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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2003
Commission File No. 001-31463
DICK’S SPORTING GOODS, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 16-1241537 (I.R.S. Employer Identification No.) | |
| 200 Industry Drive, RIDC Park West, Pittsburgh, Pennsylvania (Address of principal executive offices) | 15275 (Zip Code) |
(412) 809-0100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of common stock and Class B common stock outstanding at December 1, 2003 was 16,260,469 and 7,132,683, respectively.
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INDEX TO FORM 10-Q
| Page Number | ||||||
| PART I. FINANCIAL INFORMATION | 3 | |||||
| Item 1. | Financial Statements | 3 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | ||||
| Item 4. | Controls and Procedures | 16 | ||||
| PART II. OTHER INFORMATION | 16 | |||||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||||
| SIGNATURES | 17 | |||||
| CERTIFICATIONS | 18 | |||||
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DICK’S SPORTING GOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands, except per share data)
| 13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| Net sales | $ | 338,164 | $ | 290,616 | $ | 996,413 | $ | 877,375 | ||||||||||
| Cost of goods sold, including occupancy and distribution costs | 249,325 | 218,487 | 728,179 | 654,853 | ||||||||||||||
| GROSS PROFIT | 88,839 | 72,129 | 268,234 | 222,522 | ||||||||||||||
| Selling, general and administrative expenses | 80,210 | 64,984 | 219,295 | 183,007 | ||||||||||||||
| Pre-opening expenses | 2,594 | 1,649 | 6,212 | 4,861 | ||||||||||||||
| INCOME FROM OPERATIONS | 6,035 | 5,496 | 42,727 | 34,654 | ||||||||||||||
| Gain on sale of investment | 2,324 | — | 3,536 | — | ||||||||||||||
| Interest expense, net | 504 | 907 | 1,545 | 2,647 | ||||||||||||||
| INCOME BEFORE INCOME TAXES | 7,855 | 4,589 | 44,718 | 32,007 | ||||||||||||||
| Provision for income taxes | 3,142 | 1,835 | 17,887 | 12,803 | ||||||||||||||
| NET INCOME | $ | 4,713 | $ | 2,754 | $ | 26,831 | $ | 19,204 | ||||||||||
| EARNINGS PER COMMON SHARE: | ||||||||||||||||||
| Basic | $ | 0.20 | $ | 0.16 | $ | 1.22 | $ | 1.13 | ||||||||||
| Diluted | $ | 0.18 | $ | 0.14 | $ | 1.08 | $ | 0.98 | ||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||||
| Basic | 23,215 | 17,365 | 22,031 | 17,006 | ||||||||||||||
| Diluted | 25,584 | 19,992 | 24,927 | 19,512 | ||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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DICK’S SPORTING GOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
(Dollars in thousands)
| November 1, | February 1, | |||||||||
| 2003 | 2003 | |||||||||
ASSETS | ||||||||||
| CURRENT ASSETS: | ||||||||||
| Cash | $ | 14,694 | $ | 11,120 | ||||||
| Accounts receivable, net | 25,826 | 16,391 | ||||||||
| Inventories, net | 370,356 | 233,497 | ||||||||
| Prepaid expenses and other current assets | 6,306 | 5,572 | ||||||||
| Deferred income taxes | 12,836 | 8,697 | ||||||||
| Total current assets | 430,018 | 275,277 | ||||||||
| Property and equipment, net | 86,340 | 80,109 | ||||||||
| Construction in progress — leased facilities | 10,767 | — | ||||||||
| Other assets | 22,177 | 20,840 | ||||||||
TOTAL ASSETS | $ | 549,302 | $ | 376,226 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| CURRENT LIABILITIES: | ||||||||||
| Accounts payable | $ | 175,561 | $ | 125,208 | ||||||
| Accrued expenses | 62,200 | 59,239 | ||||||||
| Deferred revenue and other liabilities | 25,434 | 22,752 | ||||||||
| Income taxes payable | — | 12,763 | ||||||||
| Current portion of long-term debt and capital leases | 479 | 213 | ||||||||
| Total current liabilities | 263,674 | 220,175 | ||||||||
| LONG-TERM LIABILITIES: | ||||||||||
| Revolving credit borrowings | 50,141 | — | ||||||||
| Long-term debt and capital leases | 3,561 | 3,364 | ||||||||
| Non-cash obligations for construction in progress — leased facilities | 10,767 | — | ||||||||
| Deferred revenue and other liabilities | 13,019 | 12,188 | ||||||||
| Total long-term liabilities | 77,488 | 15,552 | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||||
| Preferred stock | — | — | ||||||||
| Common stock | 162 | 126 | ||||||||
| Class B common stock | 71 | 77 | ||||||||
| Additional paid-in capital | 167,544 | 130,071 | ||||||||
| Retained earnings | 37,056 | 10,225 | ||||||||
| Accumulated other comprehensive income | 3,307 | — | ||||||||
| Total stockholders’ equity | 208,140 | 140,499 | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 549,302 | $ | 376,226 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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DICK’S SPORTING GOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
(Dollars in thousands)
| 13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| NET INCOME | $ | 4,713 | $ | 2,754 | $ | 26,831 | $ | 19,204 | ||||||||
