
(598)
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Net (loss) income
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(10.76
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%)
|
|
3.00
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%
|
|
(1,376)
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Other Data:
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|
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Consolidated same store sales decrease (5)
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(29.5
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%)
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—
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%
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Number of stores at end of period (6)
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851
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|
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858
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|
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Total square feet at end of period (6)
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41,809,138
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42,236,261
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(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. 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 of store opening.
(5)Consolidated same store sales include stores that were temporarily closed in the first quarter of fiscal 2020 as a result of COVID-19. The method of calculating consolidated same store sales varies across the retail industry, including the treatment of temporary store closures as a result of COVID-19. Accordingly, our method of calculating this metric may not be the same as other retailers’ methods. For additional information on consolidated same store sales, please see our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.
(6)Includes DICK’S Sporting Goods, Golf Galaxy, Field & Stream and clearance stores.
13 Weeks Ended May 2, 2020 Compared to the 13 Weeks Ended May 4, 2019
Net Sales
Net sales decreased 30.6% in the current quarter to $1,333.2 million from $1,920.7 million for the quarter ended May 4, 2019, due primarily to the COVID-19 pandemic, which resulted in temporary store closures and reduced customer traffic from March 11, 2020 through the end of the quarter. Our consolidated same store sales decreased by $542.7 million, or 29.5%, which included a 38.7% decrease in transactions and a 9.2% increase in sales per transaction, and an increase of approximately 110% in eCommerce sales. Following our store closures due to COVID-19, eCommerce sales grew 210%, with our new curbside contactless pickup service accounting for over 40% of our total online business during this time period. As a result, eCommerce sales penetration increased to approximately 39% of total net sales during the current quarter compared to approximately 13% of total net sales during the prior year quarter.
Through March 10, 2020, our consolidated same store sales had increased 7.9% compared to the same period of fiscal 2019.
(Loss) Income from Operations
Income from operations decreased to a $186.2 million loss in the current quarter compared to income of $76.1 million for the quarter ended May 4, 2019 for the reasons described below.
Gross profit decreased 61.1% to $219.3 million in the current quarter from $563.8 million for the quarter ended May 4, 2019 and decreased as a percentage of net sales by 1,290 basis points due primarily to occupancy deleverage, lower merchandise margins and higher eCommerce shipping and fulfillment.
Our occupancy costs, which after the cost of merchandise represents the largest expense item within our cost of goods sold, are generally fixed in nature and fluctuate based on the number of stores that we operate. Occupancy costs decreased $8.7 million in the current quarter compared to the quarter ended May 4, 2019 and decreased gross profit by 526 basis points. Merchandise margins also decreased 475 basis points, primarily driven by an unfavorable sales mix, which was impacted by a higher penetration of hardlines and lower penetration of apparel and footwear, higher promotions and $28 million in inventory write-downs resulting from our temporary store closures. Higher eCommerce shipping and fulfillment costs decreased gross profit by 240 basis points due primarily to sales growth and to a higher penetration of eCommerce sales as well as costs incurred to open two new dedicated fulfillment centers.
Selling, general and administrative expenses decreased 17.2% to $403.2 million in the current quarter from $487.2 million for the quarter ended May 4, 2019 and increased 488 basis points as a percentage of net sales due primarily to deleverage on the sales decline. The current quarter included an increase of $21.3 million of income associated with changes in our deferred compensation plan investment values, for which the corresponding investment loss was recognized in other expense (income). The remaining $62.7 million decrease is primarily due to $93.7 million of operating expense reductions resulting from our temporary store closures, partially offset by approximately $31.0 million of teammate compensation and safety costs incurred as a result of the COVID-19 pandemic. The teammate compensation and safety costs are net of the $16.6 million benefit from employee retention tax credits provided by the CARES Act.
Pre-opening expenses increased to $2.3 million in the current quarter from $0.6 million for the quarter ended May 4, 2019. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. We opened three new stores in the current quarter compared to one new store during the quarter ended May 4, 2019.
Interest Expense
Interest expense was $8.0 million for the current quarter as compared to $3.1 million for the prior year quarter. Average borrowings outstanding on our Credit Facility increased to $900.8 million in the current quarter compared to $181.3 million in the prior year quarter, primarily due to precautionary borrowings undertaken in response to the uncertainty related to the COVID-19 pandemic. The average interest rate on the Credit Facility decreased by 140 basis points compared to the prior year quarter, which reflected a base LIBOR rate decrease, partially offset by an increase in the applicable margin following the amendment to our Credit Facility completed in March 2020.
In addition, we recorded approximately $1.9 million of interest related to the Convertible Senior Notes issued during the quarter ended May 2, 2020.
Other Expense (Income)
Other expense totaled $13.5 million in the current quarter compared to income of approximately $6.7 million in the prior year quarter. Substantially all of the change is related to changes in our deferred compensation plan investment values, which we account for by recognizing investment income or expense and recording a corresponding charge or reduction to selling, general and administrative costs.
Income Taxes
Our effective tax rate increased to 31.0% for the current quarter from 27.9% for the quarter ended May 4, 2019. The increase is due primarily to the benefit resulting from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which allows us to carry-back net operating losses to periods prior to the Tax Cuts and Jobs Act, when the federal statutory tax rate was 35%. This benefit was partially offset by the tax impact of certain share-based payments that vested during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Our cash on hand totaled $1.5 billion as of May 2, 2020, compared to $0.1 billion as of February 1, 2020. Our liquidity and capital needs have generally been met by net cash provided by operating activities, supplemented by borrowings under our 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.
