10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 31, 2015
 
OR 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to                    .
 
Commission File No. 001-31463
 
 
DICK'S SPORTING GOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
16-1241537
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
345 Court Street, Coraopolis, Pennsylvania 15108
(Address of Principal Executive Offices)
 
(724) 273-3400
(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.
Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
 
The number of shares of common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, outstanding as of November 20, 2015, was 90,081,362 and 24,900,870, respectively.

 
 

INDEX TO FORM 10-Q
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 

2
 
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS 

DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(Amounts in thousands, except per share data)
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net sales
 
 
$
1,642,627

 
$
1,526,675

 
$
5,030,914

 
$
4,654,473

Cost of goods sold, including occupancy and distribution costs
 
 
1,154,251

 
1,074,703

 
3,519,993

 
3,259,063

 
 
 
 
 
 
 
 
 
 
GROSS PROFIT
 
 
488,376

 
451,972

 
1,510,921

 
1,395,410

 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 
395,015

 
357,708

 
1,151,686

 
1,063,351

Pre-opening expenses
 
 
16,280

 
14,334

 
31,836

 
28,480

 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
 
 
77,081

 
79,930

 
327,399

 
303,579

 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
1,076

 
858

 
2,550

 
2,230

Other expense (income)
 
 
1,185

 
(486
)
 
(812
)
 
(4,863
)
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
74,820

 
79,558

 
325,661

 
306,212

 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
 
27,605

 
30,347

 
124,262

 
117,550

 
 
 
 
 
 
 
 
 
 
NET INCOME
 
 
$
47,215

 
$
49,211

 
$
201,399

 
$
188,662

 
 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE:
 
 
 

 
 

 
 

 
 

Basic
 
 
$
0.41

 
$
0.42

 
$
1.73

 
$
1.58

Diluted
 
 
$
0.41

 
$
0.41

 
$
1.71

 
$
1.55

 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 

 
 

 
 

 
 

Basic
 
 
114,978

 
118,142

 
116,101

 
119,743

Diluted
 
 
116,506

 
120,002

 
117,739

 
121,734

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
 
 
$
0.1375

 
$
0.1250

 
$
0.4125

 
$
0.3750


See accompanying notes to unaudited consolidated financial statements.

3
 
 

DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(Dollars in thousands)
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
NET INCOME
 
$
47,215

 
$
49,211

 
$
201,399

 
$
188,662

OTHER COMPREHENSIVE LOSS:
 
 

 
 

 
 

 
 

Foreign currency translation adjustment, net of tax
 
(16
)
 
(25
)
 
(52
)
 
(9
)
TOTAL OTHER COMPREHENSIVE LOSS
 
(16
)
 
(25
)
 
(52
)
 
(9
)
COMPREHENSIVE INCOME
 
$
47,199

 
$
49,186

 
$
201,347

 
$
188,653

 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.



4
 
 

DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands) 
 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
ASSETS
 

 
 

 
 
CURRENT ASSETS:
 

 
 

 
 
Cash and cash equivalents
$
73,799

 
$
221,679

 
$
77,933

Accounts receivable, net
96,406

 
80,292

 
87,944

Income taxes receivable
8,719

 
14,293

 
10,361

Inventories, net
1,997,105

 
1,390,767

 
1,765,119

Prepaid expenses and other current assets
107,755

 
91,767

 
92,375

Deferred income taxes
47,789

 
51,586

 
42,133

Total current assets
2,331,573

 
1,850,384

 
2,075,865

 
 
 
 
 
 
Property and equipment, net
1,341,166

 
1,203,382

 
1,195,274

Intangible assets, net
109,827

 
110,162

 
111,195

Goodwill
200,594

 
200,594

 
200,594

Other assets:
 

 
 

 
 
Deferred income taxes
1,355

 
1,862

 
2,209

Other
73,912

 
69,814

 
70,395

Total other assets
75,267

 
71,676

 
72,604

TOTAL ASSETS
$
4,058,427

 
$
3,436,198

 
$
3,655,532

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
CURRENT LIABILITIES:
 

 
 

 
 
Accounts payable
$
941,973

 
$
614,511

 
$
826,945

Accrued expenses
345,052

 
283,828

 
307,708

Deferred revenue and other liabilities
133,593

 
172,259

 
123,665

Income taxes payable
—

 
47,698

 
—

Current portion of other long-term debt and leasing obligations
575

 
537

 
461

Total current liabilities
1,421,193

 
1,118,833

 
1,258,779

LONG-TERM LIABILITIES:
 

 
 

 
 
Revolving credit borrowings
342,400

 
—

 
280,500

Other long-term debt and leasing obligations
5,477

 
5,913

 
6,108

Deferred income taxes
29,078

 
44,494

 
23,584

Deferred revenue and other liabilities
536,973

 
434,733

 
422,407

Total long-term liabilities
913,928

 
485,140

 
732,599

COMMITMENTS AND CONTINGENCIES


 


 


STOCKHOLDERS' EQUITY:
 

 
 

 
 
Common stock
883

 
932

 
925

Class B common stock
249

 
249

 
249

Additional paid-in capital
1,053,748

 
1,015,404

 
987,892

Retained earnings
1,623,962

 
1,471,182

 
1,330,542

Accumulated other comprehensive (loss) income
(125
)
 
(73
)
 
15

Treasury stock, at cost
(955,411
)
 
(655,469
)
 
(655,469
)
Total stockholders' equity
1,723,306

 
1,832,225

 
1,664,154

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
4,058,427

 
$
3,436,198

 
$
3,655,532

 
 
 
 
 
 

See accompanying notes to unaudited consolidated financial statements.