| OTHER COMPREHENSIVE INCOME: | ||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of tax | 1,198 | (131 | ) | 5,606 | (701 | ) | ||||||||||
| Reclassification adjustment for gains realized in net income due to the sale of available-for-sale securities, net of tax | (1,511 | ) | — | (2,299 | ) | — | ||||||||||
| COMPREHENSIVE INCOME | $ | 4,400 | $ | 2,623 | $ | 30,138 | $ | 18,503 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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DICK’S SPORTING GOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — UNAUDITED
(Dollars in thousands)
| Class B | Accumulated | ||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Additional | Other | ||||||||||||||||||||||||||||||
| Paid-In | Retained | Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | Capital | Earnings | Income | Total | ||||||||||||||||||||||||||
| BALANCE, February 1, 2003 | 12,567,024 | $ | 126 | 7,681,008 | $ | 77 | $ | 130,071 | $ | 10,225 | $ | — | $ | 140,499 | |||||||||||||||||||
| Exchange of Class B common stock for common stock | 548,325 | 6 | (548,325 | ) | (6 | ) | — | — | — | — | |||||||||||||||||||||||
| Exercise of stock options, including tax benefit of $23,594 | 2,972,934 | 29 | — | — | 35,949 | — | — | 35,978 | |||||||||||||||||||||||||
| Sale of common stock under employee stock purchase plan | 82,209 | 1 | — | — | 1,341 | — | — | 1,342 | |||||||||||||||||||||||||
| Transaction costs related to initial public offering | — | — | — | — | 183 | — | — | 183 | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | 26,831 | — | 26,831 | |||||||||||||||||||||||||
| Unrealized gain on securities available-for-sale, net of taxes of $2,124 | — | — | — | — | — | — | 3,307 | 3,307 | |||||||||||||||||||||||||
| BALANCE, November 1, 2003 | 16,170,492 | $ | 162 | 7,132,683 | $ | 71 | $ | 167,544 | $ | 37,056 | $ | 3,307 | $ | 208,140 | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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DICK’S SPORTING GOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(Dollars in thousands)
| 39 Weeks Ended | ||||||||||||||
| November 1, | November 2, | |||||||||||||
| 2003 | 2002 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
| Net income | $ | 26,831 | $ | 19,204 | ||||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||
| Depreciation and amortization | 12,993 | 10,077 | ||||||||||||
| Deferred income taxes | (4,053 | ) | (112 | ) | ||||||||||
| Tax benefit from exercise of stock options | 23,594 | — | ||||||||||||
| Gain on sale of investment | (3,536 | ) | — | |||||||||||
| Other non-cash items | 2,067 | — | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | (7,472 | ) | (2,581 | ) | ||||||||||
| Inventories | (136,859 | ) | (94,502 | ) | ||||||||||
| Prepaid expenses and other assets | 538 | (2,634 | ) | |||||||||||
| Accounts payable | 43,530 | 41,106 | ||||||||||||
| Accrued expenses | 2,961 | 8,618 | ||||||||||||
| Income taxes payable | (12,763 | ) | (5,728 | ) | ||||||||||
| Deferred revenue and other liabilities | 2,681 | (4,508 | ) | |||||||||||
| Net cash used in operating activities | (49,488 | ) | (31,060 | ) | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
| Proceeds from sale-leaseback transactions | 12,100 | 5,497 | ||||||||||||
| Capital expenditures | (32,562 | ) | (20,528 | ) | ||||||||||
| Increase in recoverable costs from developed properties | (1,963 | ) | — | |||||||||||
| Proceeds from sale of investment | 4,150 | — | ||||||||||||
| Net cash used in investing activities | (18,275 | ) | (15,031 | ) | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
| Revolving credit borrowings, net | 50,141 | 21,468 | ||||||||||||
| Borrowings (payments) on long-term debt and capital leases | 463 | (158 | ) | |||||||||||
| Proceeds from sale of common stock in initial public offering | — | 30,935 | ||||||||||||
| Proceeds from sale of common stock under employee stock purchase plan | 1,342 | — | ||||||||||||
| Proceeds from exercise of stock options | 12,385 | 292 | ||||||||||||
| Increase in bank overdraft | 6,823 | 3,579 | ||||||||||||
| Other | 183 | (3,000 | ) | |||||||||||
| Net cash provided by financing activities | 71,337 | 53,116 | ||||||||||||
| NET INCREASE IN CASH | 3,574 | 7,025 | ||||||||||||
| CASH, BEGINNING OF PERIOD | 11,120 | 8,976 | ||||||||||||
| CASH, END OF PERIOD | $ | 14,694 | $ | 16,001 | ||||||||||
| Supplemental non-cash investing and financing activities: | ||||||||||||||
| Construction in progress — leased facilities | $ | 10,767 | $ | — | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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DICK’S SPORTING GOODS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by us, in accordance with the requirements for Form 10-Q and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Unless otherwise specified, any reference to year is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s,” “we,” “us,” “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its subsidiary.