In response to the COVID-19 pandemic, we have taken actions to preserve and fortify our liquidity, including reducing planned operating expenses, inventory receipts and capital expenditures, temporarily suspending our share repurchase and dividend programs, renegotiating payment terms with vendors and landlords, temporarily furloughing teammates or reducing teammate salaries, drawing $1.4 billion from our Credit Facility and exercising the accordion feature within the Credit Facility to provide $255.0 million of additional borrowing capacity, and issuing convertible senior notes that added over approximately $500 million of net proceeds to our cash position.
We believe that the above measures taken to increase and maintain our liquidity have provided us with sufficient cash flows to operate our business through this volatile period and that our current cash position supplemented by cash flows generated by operations and funds available under our Credit Facility will be sufficient to satisfy capital requirements for at least the next 12 months. 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
Following an amendment that we completed on March 27, 2020, we have a $1.855 billion Credit Facility, which includes a maximum amount of $150.0 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 $245.0 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 2, 2020, we have total remaining borrowing capacity, after subtracting amounts drawn and outstanding letters of credit, of $213.8 million. See Note 5 to the unaudited Consolidated Financial Statements for additional details.
Credit Facility information for the periods ended:
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|
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(in millions)
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May 2,
2020
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May 4,
2019
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Funds drawn on Credit Facility
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$
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1,291.7
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|
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$
|
635.3
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Number of business days with outstanding balance on Credit Facility
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64 days
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|
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62 days
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Maximum daily amount outstanding under Credit Facility
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$
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1,429.0
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|
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$
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369.5
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|
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Liquidity information as of the following dates:
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(in millions)
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May 2,
2020
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|
May 4,
2019
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Outstanding borrowings under Credit Facility
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$
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1,429.0
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|
|
$
|
369.5
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Cash and cash equivalents
|
$
|
1,484.0
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|
|
$
|
92.4
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Remaining borrowing capacity under Credit Facility
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$
|
213.8
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|
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$
|
864.4
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Outstanding letters of credit under Credit Facility
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$
|
16.1
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|
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$
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16.1
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|
|
|
|
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Convertible Notes due 2025
As of May 2, 2020, we have an aggregate principal amount of $575.0 million convertible notes due 2025 (the “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 of each year, beginning on October 15, 2020. We expect to repay the Convertible Senior Notes principal amount in cash, whether in connection with a conversion of such notes or repayment at maturity.
While we anticipate using excess cash, free cash flow and borrowings on our Credit Facility to repay the Convertible Senior Notes in cash to minimize dilution, 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. There can be no assurance as to the availability of capital to fund such repayments, or that if capital is available through additional debt issuances or refinancing of the Convertible Senior Notes, that such capital will be available on terms that are favorable to us. See Note 6 to the unaudited Consolidated Financial Statements for additional details.
Capital expenditures
Our capital expenditures are primarily targeted 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. In the first quarter of fiscal 2020, capital expenditures totaled $59.6 million on a gross basis, or $51.0 million net of tenant allowances provided by landlords.
Share repurchases
On March 16, 2016, our Board of Directors authorized a five-year share repurchase program of up to $1 billion of our common stock. Under the 2016 program, we have repurchased $968.8 million of common stock and have $31.2 million remaining under this authorization. On June 12, 2019, our Board of Directors authorized an additional five-year share repurchase program of up to $1 billion of our common stock.
We temporarily suspended our share repurchase programs in response to the impact of COVID-19. As our business continues to stabilize, we may resume opportunistic share repurchases under our existing authorizations.
Dividends
During the 13 weeks ended May 2, 2020, we paid $28.1 million of dividends to our stockholders. The declaration of future dividends and the establishment of the per share amount, record dates and payment dates for any such future dividends are subject to authorization by our Board of Directors and will be dependent upon multiple factors including future earnings, cash flows, financial requirements and other considerations.
We temporarily suspended our dividend program in response to the impact of COVID-19.
Cash Flows
Changes in cash and cash equivalents are as follows:
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13 Weeks Ended
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(in millions)
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May 2,
2020
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May 4,
2019
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Net cash used in operating activities
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$
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(214.8)
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$
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(222.1)
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Net cash used in investing activities
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(59.6)
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|
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(46.9)
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Net cash provided by financing activities
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1,689.2
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|
|
247.8
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Effect of exchange rate changes on cash and cash equivalents
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(0.1)
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|
—
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Net increase (decrease) in cash and cash equivalents
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$
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1,414.7
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|
|
$
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(21.2)
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Operating Activities
Notwithstanding the negative earnings impacts associated with the COVID-19 pandemic, current period cash flows used in operating activities approximated those from the prior year period, increasing $7.3 million on a comparative basis. The adverse cash flow effects of our temporary store closures were offset by the aforementioned precautionary liquidity measures we took in response to the COVID-19 pandemic, including reductions in operating expenses, extended payment terms with vendors and deferrals of rent payments, in addition to last year’s inventory investment in key growth categories including footwear, apparel, baseball and golf.
Investing Activities
Cash used in investing activities increased $12.7 million for the 13 weeks ended May 2, 2020 compared to the prior year period. The increase in gross capital expenditures was primarily driven by the timing and number of new store openings.
Financing Activities
Financing activities for the current period reflect precautionary measures taken in response to the COVID-19 pandemic, including 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 2, 2020 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 February 1, 2020, see our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, filed with the Securities and Exchange Commission on March 20, 2020. With the exception of the issuance of the Convertible Senior Notes in the current quarter, there were no material changes with respect to contractual obligations and other commercial commitments outside the ordinary course of business.