5
 
 

DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Class B
 
Additional
 
 
 
Other
 
 
 
 
 
Common Stock
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Capital
 
Earnings
 
Loss
 
Stock
 
Total
BALANCE, January 31, 2015
93,205,708

 
$
932

 
24,900,870

 
$
249

 
$
1,015,404

 
$
1,471,182

 
$
(73
)
 
$
(655,469
)
 
$
1,832,225

Exercise of stock options
658,606

 
6

 
—

 
—

 
18,662

 
—

 
—

 
—

 
18,668

Restricted stock vested
395,544

 
4

 
—

 
—

 
(4
)
 
—

 
—

 
—

 
—

Minimum tax withholding requirements
(132,792
)
 
(1
)
 
—

 
—

 
(7,702
)
 
—

 
—

 
—

 
(7,703
)
Net income
—

 
—

 
—

 
—

 
—

 
201,399

 
—

 
—

 
201,399

Stock-based compensation
—

 
—

 
—

 
—

 
21,687

 
—

 
—

 
—

 
21,687

Total tax benefit from exercise of stock options
—

 
—

 
—

 
—

 
5,701

 
—

 
—

 
—

 
5,701

Foreign currency translation adjustment, net of taxes of $30
—

 
—

 
—

 
—

 
—

 
—

 
(52
)
 
—

 
(52
)
Purchase of shares for treasury
(5,823,695
)
 
(58
)
 
—

 
—

 
—

 
—

 
—

 
(299,942
)
 
(300,000
)
Cash dividends declared
—

 
—

 
—

 
—

 
—

 
(48,619
)
 
—

 
—

 
(48,619
)
BALANCE, October 31, 2015
88,303,371

 
$
883

 
24,900,870

 
$
249

 
$
1,053,748

 
$
1,623,962

 
$
(125
)
 
$
(955,411
)
 
$
1,723,306

 
See accompanying notes to unaudited consolidated financial statements.



6
 
 

DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
 
39 Weeks Ended
 
October 31,
2015
 
November 1,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
201,399

 
$
188,662

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depreciation and amortization
136,683

 
131,000

Deferred income taxes
(11,112
)
 
(18,063
)
Stock-based compensation
21,687

 
19,430

Excess tax benefit from exercise of stock options
(6,308
)
 
(6,560
)
Gain on sale of asset
—

 
(14,428
)
Other non-cash items
442

 
435

Changes in assets and liabilities:
 

 
 

Accounts receivable
(22,556
)
 
(14,146
)
Inventories
(606,338
)
 
(533,054
)
Prepaid expenses and other assets
(18,685
)
 
(12,870
)
Accounts payable
324,832

 
290,216

Accrued expenses
38,817

 
25,532

Income taxes payable / receivable
(36,424
)
 
(16,362
)
Deferred construction allowances
118,647

 
87,898

Deferred revenue and other liabilities
(25,215
)
 
(24,933
)
Net cash provided by operating activities
115,869

 
102,757

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(273,962
)
 
(271,257
)
Proceeds from sale of other assets
—

 
74,534

Deposits and purchases of other assets
(2,406
)
 
(26,780
)
Net cash used in investing activities
(276,368
)
 
(223,503
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Revolving credit borrowings
1,019,100

 
1,057,600

Revolving credit repayments
(676,700
)
 
(777,100
)
Payments on other long-term debt and leasing obligations
(398
)
 
(806
)
Construction allowance receipts
—

 
—

Proceeds from exercise of stock options
18,668

 
10,671

Excess tax benefit from exercise of stock options
6,309

 
6,588

Minimum tax withholding requirements
(7,703
)
 
(7,722
)
Cash paid for treasury stock
(300,000
)
 
(200,000
)
Cash dividends paid to stockholders
(49,235
)
 
(46,564
)
Increase (decrease) in bank overdraft
2,630

 
(25,710
)
Net cash provided by financing activities
12,671

 
16,957

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(52
)
 
(9
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(147,880
)
 
(103,798
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
221,679

 
181,731

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
73,799

 
$
77,933

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Accrued property and equipment
$
65,707

 
$
56,708

Cash paid for interest
$
1,761

 
$
1,700

Cash paid for income taxes
$
170,752

 
$
151,380

 
See accompanying notes to unaudited consolidated financial statements.

7
 
 

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

1.  Basis of Presentation

Dick's Sporting Goods, Inc. (together with its subsidiaries, referred to as "the Company", "we", "us" and "our" unless specified otherwise) is a leading omni-channel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories through a blend of dedicated associates, in-store services and unique specialty shop-in-shops. The Company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores. When used in this Quarterly Report on Form 10-Q, unless the context otherwise requires or otherwise specifies, any reference to "year" is to the Company's fiscal year.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements for Quarterly Reports on Form 10-Q and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The interim consolidated financial statements are unaudited and have been prepared on the same basis as the annual audited consolidated financial statements. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information. This unaudited interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 2015 as filed with the Securities and Exchange Commission on March 27, 2015. Operating results for the 13 and 39 weeks ended October 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending January 30, 2016 or any other period.

Recently Issued Accounting Pronouncements

Deferred Taxes

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, "Balance Sheet Classification of Deferred Taxes." This update requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early application is permitted as of the beginning of the interim or annual reporting period. The Company does not expect that the adoption of this guidance will have a significant impact on the Company's Consolidated Financial Statements.

Measurement of Inventory

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." This update requires an entity that determines the cost of inventory by methods other than last-in, first-out (LIFO) and the retail inventory method (RIM) to measure inventory at the lower of cost and net realizable value. ASU 2015-11 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. Prospective application is required. Early application is permitted as of the beginning of the interim or annual reporting period. The Company does not expect that the adoption of this guidance will have a significant impact on the Company's Consolidated Financial Statements.

Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This update requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the update (1) specifies the accounting for some costs to obtain or fulfill a contract with a customer and (2) expands disclosure requirements related to revenue and cash flows arising from contracts with customers. The update permits the use of either the retrospective or cumulative effect transition method.  In August 2015, the FASB subsequently issued ASU 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date," which approved a one year deferral of ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted as of the original effective date for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of ASU 2014-09 and ASU 2015-14 on the Company's Consolidated Financial Statements.


8
 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2.  Store Closings
 
The calculation of accrued store closing and relocation reserves primarily includes future minimum lease payments, maintenance costs and taxes from the date of closure or relocation to the end of the remaining lease term, net of contractual or estimated sublease income. The liability is discounted using a credit-adjusted risk-free rate of interest. The assumptions used in the calculation of the accrued store closing and relocation reserves are evaluated each quarter.
 