2. Unaudited Interim Financial Data
The interim financial information as of November 1, 2003 and for the 13 and 39 weeks ended November 1, 2003 and November 2, 2002 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information. This financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended February 1, 2003 dated April 29, 2003, as filed with the Securities and Exchange Commission. Operating results for the 13 and 39 weeks ended November 1, 2003 are not necessarily indicative of the results that may be expected for the year ending January 31, 2004 or any other period.
3. Earnings Per Share
Basic earnings per share are based upon the weighted average number of shares outstanding. Diluted earnings per share are based upon the weighted average number of shares outstanding plus the incremental shares that would be outstanding assuming exercise of dilutive stock options and warrants, calculated by applying the treasury stock method.
We are reporting earnings per share in accordance with accounting principles generally accepted in the United States of America and are disclosing earnings per share on a pro-forma basis. We effected an initial public offering on October 16, 2002. The pro-forma amounts assume that the initial public offering took place at the beginning of the 13 and 39 weeks ended November 2, 2002, and exclude interest expense, net of tax, of $109 and $373 for the 13 and 39 weeks ended November 2, 2002, respectively, on the portion of our revolving credit facility that would have been paid down with the proceeds to us from the initial public offering. The pro-forma results also include an increase in shares for basic and diluted earnings per share purposes as if the initial public offering was executed prior to the beginning of the 13 and 39 weeks ended November 2, 2002. The Company’s management believes the use of pro-forma results for the 13 and 39 weeks ended November 2, 2002 provides a more meaningful comparison to the 13 and 39 weeks ended November 1, 2003 results due to the significant increase in shares since October 15, 2002 when the Company completed its initial public offering, and the related reduction in interest expense due to the application of the net proceeds thereof.
The computations for basic and diluted earnings per share are as follows:
| 13 Weeks Ended | |||||||||||||
| Pro-Forma | |||||||||||||
| November 1, | November 2, | November 2, | |||||||||||
| 2003 | 2002 | 2002 | |||||||||||
| (In thousands, except per share data) | |||||||||||||
| Earnings per common share — Basic: | |||||||||||||
| Net income | $ | 4,713 | $ | 2,754 | $ | 2,863 | |||||||
| Weighted average common shares outstanding | 23,215 | 17,365 | 19,619 | ||||||||||
| Earnings per common share | $ | 0.20 | $ | 0.16 | $ | 0.15 | |||||||
| Earnings per common share — Diluted: | |||||||||||||
| Net income | $ | 4,713 | $ | 2,754 | $ | 2,863 | |||||||
| Weighted average common shares outstanding — basic | 23,215 | 17,365 | 19,619 | ||||||||||
| Stock options and warrants | 2,369 | 2,627 | 2,624 | ||||||||||
| Weighted average common shares outstanding | 25,584 | 19,992 | 22,243 | ||||||||||
| Earnings per common share | $ | 0.18 | $ | 0.14 | $ | 0.13 | |||||||
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| 39 Weeks Ended | |||||||||||||
| Pro-Forma | |||||||||||||
| November 1, | November 2, | November 2, | |||||||||||
| 2003 | 2002 | 2002 | |||||||||||
| (In thousands, except per share data) | |||||||||||||
| Earnings per common share — Basic: | |||||||||||||
| Net income | $ | 26,831 | $ | 19,204 | $ | 19,577 | |||||||
| Weighted average common shares outstanding | 22,031 | 17,006 | 19,606 | ||||||||||
| Earnings per common share | $ | 1.22 | $ | 1.13 | $ | 1.00 | |||||||
| Earnings per common share — Diluted: | |||||||||||||
| Net income | $ | 26,831 | $ | 19,204 | $ | 19,577 | |||||||
| Weighted average common shares outstanding — basic | 22,031 | 17,006 | 19,606 | ||||||||||
| Stock options and warrants | 2,896 | 2,506 | 2,592 | ||||||||||
| Weighted average common shares outstanding | 24,927 | 19,512 | 22,198 | ||||||||||
| Earnings per common share | $ | 1.08 | $ | 0.98 | $ | 0.88 | |||||||
4. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense has been recognized where the exercise price of the option was equal to or greater than the market value of the underlying common stock on the date of grant. The pro-forma net income and earnings per share in the following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
| 13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| Net income, as reported | $ | 4,713 | $ | 2,754 | $ | 26,831 | $ | 19,204 | ||||||||
| Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (814 | ) | (248 | ) | (2,049 | ) | (784 | ) | ||||||||
| Pro-forma net income | $ | 3,899 | $ | 2,506 | $ | 24,782 | $ | 18,420 | ||||||||
| Earnings per share: | ||||||||||||||||
| Basic — as reported | $ | 0.20 | $ | 0.16 | $ | 1.22 | $ | 1.13 | ||||||||
| Basic — pro-forma | $ | 0.17 | $ | 0.14 | $ | 1.12 | $ | 1.08 | ||||||||
| Diluted — as reported | $ | 0.18 | $ | 0.14 | $ | 1.08 | $ | 0.98 | ||||||||
| Diluted — pro-forma | $ | 0.15 | $ | 0.13 | $ | 0.99 | $ | 0.94 | ||||||||
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5. Newly Issued Accounting Pronouncements
In November 2002, the FASB issued Emerging Issues Task Force Issue No. 02-16 (“Issue 02-16”), “Accounting by a Reseller for Cash Consideration Received from a Vendor.” Issue 02-16 addresses the issue of how a reseller of a vendor’s product should account for cash consideration received from a vendor. The adoption of Issue 02-16, effective with agreements entered into after November 21, 2002, did not have a material impact on the Company’s consolidated financial position or results of operations.
6. Construction In Progress — Leased Facilities
In accordance with Emerging Issues Task Force No. 97-10 (“Issue 97-10”), “The Effect of Lessee Involvement in Asset Construction,” the Company is considered to be the owner of certain buildings, for accounting purposes only, for various building leases during the construction period. As such, the Company has recognized a non-cash asset and related non-cash obligation of $10.8 million as of November 1, 2003. At the conclusion of the construction period, the asset and related liability will be removed from the balance sheet in a manner similar to a sale-leaseback transaction if certain conditions are met. The application of Issue 97-10 has no impact to cash balances, net cash flow, the statement of operations or cash obligations.
7. Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year presentation.
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. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. You can identify these statements 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,” “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, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase profit margins and return on invested capital, plans to grow our private label business, projections of our future profitability, results of operations, capital expenditures or our financial condition or other “forward-looking” information and includes statements about revenues, earnings, spending, margins, liquidity, store openings and operations, inventory, exclusive branded products, our actions, plans or strategies.
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 2003 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our management: the intense competition in the sporting goods industry and actions by our competitors; our inability to manage our growth, open new stores on a timely basis and expand successfully in new and existing markets; the availability of retail store sites on terms acceptable to us; the cost of real estate and other items related to our stores; our ability to access adequate capital; changes in consumer demand; risks relating to product liability claims and the availability of sufficient insurance coverage relating to those claims; our relationships with our suppliers, distributors or manufacturers and their ability to provide us with sufficient quantities of products; any serious disruption at our distribution or return facility; the seasonality of our business; the potential impact of natural disasters or national and international security concerns on us or the retail environment; risks relating to the regulation of the products we sell, such as hunting rifles; risks associated with relying on foreign sources of production; risks relating to implementation of new management information systems; risks relating to operational and financial restrictions imposed by our credit facility; factors associated with our pursuit of strategic acquisitions; the loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive Officer; our ability to meet our labor needs; changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular; changes in our business strategies and other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission.
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The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s net sales and profits are realized during the fourth quarter of the Company’s fiscal year, which is due, in part, to the holiday selling season and, in part, to our sales of cold weather sporting goods and apparel. Any decrease in fiscal fourth quarter sales, whether because of a slow holiday selling season, unseasonable weather conditions, or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year.
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 factors, may cause results to differ materially from those contained in any forward-looking statement. We do not assume any obligation and do not intend to update any forward-looking statements.