The following table summarizes the activity in fiscal 2015 and 2014 (in thousands):
 
 
39 Weeks Ended
 
 
October 31,
2015
 
November 1,
2014
Accrued store closing and relocation reserves, beginning of period
 
$
12,785

 
$
17,102

Expense charged to earnings
 
3,451

 
2,119

Cash payments
 
(3,427
)
 
(5,357
)
Interest accretion and other changes in assumptions
 
(115
)
 
(81
)
Accrued store closing and relocation reserves, end of period
 
12,694

 
13,783

Less: current portion of accrued store closing and relocation reserves
 
(4,577
)
 
(4,267
)
Long-term portion of accrued store closing and relocation reserves
 
$
8,117

 
$
9,516

 
The current portion of accrued store closing and relocation reserves is included within accrued expenses and the long-term portion is included within long-term deferred revenue and other liabilities on the unaudited Consolidated Balance Sheets. The related expense is recorded within selling, general and administrative expenses on the unaudited Consolidated Statements of Income.

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

The computations for basic and diluted earnings per common share are as follows (in thousands, except per share data): 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net income
 
$
47,215

 
$
49,211

 
$
201,399

 
$
188,662

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
114,978

 
118,142

 
116,101

 
119,743

Dilutive effect of stock-based awards
 
1,528

 
1,860

 
1,638

 
1,991

Weighted average common shares outstanding - diluted
 
116,506

 
120,002

 
117,739

 
121,734

 
 
 
 
 
 
 
 
 
Earnings per common share - basic
 
$
0.41

 
$
0.42

 
$
1.73

 
$
1.58

Earnings per common share - diluted
 
$
0.41

 
$
0.41

 
$
1.71

 
$
1.55

 
 
 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded from diluted calculation
 
1,405

 
1,428

 
1,181

 
1,435



9
 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Level 1:
Observable inputs such as quoted prices in active markets;
 
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
Assets measured at fair value on a recurring basis as of October 31, 2015 and January 31, 2015 are set forth in the table below (in thousands):
Description
 
Level 1
 
Level 2
 
Level 3
As of October 31, 2015
 
 

 
 

 
 

Assets:
 
 

 
 

 
 

Deferred compensation plan assets held in trust (1)
 
$
54,802

 
$
—

 
$
—

Total assets
 
$
54,802

 
$
—

 
$
—

 
 
 
 
 
 
 
As of January 31, 2015
 
 

 
 

 
 

Assets:
 
 

 
 

 
 

Deferred compensation plan assets held in trust (1)
 
$
52,193

 
$
—

 
$
—

Total assets
 
$
52,193

 
$
—

 
$
—


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

The fair value of cash and cash equivalents, accounts receivable, accounts payable, revolving credit borrowings and certain other liabilities approximated book value due to the short-term nature of these instruments at both October 31, 2015 and January 31, 2015.
 
The Company uses quoted prices in active markets to determine the fair value of the aforementioned assets determined to be Level 1 instruments. The Company's policy for recognition of transfers between levels of the fair value hierarchy is to recognize any transfer at the end of the fiscal quarter in which the determination to transfer was made. The Company did not transfer any assets or liabilities among the levels within the fair value hierarchy during the 39 weeks ended October 31, 2015 or the fiscal year ended January 31, 2015. 

5.  Debt

Revolving Credit Agreement - On August 12, 2015, the Company entered into a five-year senior secured revolving credit agreement (the "Credit Agreement") that amended and restated the Company's then existing credit facility. The Credit Agreement provides for a $1 billion revolving credit facility, including up to $150 million in the form of letters of credit and allows the Company, subject to the satisfaction of certain conditions, to request an increase of up to $250 million.

The Credit Agreement matures on August 12, 2020. It is secured by a first priority security interest in certain property and assets, including receivables, inventory, deposit accounts, securities accounts and other personal property of the Company and is guaranteed by the Company's domestic subsidiaries.

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

10
 
 
 
 
 
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Credit Agreement contains certain covenants that limit the ability of the Company to, among other things: incur or guarantee additional indebtedness; pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; make certain investments; sell assets; or consolidate, merge or transfer all or substantially all of the Company's assets. In addition, the Credit Agreement contains a covenant that requires the Company to maintain a minimum adjusted availability of 7.5% of its borrowing base.

6.  Subsequent Event
 
Dividend - On November 12, 2015, the Company's Board of Directors authorized and declared a quarterly cash dividend in the amount of $0.1375 per share of common stock and Class B common stock payable on December 31, 2015 to stockholders of record as of the close of business on December 11, 2015.

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, our expectations, our growth strategies, including our plans to open new stores and further develop our own eCommerce platform, our efforts to increase profit margins and return on invested capital or projections of, among other things: our future profitability, capital expenditures, plans to return capital to stockholders through dividends or share repurchases or our financial condition.

The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results, and could cause actual results for fiscal 2015 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by our management:

▪
The dependence of our business on consumer discretionary spending;

▪
Intense competition in the sporting goods industry and in retail;

▪
Our ability to predict or effectively react to changes in consumer demand or shopping patterns;

▪
Lack of available retail store sites on terms acceptable to us, rising real estate prices and other costs and risks relating to a brick and mortar retail store model;
 
▪
Omni-channel growth and our continued development of an eCommerce platform;

▪
Unauthorized disclosure of sensitive or confidential customer information;

▪
Risks associated with our private brand offerings and new retail concept stores;

▪
Disruption of or other problems with the services provided by our primary eCommerce services provider;

▪
Our ability to access adequate capital to operate and expand our business and to respond to changing business and economic conditions;


11
 
 

▪
Risks and costs relating to changing laws and regulations affecting our business, including: labor laws, consumer products and firearms and ammunition;

▪
Our relationships with our vendors or disruptions in our or our vendors' supply chains, which could be caused by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials or foreign political instability;

▪
Litigation risks for which we may not have sufficient insurance or other coverage;

▪
Our ability to attract, train, engage and retain qualified leaders and associates and the loss of Mr. Edward Stack as our key executive;

▪
Our ability to secure and protect our trademarks and other intellectual property and defend claims of intellectual property infringement;

▪
Disruption of or other problems with our information systems;

▪
Disruption at our distribution facilities;

▪
Performance of professional sports teams, professional team lockouts or strikes, retirement or scandal involving sports superstars;

▪
The seasonality of our business, as well as other factors such as weather and weather-related disruptions;

▪
Regional risks because our stores are generally concentrated in the eastern half of the United States;

▪
Our pursuit of strategic investments or acquisitions, including costs and uncertainties associated with combining businesses and / or assimilating acquired companies;

▪
We are controlled by our Chairman and Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders; and

▪
Our current anti-takeover provisions, which could prevent or delay a change in control of the Company.