OVERVIEW
The Company is an authentic full-line sporting goods retailer offering a broad assortment of brand-name sporting goods equipment, apparel and footwear in a specialty store environment. As of November 1, 2003, the Company operated 162 stores in 27 states throughout the Eastern half of the United States.
RESULTS OF OPERATIONS
The following table presents for the periods indicated the Company’s Condensed Consolidated Statements of Income data as a percentage of the Company’s net sales:
| 13 Weeks Ended (1) | 39 Weeks Ended (1) | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of goods sold, including occupancy and distribution costs | 73.7 | 75.2 | 73.1 | 74.6 | ||||||||||||
| Gross profit | 26.3 | 24.8 | 26.9 | 25.4 | ||||||||||||
| Selling, general and administrative expenses | 23.7 | 22.4 | 22.0 | 20.9 | ||||||||||||
| Pre-opening expenses | 0.8 | 0.6 | 0.6 | 0.6 | ||||||||||||
| Income from operations | 1.8 | 1.9 | 4.3 | 3.9 | ||||||||||||
| Gain on sale of investment | 0.7 | — | 0.4 | — | ||||||||||||
| Interest expense, net | 0.1 | 0.3 | 0.2 | 0.3 | ||||||||||||
| Income before income taxes | 2.3 | 1.6 | 4.5 | 3.6 | ||||||||||||
| Provision for income taxes | 0.9 | 0.6 | 1.8 | 1.5 | ||||||||||||
| Net income | 1.4 | 0.9 | 2.7 | 2.2 | ||||||||||||
| (1) | due to rounding, columns may not add |
Cost of goods sold includes the cost of merchandise, inventory shrinkage, freight, distribution and store occupancy costs. Store occupancy costs include rent, common area maintenance charges, real estate and other asset based taxes, store maintenance, utilities, depreciation, fixture lease expenses and certain insurance expenses.
Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company’s corporate headquarters.
Pre-opening expenses consist primarily of marketing, payroll and recruiting costs incurred prior to a new store opening.
Interest expense results primarily from interest on our revolving credit facility.
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13 WEEKS ENDED NOVEMBER 1, 2003 COMPARED TO THE 13 WEEKS ENDED NOVEMBER 2, 2002
Net Sales
Net sales increased by $47.6 million, or 16%, to $338.2 million for the 13 weeks ended November 1, 2003, from $290.6 million for the 13 weeks ended November 2, 2002. This increase resulted from a comparable store sales increase of $6.9 million, or 2.5%, and an increase of $40.7 million in non-comparable store sales. The increase in comparable store sales is attributable to sales increases in team sports, licensed apparel, women’s apparel and water sports. These increases were partially offset by lower sales of in-line skates, fishing tackle and hunting clothing.
Gross Profit
Gross profit increased by $16.7 million, or 23%, to $88.8 million for the 13 weeks ended November 1, 2003, from $72.1 million for the 13 weeks ended November 2, 2002. As a percentage of net sales, gross profit increased to 26.3% for the 13 weeks ended November 1, 2003, from 24.8% for the 13 weeks ended November 2, 2002. The gross profit percentage was favorably impacted by improved merchandise margin, a reclassification of cooperative advertising funds from selling, general and administrative expenses, as fewer of these funds were directly tied to advertising expenditures this year as compared to last year and improved productivity at the Company’s distribution center. These increases were partially offset by expenses related to the closing of two women’s apparel concept test stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $15.2 million to $80.2 million for the 13 weeks ended November 1, 2003, from $65.0 million for the 13 weeks ended November 2, 2002. As a percentage of net sales, selling, general and administrative expenses increased to 23.7% for the 13 weeks ended November 1, 2003, from 22.4% for the 13 weeks ended November 2, 2002. The percentage increase was due primarily to the reclassification of cooperative advertising funds to cost of sales (as discussed above), relocation expense for new hires and transferred associates and additional professional and insurance expenses associated with being a public company for the 13 weeks ended November 1, 2003 as compared to being a private company for the majority of the 13 weeks ended November 2, 2002.
Pre-Opening Expenses
Pre-opening expenses increased by $1.0 million to $2.6 million for the 13 weeks ended November 1, 2003, from $1.6 million for the 13 weeks ended November 2, 2002. Pre-opening expenses were for the addition of 11 new stores for the 13 weeks ended November 1, 2003, compared to seven new stores for the 13 weeks ended November 2, 2002.