The foregoing and additional risk factors are described in more detail in other reports or filings filed or furnished by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 31, 2015. 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 this date. 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 the securities laws.

OVERVIEW

Dick's Sporting Goods, Inc. (together with its subsidiaries, referred to as "the Company", "we", "us" and "our" unless specified otherwise) is a leading omni-channel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories through a blend of dedicated associates, in-store services and unique specialty shop-in-shops. The Company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores. When used in this Quarterly Report on Form 10-Q, unless the context otherwise requires or unless otherwise specified, any reference to "year" is to the Company's fiscal year.

As of October 31, 2015, we operated 645 Dick's Sporting Goods stores in 47 states, 75 Golf Galaxy stores in 29 states and 19 Field & Stream stores in nine states, with approximately 36.8 million square feet on a consolidated basis, the majority of which are located throughout the eastern half of the United States. In some markets we operate two adjacent stores on the same property with a pass-through for customers. We call these combined stores All-American Sports Centers. We also operate eCommerce websites at www.DICKS.com, www.golfgalaxy.com and www.fieldandstreamshop.com.
 

12
 
 

Due to the seasonal nature of our business, interim results are not necessarily indicative of results for any other period within, or the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the holiday selling season.
 
The primary factors that have historically influenced the Company's profitability and success have been the growth in its number of stores and selling square footage, the integration of eCommerce with its brick and mortar stores, positive consolidated same store sales, which include the Company's eCommerce business, and its strong gross profit margins. For example, in the last five years, the Company has grown from 437 Dick's Sporting Goods stores as of October 30, 2010 to 645 Dick's Sporting Goods stores as of October 31, 2015. The Company's eCommerce sales penetration to total net sales has increased from 2.2% to 7.9% for the year-to-date period ended October 30, 2010 and October 31, 2015, respectively.

Over the past three years, the Company has innovated its eCommerce sites with enhancements in the customer experience, new releases of its mobile and tablet sites, and development of capabilities that integrate the Company's online presence with its brick and mortar stores, including ship-from-store; buy-online, pick-up in-store; return-to-store and multi-faceted marketing campaigns that are consistent across the stores and eCommerce websites. On average, approximately 80% of the Company's eCommerce sales are generated within brick and mortar store trade areas.

The Company's store network and the integration of eCommerce remain fundamental to the strength of its omni-channel platform, and it continues to expand its presence through the opening of new stores. The Company believes it has the potential to reach approximately 1,100 Dick's Sporting Goods locations, including smaller market locations across the United States. The Company believes that growing its store network and eCommerce business simultaneously will enable it to profitably grow the business by delivering an omni-channel shopping experience for its customers.
 
The Company's senior management focuses on certain key indicators to monitor the Company's performance including:

▪
Consolidated same store sales performance – Same store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period and sales completed on our eCommerce websites. A store is included in the same store sales calculation in 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. Each relocated store is returned to the same store sales base in the fiscal period that it commences its 14th full month of operations at that new location. Our management considers same store 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, cash and working capital. See further discussion of our same store sales in the "Results of Operations and Other Selected Data" section herein.

▪
Operating cash flow – Cash flow generation supports the general operating needs of the Company and funds capital expenditures related to its omni-channel platform, distribution and administrative facilities, costs associated with continued improvement of information technology tools, costs associated with potential strategic acquisitions or investments that may arise from time to time and stockholder return initiatives, including cash dividends and share repurchases. The Company typically generates significant positive operating cash flows and proportionately higher net income levels in the fiscal fourth quarter in connection with the holiday selling season. See further discussion of the Company's cash flows in the "Liquidity and Capital Resources and Changes in Financial Condition" section herein.

▪
Quality of merchandise offerings – To monitor and maintain acceptance of its merchandise offerings, the Company monitors sell-throughs, inventory turns, gross margins and markdown rates on a department and style level. This analysis helps the Company manage inventory levels to reduce cash flow requirements and deliver optimal gross margins by improving merchandise flow and establishing appropriate price points to minimize markdowns.

▪
Store productivity – To assess store-level performance, the Company monitors various indicators, including new store productivity, sales per square foot, store operating contribution margin and store cash flow.
 

13
 
 

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 January 31, 2015, the Company considers its policies on inventory valuation, vendor allowances, goodwill and intangible assets, impairment of long-lived assets and closed store reserves, self-insurance reserves, stock-based compensation and uncertain tax positions to be the most critical in understanding the judgments that are involved in preparing the Company's consolidated financial statements. There have been no changes in the Company's critical accounting policies during the quarter ended October 31, 2015.

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary
 
▪
Net income for the current quarter decreased 4% to $47.2 million, or $0.41 per diluted share, as compared to net income of $49.2 million, or $0.41 per diluted share, for the quarter ended November 1, 2014. Net income for the quarter ended October 31, 2015 includes $4.7 million, net of tax, or $0.04 per diluted share, related to a litigation settlement charge.

▪
Net sales increased 8% to $1.6 billion in the current quarter compared to the same quarter in fiscal 2014, due primarily to the growth of our store network and a 0.4% increase in consolidated same store sales.

▪
eCommerce sales penetration in the current quarter increased to 8.0% of total net sales compared to 7.3% in the third quarter of 2014.

▪
Gross profit increased 13 basis points to 29.73% as a percentage of net sales in the current quarter, as compared to the quarter ended November 1, 2014, due primarily to merchandise margin expansion, partially offset by increased occupancy and shipping expenses as a percentage of net sales.

▪
In the third quarter of 2015, the Company:

▪
Opened 27 new Dick's Sporting Goods stores and seven new Field & Stream stores. The Company also relocated five Dick's Sporting Goods stores, remodeled two Dick's Sporting Goods stores and closed one Dick's Sporting Goods store.

▪
Declared and paid a quarterly cash dividend in the amount of $0.1375 per share of common stock and Class B common stock.

▪
Repurchased approximately 3.2 million shares of common stock for $150 million.

▪
Amended its Credit Agreement to increase lender commitments from $500 million to $1 billion, reduce applicable margins on base rate and LIBOR rate loans and extend the maturity date to August 12, 2020.
 

14
 
 

The following represents a reconciliation of beginning and ending stores for the periods indicated:
 
39 Weeks Ended 
 October 31, 2015
 
39 Weeks Ended 
 November 1, 2014
 
Dick's Sporting Goods
 
Specialty Store Concepts (1)
 
Total
 
Dick's Sporting Goods
 
Specialty Store Concepts (1)
 
Total
Beginning stores
603

 
91

 
694

 
558

 
84

 
642

Q1 New stores
9

 
1

 
10

 
8

 
—

 
8

Q2 New stores
7

 
1

 
8

 
8

 
1

 
9

Q3 New stores
27

 
9

 
36

 
24

 
8

 
32

Ending stores
646

 
102

 
748

 
598

 
93

 
691

 
 
 
 
 
 
 
 
 
 
 
 
Closed stores
1

 
3

 
4

 
1

 
—

 
1

Ending stores
645

 
99

 
744

 
597

 
93

 
690

 
 
 
 
 
 
 
 
 
 
 
 
Remodeled stores
2

 
—

 
2

 
5

 
—

 
5

Relocated stores
6

 
1

 
7

 
5

 
2

 
7

 
(1) 
Includes the Company's Golf Galaxy, Field & Stream and other specialty concept stores. As of October 31, 2015, the Company operated 75 Golf Galaxy stores and 19 Field & Stream stores.

The following tables present for the periods indicated selected items in the unaudited Consolidated Statements of Income as a percentage of the Company's net sales, as well as the basis point change in the percentage of net sales from the prior year's period. In addition, other data is provided to facilitate a further understanding of our business. These tables should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the accompanying unaudited Consolidated Financial Statements and related notes thereto.
 
 
 
 
 
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2014-2015 (A)
 
13 Weeks Ended
 
 
October 31,
2015
 
November 1,
2014 (A)
 
Net sales (1)
100.00
%
 
100.00
%
 
N/A
Cost of goods sold, including occupancy and distribution costs (2)
70.27

 
70.40

 
(13)
Gross profit
29.73

 
29.60

 
13
Selling, general and administrative expenses (3)
24.05

 
23.43

 
62
Pre-opening expenses (4)
0.99

 
0.94

 
5
Income from operations
4.69

 
5.24

 
(55)
Interest expense
0.07

 
0.06

 
1
Other expense (income) (5)
0.07

 
(0.03
)
 
10
Income before income taxes
4.55

 
5.21

 
(66)
Provision for income taxes
1.68

 
1.99

 
(31)
Net income
2.87
%
 
3.22
%
 
(35)
 
 
 
 
 
 
Other Data:
 

 
 

 
 
Consolidated same store sales increase
0.4
%
 
1.1
%
 
 
Number of stores at end of period (6)
744

 
690

 
 
Total square feet at end of period (6)
36,775,761

 
33,951,067

 
 


15
 
 

 
 
 
 
 
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year 2014-2015 (A)
 
39 Weeks Ended
 
 
October 31,
2015 (A)
 
November 1,
2014 (A)
 
Net sales (1)
100.00
%
 
100.00
%
 
N/A
Cost of goods sold, including occupancy and distribution costs (2)
69.97

 
70.02

 
(5)
Gross profit
30.03

 
29.98

 
5
Selling, general and administrative expenses (3)
22.89

 
22.85

 
4
Pre-opening expenses (4)
0.63

 
0.61

 
2
Income from operations
6.51

 
6.52

 
(1)
Interest expense
0.05

 
0.05

 
—
Other income (5)
(0.02
)
 
(0.10
)
 
8
Income before income taxes
6.47

 
6.58

 
(11)
Provision for income taxes
2.47

 
2.53

 
(6)
Net income
4.00
%
 
4.05
%
 
(5)
 
 
 
 
 
 
Other Data:
 

 
 

 
 
Consolidated same store sales increase
0.9
%
 
2.0
%
 
 
Number of stores at end of period (6)
744

 
690

 
 
Total square feet at end of period (6)
36,775,761

 
33,951,067

 
 

(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 is recognized upon shipment of merchandise. Service-related revenue is recognized as the services are performed. 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. These cards have no expiration date. Income from unredeemed cards is recognized on the unaudited Consolidated Statements of Income within selling, general and administrative expenses at the point at which redemption becomes remote. The Company performs an evaluation of the aging of the unredeemed cards, based on the elapsed time from the date of original issuance, to determine when redemption becomes remote.

(2) 
Cost of goods sold includes the cost of merchandise, vendor allowances, inventory shrinkage, freight, distribution, shipping and store occupancy costs. The Company defines merchandise margin as net sales less the cost of merchandise sold. The cost of merchandise includes product costs paid to the vendor, including items such as purchase discounts and vendor chargebacks, as well as inventory write-downs for the lower of cost or market. 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. Cost of goods sold included a $2.4 million write-down of golf-related inventory for the 39 weeks ended November 1, 2014 relating to the Company's golf restructuring.
 
(3) 
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. Selling, general and administrative expenses for the 13 and 39 weeks ended October 31, 2015 includes a $7.9 million litigation settlement charge. Selling, general and administrative expenses for the 39 weeks ended November 1, 2014 included a $14.4 million gain on sale of a Gulfstream G650 corporate aircraft and asset impairment and severance charges related to the Company's golf restructuring of $14.3 million and $3.7 million, respectively.

(4) 
Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs incurred prior to a new or relocated store opening, which are expensed as incurred.

(5) 
Includes investment income recognized to reflect changes in deferred compensation plan investment values with a corresponding charge to selling, general and administrative costs for the same amount.

(6) 
Includes Dick's Sporting Goods, Golf Galaxy, Field & Stream and other specialty concept stores.


16
 
 

13 Weeks Ended October 31, 2015 Compared to the 13 Weeks Ended November 1, 2014
 
Net Income
 
The Company reported net income of $47.2 million for the current quarter, or $0.41 per diluted share, compared to net income of $49.2 million, or $0.41 per diluted share, for the quarter ended November 1, 2014. Net income for the quarter ended October 31, 2015 includes $4.7 million, net of tax, or $0.04 per diluted share, related to a litigation settlement charge.

Net Sales

Net sales increased 8% in the current quarter to $1.6 billion from $1.5 billion for the quarter ended November 1, 2014 due primarily to the growth of our store network and a 0.4% increase in consolidated same store sales. The 0.4% increase in consolidated same store sales contributed $6.3 million of the increase in net sales for the quarter ended October 31, 2015. The remaining $109.7 million increase in sales is primarily attributable to new stores. The 0.4% increase in consolidated same store sales consisted of a 0.7% increase at Dick's Sporting Goods and a 2.9% decrease at Golf Galaxy. eCommerce sales penetration was 8.0% of total net sales during the current quarter compared to 7.3% of total net sales during the quarter ended November 1, 2014, representing an approximate increase of 18% in eCommerce sales across both Dick's Sporting Goods and Golf Galaxy.