Income from Operations
Income from operations increased by $0.5 million, or 9%, to $6.0 million for the 13 weeks ended November 1, 2003, from $5.5 million for the 13 weeks ended November 2, 2002. The increase in income from operations is primarily attributable to a higher gross margin percentage combined with operating income from non-comparable stores. Excluding the $2.2 million of expenses related to the closing of the two women’s apparel concept test stores, income from operations increased $2.7 million, or 49%, to $8.2 million for the 13 weeks ended November 1, 2003 (this number is calculated as GAAP income from operations (or $6.0 million) for the 13 weeks ended November 1, 2003, plus the expense incurred with the closing of two women’s apparel concept test stores (or $2.2 million); the percentage increase is calculated by dividing the difference between the adjusted income from operations number and the income from operations number for the 13 weeks ended November 2, 2002 and dividing it by the income from operations for the 13 weeks ended November 2, 2002). The Company believes providing income from operations adjusted for the women’s concept store closings provides a further understanding of operating results as compared to the prior year.
Gain on Sale of Investment
Gain on sale of investment of $2.3 million for the 13 weeks ended November 1, 2003 resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider.
Interest Expense, Net
Interest expense decreased by $0.4 million to $0.5 million for the 13 weeks ended November 1, 2003, from $0.9 million for the 13 weeks ended November 2, 2002. This decrease was due to lower interest rates and lower average borrowings.
Provision for Income Taxes
The Company’s effective tax rate was 40% for both the 13 weeks ended November 1, 2003 and the 13 weeks ended November 2, 2002.
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Net Income
Net income increased by $1.9 million, or 68%, to $4.7 million for the 13 weeks ended November 1, 2003, from $2.8 million for the 13 weeks ended November 2, 2002.
39 WEEKS ENDED NOVEMBER 1, 2003 COMPARED TO THE 39 WEEKS ENDED NOVEMBER 2, 2002
Net Sales
Net sales increased by $119.0 million, or 14%, to $996.4 million for the 39 weeks ended November 1, 2003, from $877.4 million for the 39 weeks ended November 2, 2002. This increase resulted from a comparable store sales increase of $8.1 million, or 1.0%, and an increase of $110.9 million in non-comparable store sales. The increase in comparable store sales is attributable to sales increases in team sports, water sports and women’s apparel. These increases were partially offset by lower sales of in-line skates, fishing tackle and golf.
Gross Profit
Gross profit increased by $45.7 million, or 21%, to $268.2 million for the 39 weeks ended November 1, 2003, from $222.5 million for the 39 weeks ended November 2, 2002. As a percentage of net sales, gross profit increased to 26.9% for the 39 weeks ended November 1, 2003, from 25.4% for the 39 weeks ended November 2, 2002. The gross profit percentage was favorably impacted by improved merchandise margin, lower shrink expense, a reclassification of cooperative advertising funds from selling, general and administrative expense, as fewer of these funds were directly tied to advertising expenditures this year as compared to last year and improved productivity at the Company’s distribution center.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $36.3 million to $219.3 million for the 39 weeks ended November 1, 2003, from $183.0 million for the 39 weeks ended November 2, 2002. As a percentage of net sales, selling, general and administrative expenses increased to 22.0% for the 39 weeks ended November 1, 2003 from 20.9% for the 39 weeks ended November 2, 2002. The percentage increase was due primarily to the reclassification of cooperative advertising funds to cost of sales (as discussed above), higher information systems costs, higher professional and insurance expenses associated with being a public company for the 39 weeks ended November 1, 2003 as compared to being a private company for the majority of the 39 weeks ended November 2, 2002 and relocation expense for new hires and transferred associates.
Pre-Opening Expenses
Pre-opening expenses increased by $1.3 million to $6.2 million for the 39 weeks ended November 1, 2003, from $4.9 million for the 39 weeks ended November 2, 2002. Pre-opening expenses were for the addition of 21 new stores and one relocated store for the 39 weeks ended November 1, 2003, compared to 16 new stores and three relocated stores for the 39 weeks ended November 2, 2002.
Income from Operations
Income from operations increased by $8.0 million, or 23%, to $42.7 million for the 39 weeks ended November 1, 2003, from $34.7 million for the 39 weeks ended November 2, 2002. The increase in income from operations is primarily attributable to a higher gross margin percentage combined with operating income from non-comparable stores.
Gain on Sale of Investment
Gain on sale of investment of $3.5 million for the 39 weeks ended November 1, 2003 resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider.
Interest Expense, Net
Interest expense decreased by $1.1 million to $1.5 million for the 39 weeks ended November 1, 2003, from $2.6 million for the 39 weeks ended November 2, 2002. This decrease was due to lower interest rates and lower average borrowings.
Provision for Income Taxes
The Company’s effective tax rate was 40% for both the 39 weeks ended November 1, 2003 and the 39 weeks ended November 2, 2002.
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Net Income
Net income increased by $7.6 million, or 40%, to $26.8 million for the 39 weeks ended November 1, 2003, from $19.2 million for the 39 weeks ended November 2, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for inventory, capital improvements, and pre-opening expenses to support expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing infrastructure improvements. The Company’s main sources of liquidity for the 39 weeks ended November 1, 2003 have been our net income, borrowings under our revolving credit facility, proceeds and related tax benefit from the exercise of stock options and proceeds from sale-leaseback transactions.
Net cash used in operating activities was $49.5 million for the 39 weeks ended November 1, 2003 compared to $31.1 million for the 39 weeks ended November 2, 2002. All of the Company’s revenues are realized at the point-of-sale in the stores. Thus, net sales are essentially on a cash basis. Inventory levels increased largely due to the addition of new stores, an increase in in-transit import inventory where we take possession overseas, and changes in the product mix including expanded assortments of athletic apparel, team licensed product, and paintball. Accounts payable was 47% of inventory at both November 1, 2003 and November 2, 2002.
Net cash used in investing activities was $18.3 million for the 39 weeks ended November 1, 2003 compared to $15.0 million for the 39 weeks ended November 2, 2002. We use cash in investing activities to build new stores and remodel or relocate existing stores. Furthermore, net cash used in investing activities includes purchases of information technology assets and expenditures for distribution facilities and corporate headquarters. During the 39 weeks ended November 1, 2003 and November 2, 2002, the Company opened 21 and 16 new stores, respectively, and relocated one and three stores during the 39 weeks ended November 1, 2003 and November 2, 2002, respectively. During the 39 weeks ended November 1, 2003, the Company completed one building sale-leaseback of $5.0 million for which the capital expenditures were incurred in 2002. The Company generated $4.2 million in proceeds from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider during the 39 weeks ended November 1, 2003.
In accordance with Emerging Issues Task Force No. 97-10 (“Issue 97-10”), “The Effect of Lessee Involvement in Asset Construction,” the Company is considered to be the owner of certain buildings, for accounting purposes only, for various building leases during the construction period. As such, the Company has recognized a non-cash asset and related non-cash obligation of $10.8 million as of November 1, 2003. At the conclusion of the construction period, the asset and related liability will be removed from the balance sheet in a manner similar to a sale-leaseback transaction if certain conditions are met. The application of Issue 97-10 has no impact to cash balances, net cash flow, the statement of operations or cash obligations.
Net cash provided by financing activities was $71.3 million for the 39 weeks ended November 1, 2003 compared to $53.1 million for the 39 weeks ended November 2, 2002. Financing activities consist primarily of borrowings under the revolving credit facility and proceeds from transactions in the Company’s common stock. During the 39 weeks ended November 1, 2003, the Company received proceeds of $13.7 million from the exercise of employee stock options and purchases of common stock under the employee stock purchase plan.
The Company’s liquidity and capital needs have generally been met by cash from operations and borrowings under the revolving credit facility. This credit facility provides for borrowings in an aggregate outstanding principal amount of up to $180 million, including up to $50 million in the form of letters of credit. The actual availability under the credit facility is limited to the lesser of 70% of the Company’s eligible inventory or 85% of the Company’s inventory’s liquidation value, in each case net of specified reserves and less any letters of credit outstanding. Outstanding borrowings on the credit facility, as of November 1, 2003 and February 1, 2003 were $50.1 million and $0, respectively. Total remaining borrowing capacity, after subtracting letters of credit as of November 1, 2003 was $119.8 million. Interest on outstanding indebtedness under the credit facility currently accrues at the lender’s prime commercial lending rate or, if the Company elects, at the one month LIBOR plus 1.25% based on the Company’s current interest coverage ratio. The Company’s obligations under the credit facility are secured by interests in substantially all of the Company’s personal property excluding store and distribution center equipment and fixtures. The credit facility matures on May 30, 2006. The Company has used the credit facility to meet seasonal working capital requirements and to support the Company’s growth.
The credit facility contains restrictions regarding the Company’s and related subsidiary’s ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur indebtedness or liens, to pay dividends or make distributions on the Company’s stock, to make investments or loans, or to engage in transactions with affiliates. The Company is also required to comply with a fixed charge coverage ratio.