The increase in Dick's Sporting Goods same store sales was primarily driven by increases within our hardlines and footwear categories, partially offset by a decrease within the apparel category, most notably seasonal outerwear that was negatively impacted by record-setting warm weather across the majority of our markets. The same store sales increase at Dick's Sporting Goods was driven by an increase in sales per transaction of approximately 1.2% partially offset by a decrease in transactions of approximately 0.5%. Based upon the current quarter sales mix, every 1% change in consolidated same store sales, which consists of both brick and mortar and eCommerce sales, would impact earnings before income taxes for the current quarter by approximately $5.0 million.

Income from Operations
 
Income from operations decreased to $77.1 million in the current quarter from $79.9 million for the quarter ended November 1, 2014.
 
Gross profit increased 8% to $488.4 million in the current quarter from $452.0 million for the quarter ended November 1, 2014, and increased as a percentage of net sales by 13 basis points compared to the same period last year. The increase in the gross profit rate was primarily driven by an increase in merchandise margin of 32 basis points partially offset by an increase in occupancy and shipping expenses in the current quarter compared to the same period last year. The increase in merchandise margin was primarily driven by lower inventory markdowns during the current quarter compared to the same period last year. Occupancy costs increased $16.7 million in the current quarter from the quarter ended November 1, 2014. Our occupancy costs are generally fixed in nature and fluctuate based on the number of stores that we operate. As a percentage of net sales, occupancy costs increased at a higher rate than the 8% increase in net sales during the current quarter. The increase in shipping expenses during the current quarter was the result of the growth and increased penetration of eCommerce sales as compared to the Company's total net sales. Every 10 basis point change in merchandise margin would impact earnings before income taxes for the current quarter by approximately $1.6 million.

Selling, general and administrative expenses increased 10% to $395.0 million in the current quarter from $357.7 million for the quarter ended November 1, 2014, and increased as a percentage of net sales by 62 basis points. The quarter ended October 31, 2015 includes a litigation settlement charge of $7.9 million. Apart from the litigation settlement charge, selling, general and administrative expenses increased 14 basis points as a percentage of net sales primarily driven by higher store payroll costs as the Company continued to invest to enhance the shopping experience within its stores.

Pre-opening expenses increased to $16.3 million in the current quarter from $14.3 million for the quarter ended November 1, 2014. Pre-opening expenses in any period fluctuate depending on the timing and number of new store openings and relocations. During the current quarter, the Company opened 27 new Dick's Sporting Goods stores and seven new Field & Stream stores. Additionally, the Company relocated five Dick's Sporting Goods stores in the current quarter. During the quarter ended November 1, 2014, the Company opened 24 new Dick's Sporting Goods stores, one new Golf Galaxy store and seven new Field & Stream stores along with relocating one Dick's Sporting Goods store and one Golf Galaxy store.

17
 
 

Income Taxes
 
The Company's effective tax rate was 36.9% for the quarter ended October 31, 2015 as compared to 38.1% for the same period last year. The effective tax rate for the quarter ended October 31, 2015 reflected discrete tax benefits resulting from return to provision items from the Company’s 2014 tax return.

39 Weeks Ended October 31, 2015 Compared to the 39 Weeks Ended November 1, 2014

Net Income

The Company reported net income of $201.4 million for the period ended October 31, 2015, or $1.71 per diluted share, compared to net income of $188.7 million, or $1.55 per diluted share, for the period ended November 1, 2014. Net income for the period ended October 31, 2015 includes $4.7 million, net of tax, or $0.04 per diluted share, related to a litigation settlement charge. Net income for the period ended November 1, 2014 included $8.7 million, net of tax, or $0.07 per diluted share, related to a gain on the sale of a Gulfstream G650 corporate aircraft and charges totaling $12.2 million, net of tax, or $0.10 per diluted share, related to the Company's golf restructuring.

Net Sales

Net sales increased 8% in the current period to $5.0 billion, due primarily to the growth of our store network and a 0.9% increase in consolidated same store sales. The 0.9% increase in consolidated same store sales contributed $40.0 million of the increase in net sales for the period ended October 31, 2015. The remaining $336.4 million increase in sales is primarily attributable to new stores. The 0.9% increase in consolidated same store sales consisted of a 1.3% increase at Dick's Sporting Goods and a 5.6% decrease at Golf Galaxy. eCommerce sales penetration was 7.9% of total net sales during the current period compared to 6.8% of total net sales during the period ended November 1, 2014, representing an approximate increase of 25% in eCommerce sales across both Dick's Sporting Goods and Golf Galaxy.

The increase in Dick's Sporting Goods same store sales was primarily driven by increases across each of our three primary categories: apparel, hardlines and footwear. The same store sales increase at Dick's Sporting Goods was driven by an increase in sales per transaction of approximately 1.6% partially offset by a decrease in transactions of approximately 0.3%. Based upon the current period sales mix, every 1% change in consolidated same store sales, which consists of brick and mortar and eCommerce sales, would impact earnings before income taxes for the current period by approximately $15.5 million.

Income from Operations

Income from operations increased to $327.4 million in the current period from $303.6 million for the period ended November 1, 2014.

Gross profit increased 8% to $1,510.9 million for the current period from $1,395.4 million for the period ended November 1, 2014, and increased as a percentage of net sales by five basis points compared to the same period last year. The period ended November 1, 2014 included a $2.4 million write-down of inventory relating to our golf restructuring. Apart from the golf restructuring, gross profit was flat as a percentage of net sales. Merchandise margins expanded 15 basis points, while occupancy costs deleveraged by 21 basis points. The increase in merchandise margin was primarily driven by lower inventory markdowns during the current period. Occupancy costs increased $57.1 million in the current period from the period ended November 1, 2014. Our occupancy costs are generally fixed in nature and fluctuate based on the number of stores that we operate. As a percentage of net sales, occupancy costs increased at a higher rate than the 8% increase in net sales during the current period. Every 10 basis point change in merchandise margin would impact earnings before income taxes for the current period by approximately $5.0 million.