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Cash requirements in fiscal 2003, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new stores and investments in information technology. The Company plans to open 22 new stores during fiscal 2003. The Company also anticipates incurring additional expenditures for remodeling or relocating certain existing stores as well as other infrastructure improvements. While there can be no assurance that current expectations will be realized, the Company expects net capital expenditures in fiscal 2003 to be approximately $37.0 million, which includes $12.4 million of building costs that will be reimbursed in fiscal 2004 under the terms of sale-leaseback agreements.
The Company believes that existing cash flows generated from operations and funds available under our credit facility will be sufficient to satisfy our capital requirements through fiscal 2003. Other new business opportunities or store expansion rates substantially in excess of those presently planned may require additional funding.
Contractual Obligations and Other Commercial Commitments
The only off-balance sheet contractual obligations and commercial commitments as of November 1, 2003 relate to operating lease obligations and letters of credit. The Company has excluded these items from the balance sheet in accordance with generally accepted accounting principles.
The following table summarizes the Company’s material contractual obligations, including both on-and off-balance sheet arrangements in effect at November 1, 2003:
| 13 Weeks | |||||||||||||||||||||
| Ending | |||||||||||||||||||||
| January 31, | Fiscal | Fiscal | |||||||||||||||||||
| 2004 | 2004 | 2005 | Thereafter | Total | |||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||
| Contractual obligations: | |||||||||||||||||||||
| Long-term debt | $ | 41 | $ | 174 | $ | 193 | $ | 50,928 | $ | 51,336 | |||||||||||
| Capital lease obligations | 82 | 333 | 346 | 2,084 | 2,845 | ||||||||||||||||
| Operating lease obligations | 27,726 | 117,466 | 120,545 | 1,276,569 | 1,542,306 | ||||||||||||||||
| Total contractual obligations | $ | 27,849 | $ | 117,973 | $ | 121,084 | $ | 1,329,581 | $ | 1,596,487 | |||||||||||
The following table summarizes the Company’s other commercial commitments, including both on-and off-balance sheet arrangements, in effect at November 1, 2003:
| 13 Weeks | |||||||||||||
| Ending | |||||||||||||
| January 31, | Fiscal | ||||||||||||
| 2004 | 2004 | Total | |||||||||||
| (Dollars in Thousands) | |||||||||||||
| Other commercial commitments: | |||||||||||||
| Documentary letters of credit | $ | 2,743 | $ | — | $ | 2,743 | |||||||
| Standby letters of credit | 6,968 | 392 | 7,360 | ||||||||||
| Total other commercial commitments | $ | 9,711 | $ | 392 | $ | 10,103 | |||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company’s net exposure to interest rate risk consists primarily of borrowings under the revolving credit facility. The Company’s revolving credit facility bears interest at rates that are benchmarked either to U.S. short-term floating rate interest rates or one-month LIBOR rates, at the Company’s election. The aggregate balance outstanding under the revolving credit facility as of November 1, 2003 and February 1, 2003 totaled $50.1 million and $0, respectively. The impact on the Company’s annual net income of a hypothetical one percentage point interest rate change on the average outstanding balances under the revolving credit facility would be approximately $0.5 million based upon fiscal 2002 average borrowings.
IMPACT OF INFLATION
The Company does not believe that operating results have been materially affected by inflation during the preceding three fiscal years. There can be no assurance, however, that operating results will not be adversely affected by inflation in the future.
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Tax Matters
Presently, the Company does not believe that there are any tax matters that could materially affect the consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by SEC Rule 13a-15(b), an evaluation was performed of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by the report. This evaluation was conducted under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including cost limitations, judgments used in decision making, assumptions regarding the likelihood of future events, soundness of internal controls, fraud, the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable, and not absolute, assurance of achieving their control objectives. Based on the evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in all material respects at a reasonable assurance level with respect to the recordings, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
There have been no changes in the Company’s internal controls over financial reporting that occurred during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
| 10.1 | Offer Letter between the Company and William R. Newlin, Chief Administrative Officer and Executive Vice President. | |
| 31.1 | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
b. Reports on Form 8-K:
During the third quarter of 2003 and through December 8, we furnished to the Securities and Exchange Commission a Form 8-K dated November 18, 2003, announcing our third quarter 2003 financial results.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on December 9, 2003 on its behalf by the undersigned, thereunto duly authorized.
| DICK’S SPORTING GOODS, INC. | ||
| By: | /s/ EDWARD W. STACK | |
| Edward W. Stack Chairman of the Board, Chief Executive Officer and Director | ||
| By: | /s/ MICHAEL F. HINES | |
| Michael F. Hines Chief Financial Officer (principal financial and accounting officer) | ||
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