Selling, general and administrative expenses increased 8% to $1,151.7 million in the current period from $1,063.4 million for the period ended November 1, 2014, and increased as a percentage of net sales by four basis points. The period ended October 31, 2015 includes a litigation settlement charge of $7.9 million. The period ended November 1, 2014 included (i) asset impairment and severance charges related to our golf restructuring of $14.3 million and $3.7 million, respectively, and (ii) a pre-tax gain on the sale of a Gulfstream G650 corporate aircraft of $14.4 million. Apart from the enumerated items, selling, general and administrative expenses in the current period decreased three basis points as a percentage of net sales as compared to the period ended November 1, 2014.


18
 
 

Pre-opening expenses increased to $31.8 million in the current period from $28.5 million for the period ended November 1, 2014. Pre-opening expenses in any period fluctuate depending on the timing and number of new store openings and relocations. During the current period, the Company opened 43 new Dick's Sporting Goods stores and nine new Field & Stream stores. Additionally, the Company relocated six Dick's Sporting Goods stores and one Golf Galaxy store in the current period. During the same period last year, the Company opened 40 new Dick's Sporting Goods stores, one new Golf Galaxy store and eight new Field & Stream stores along with relocating five Dick's Sporting Goods stores and two Golf Galaxy stores.

Income Taxes

The Company's effective tax rate was 38.2% for the period ended October 31, 2015 as compared to 38.4% for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

Overview
 
The Company's liquidity and capital needs have generally been met by cash from operating activities and our revolving credit facility. Cash flow from operations is seasonal in our business. Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, with the pre-holiday inventory increase being the largest. In the fourth quarter, inventory levels are reduced in connection with sales during the holiday season and this inventory reduction, combined with proportionately higher net income, typically produces significant positive cash flow.

Net cash provided by operating activities for the 39 weeks ended October 31, 2015 was $115.9 million compared to net cash provided by operating activities of $102.8 million for the prior year comparable period. Net cash from operating, investing and financing activities are discussed further below.
 
On August 12, 2015, the Company entered into a five-year senior secured revolving credit agreement (the "Credit Agreement") that amended and restated the Company's then existing credit facility. The Credit Agreement provides for a $1 billion revolving credit facility, including up to $150 million in the form of letters of credit and allows the Company, subject to the satisfaction of certain conditions, to request an increase of up to $250 million. The Credit Agreement replaced the Company's prior $500 million revolving credit facility (the "Prior Credit Agreement"). The Credit Agreement is further described within Note 5 to the unaudited Consolidated Financial Statements.

The Company generally utilizes its Credit Agreement for working capital needs based primarily on the seasonal nature of its business, with the Company's peak borrowings occurring during its third quarter as the Company increases inventory in advance of the holiday selling season.

Funds drawn on our Credit Agreement during the 39 weeks ended October 31, 2015 totaled $1,019.1 million over the course of 94 days. The Company repaid $676.7 million of these borrowings, ending the period with $342.4 million of outstanding borrowings under the Credit Agreement, which was the maximum daily amount outstanding at any point in time during the 39 weeks ended October 31, 2015.

Funds drawn on our Prior Credit Agreement during the 39 weeks ended November 1, 2014 totaled $1,057.6 million over the course of 74 days. The Company repaid $777.1 million of these borrowings, ending the period with $280.5 million of outstanding borrowings under the Prior Credit Agreement, which was the maximum daily amount outstanding at any point in time during the 39 weeks ended November 1, 2014.

The Company ended the current period with $73.8 million in cash and cash equivalents as compared to $221.7 million at the end of fiscal 2014. As of October 31, 2015 and January 31, 2015, total remaining borrowing capacity, after subtracting letters of credit, was $643.6 million and $486.0 million.

The Company intends to allocate capital to invest in its future growth, specifically the development of its omni-channel platform and specialty store concepts, as well as to return capital to stockholders through dividends and share repurchases. 

Capital expenditures – Normal capital requirements primarily relate to the development of our omni-channel platform, including new and existing Dick's Sporting Goods stores and eCommerce technology investments. The Company also plans to invest in its specialty store concepts and improve its supply chain and corporate information technology infrastructure. The Company has a capital appropriations committee that approves all capital expenditures in excess of certain amounts and groups and prioritizes all capital projects among required, discretionary and strategic categories.

19
 
 

Share repurchases – On March 7, 2013, the Company's Board of Directors authorized a five-year share repurchase program of up to $1 billion of the Company's common stock. During the 39 weeks ended October 31, 2015, the Company repurchased approximately 5.8 million shares of its common stock for $300.0 million. Any future share repurchase programs are subject to the final determination of our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
 
Dividends – During the 39 weeks ended October 31, 2015, the Company paid $49.2 million of dividends to its 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 the final determination of our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
 
The Company currently believes that cash flows generated by operations and funds available under its Credit Agreement will be sufficient to satisfy current capital requirements through the remainder of fiscal 2015. Other investment opportunities, such as potential strategic acquisitions, share repurchases, investments or store expansion rates in excess of those presently planned, may require additional funding.

The change in cash and cash equivalents is as follows (in thousands):
 
39 Weeks Ended
 
October 31,
2015
 
November 1,
2014
Net cash provided by operating activities
$
115,869

 
$
102,757

Net cash used in investing activities
(276,368
)
 
(223,503
)
Net cash provided by financing activities
12,671

 
16,957

Effect of exchange rate changes on cash and cash equivalents
(52
)
 
(9
)
Net decrease in cash and cash equivalents
$
(147,880
)
 
$
(103,798
)

Operating Activities

Operating activities consist primarily of net income, adjusted for certain non-cash items and changes in operating assets and liabilities. Adjustments to net income for non-cash items include depreciation and amortization, deferred income taxes, stock-based compensation expense and tax benefits on stock options, as well as non-cash gains and losses on the disposal of the Company's assets. Changes in operating assets and liabilities primarily reflect changes in inventories, accounts payable and income taxes payable / receivable, as well as other working capital changes.
 
Cash provided by operating activities increased $13.1 million for the 39 weeks ended October 31, 2015 compared to the same period last year. The increase in cash provided by operating activities is due primarily to a $29.6 million increase in non-cash items and a $12.7 million increase in net income, partially offset by a decrease in operating assets and liabilities of $29.2 million period-over-period. The increase in non-cash items is due primarily to the sale of a Gulfstream G650 corporate aircraft during the 39 weeks ended November 1, 2014 and changes in deferred income taxes period over period.

The decrease in operating assets and liabilities is due primarily to the following:

▪
Changes in inventory and accounts payable decreased operating cash flows by $38.7 million compared to the prior year, primarily attributable to slower sell-through of seasonal outerwear categories in the current year-to-date period.

▪
Changes in income taxes payable / receivable decreased operating cash flows by $20.1 million compared to the prior year, primarily due to higher income tax payments in the current period. Income tax payments in fiscal 2015 were unfavorably impacted by the sale of a Gulfstream G650 corporate aircraft during fiscal 2014.

▪
Changes in deferred construction allowances increased operating cash flows by $30.7 million compared to the prior year, primarily due to the timing and increased amount of collections associated with self-developed stores where tenant allowances are provided by landlords.
 

20
 
 

Investing Activities
 
Cash used in investing activities increased $52.9 million for the 39 weeks ended October 31, 2015 compared to the same period last year. During the 39 weeks ended November 1, 2014, the Company received $73.4 million of proceeds from the sale of a Gulfstream G650 corporate aircraft and paid $26.3 million to acquire intellectual property rights to the Field & Stream mark in product categories that were not otherwise owned by the Company.

Financing Activities

Cash provided by financing activities consists primarily of the Company's capital return initiatives, including its share repurchase program and cash dividend payments, and cash flows generated from stock option exercises. Cash provided by financing activities for the 39 weeks ended October 31, 2015 totaled $12.7 million compared to $17.0 million for the same period in the prior year. The Company repurchased $100.0 million more shares during the 39 weeks ended October 31, 2015 compared to the same period in the prior year. The higher share repurchase activity was partially offset by higher net Credit Agreement borrowings and changes in the bank overdraft balance between years.

Event Subsequent to Quarter-end
 
Dividend – On November 12, 2015, the Company's Board of Directors authorized and declared a quarterly cash dividend in the amount of $0.1375 per share of common stock and Class B common stock payable on December 31, 2015 to stockholders of record as of the close of business on December 11, 2015.

Off-Balance Sheet Arrangements

The Company's off-balance sheet arrangements as of October 31, 2015 primarily relate to store operating leases and purchase obligations for marketing commitments, including naming rights, licenses for trademarks, corporate aircraft and technology-related and other commitments. The Company has excluded these items from the unaudited Consolidated Balance Sheets in accordance with generally accepted accounting principles. The Company does not believe that any of these arrangements have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or resources.

Contractual Obligations and Other Commercial Commitments
 
The Company is party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of the Company's contractual obligations and other commercial commitments as of January 31, 2015, see the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015, filed March 27, 2015. During the current quarter, there were no material changes outside the ordinary course of business.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company's market risk exposures from those reported in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015 filed March 27, 2015.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
During the third quarter of fiscal 2015, there were no changes in the Company's internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
 
During the quarter, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, October 31, 2015.
 

21
 
 

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the circumvention or overriding of the controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of simple errors or mistakes. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity's operating environment or deterioration in the degree of compliance with policies and procedures. 

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
Dick's Sporting Goods, Inc. and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this Quarterly Report on Form 10-Q, the Company does not expect that any of such proceedings will have a material adverse effect on the Company's financial position or results of operations.

ITEM 1A.  RISK FACTORS

For a discussion of risk factors affecting the Company refer to Part I, Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended January 31, 2015. The discussion of risk factors sets forth the material risks that could affect the Company's financial condition and operations.

Reference is also made to Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements" of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth repurchases of our common stock during the third quarter of 2015:
Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)
 
Dollar Value of Shares That May Yet be Purchased Under the Plan or Program
August 2, 2015 to August 29, 2015
 
864,548

 
$
48.01

 
864,000

 
$
352,917,995

August 30, 2015 to October 3, 2015
 
1,465,615

 
$
48.46

 
1,464,385

 
$
281,961,467

October 4, 2015 to October 31, 2015
 
867,990

 
$
43.28

 
867,990

 
$
244,397,772

Total
 
3,198,153

 
$
46.93

 
3,196,375

 
 


(a) 
Includes shares withheld from employees to satisfy minimum tax withholding obligations associated with the vesting of restricted stock during the period.
(b) 
Shares repurchased as part of the Company's previously announced five-year $1 billion share repurchase program, authorized by the Board of Directors on March 7, 2013.

ITEM 6.  EXHIBITS

The Exhibits listed in the Index to Exhibits, which appears on page 24 and is incorporated herein by reference, are filed or furnished (as noted) as part of this Quarterly Report on Form 10-Q.


22
 
 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on November 25, 2015 on its behalf by the undersigned, thereunto duly authorized.

DICK'S SPORTING GOODS, INC.
 
 
 
 
 
 
 
 
 
 
By:
/s/ EDWARD W. STACK
 
 
 
 
 
Edward W. Stack
 
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
 
 
By:
/s/ TERI L. LIST-STOLL
 
 
 
 
 
Teri L. List-Stoll
 
 
 
 
 
Executive Vice President – Chief Financial Officer
 
 
 
(principal financial officer)
 
 
 
 
 
 
 
 
 
 
By:
/s/ JOSEPH R. OLIVER
 
 
 
 
 
Joseph R. Oliver
 
 
 
 
 
Senior Vice President – Chief Accounting Officer
 
 
 
(principal accounting officer)
 
 
 
 

23
 
 

INDEX TO EXHIBITS
Exhibit Number
 
Description of Exhibit
 
Method of Filing
31.1
 
Certification of Edward W. Stack, Chairman and Chief Executive Officer, dated as of November 25, 2015 and made pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
 
 
31.2
 
Certification of Teri L. List-Stoll, Executive Vice President - Chief Financial Officer, dated as of November 25, 2015 and made pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
 
 
32.1
 
Certification of Edward W. Stack, Chairman and Chief Executive Officer, dated as of November 25, 2015 and made pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Furnished herewith
 
 
 
 
 
32.2
 
Certification of Teri L. List-Stoll, Executive Vice President - Chief Financial Officer, dated as of November 25, 2015 and made pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Furnished herewith
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
Filed herewith
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
Filed herewith
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
Filed herewith
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
Filed herewith
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
Filed herewith
 
 
 
 
 

24