ITEM 1. BUSINESS
General
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 True Runner specialty stores. The Company was founded in 1948 when Richard "Dick" Stack, the father of Edward W. Stack, our Chairman and Chief Executive Officer, opened his original bait and tackle store in Binghamton, New York. Edward W. Stack joined his father's business full-time in 1977 and in 1984 became President and Chief Executive Officer of the then two store chain. Our vision is to build leading brands that serve and inspire athletes and outdoor enthusiasts around the world to achieve their personal best; create value for our stockholders through the relentless improvement of everything we do; and make a lasting impact in our communities through sport.
We were incorporated in 1948 in New York under the name Dick's Clothing and Sporting Goods, Inc. In November 1997, we reincorporated as a Delaware corporation and in April 1999 we changed our name to Dick's Sporting Goods, Inc. Our executive office is located at 345 Court Street, Coraopolis, Pennsylvania 15108 and our phone number is (724) 273-3400. Our website is located at www.DICKS.com. The information on our website does not constitute a part of this Annual Report on Form 10-K. We include on our website, free of charge, copies of our Annual and Quarterly Reports filed on Forms 10-K and 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended.
As of January 31, 2015, the Company operated 603 Dick's Sporting Goods stores in 46 states, 78 Golf Galaxy stores in 29 states, 10 Field & Stream stores in five states and three True Runner stores in three states. We also operate eCommerce websites at www.DICKS.com and www.golfgalaxy.com.
Business Strategy
The key elements of our business strategy are:
Authentic Sporting Goods Retailer. Our history and core foundation is as a retailer of high-quality authentic athletic equipment, apparel and footwear, intended to enhance our customers' performance and enjoyment of athletic pursuits, rather than focusing our merchandise selection on the latest fashion trend or style. We believe our customers seek genuine, deep product offerings, and that ultimately this merchandising approach positions us with advantages in the market, which we believe will continue to benefit from new product offerings with enhanced technological features.
Our objective is not only to carry leading brands, but to carry a full range of products within each brand, including premium items for the sports enthusiast. We believe that the breadth of our product selections in each category of sporting goods offers our customers a wide range of good, better and best price points and enables us to address the needs of sporting goods consumers, from the beginner to the sports enthusiast, which distinguishes us from other large format sporting goods stores. We also believe that the range of merchandise we offer allows us to compete effectively against all of our competitors, from traditional independent sporting goods stores and specialty shops to other large format sporting goods stores and mass merchant discount retailers to internet-based retailers.
Omni-channel Development. We believe when our customers connect with the Dick's Sporting Goods brand they expect a seamless shopping experience, regardless of the manner in which they choose to shop us. We continue to see growth in the number of customers who shop us both online and in our stores and believe these omni-channel customers represent the future of retail.
Our customers may research products online, then visit a store to experience the merchandise and consult with one of our in-store experts, such as a bicycle mechanic or running specialist. Other customers may be inspired by one of our push notifications on their mobile device, visit our store to test the merchandise by utilizing such features as the golf hitting bay, archery lane or trying a pair of running shoes on the treadmill and complete the purchase in the store or later on their tablet device.
We believe that leveraging all of our sales channels to deliver a consistent, seamless and high-quality customer experience across our store, on the web and via mobile technology, will differentiate us from our online-only competitors. As a result, we continually upgrade website functionality, expand assortment and content and invest in new capabilities to maximize device shift and leverage our store network. We believe this will provide customers with an enhanced shopping experience that will enable our customers to buy and receive products where, when and how they want. We are also planning the development of an eCommerce platform that will allow us to fully control our customer experience and maximize profitability, while continuing store growth. We believe our store base is a competitive advantage to our online-only competitors, as our physical presence allows us to better serve our customers, whether through the convenience of accepting in-store returns or exchanges, or expediting fulfillment of eCommerce orders. We believe that offering support services for the products we sell enhances the credibility of our associates and specialty store concepts with our customers and further differentiates our stores from our competitors.
The primary factors that have historically influenced our profitability and success have been the growth in our number of stores and selling square footage, positive same store sales and our strong gross profit margins. We have grown from 419 Dick's Sporting Goods stores at the end of fiscal 2009 to 603 Dick's Sporting Goods stores at the end of fiscal 2014. We seek to expand our presence through the opening of new stores and 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 the expansion of its store network will also drive growth in eCommerce sales as the Company continues to deliver an omni-channel shopping experience for its customers. We also make continued investments in our store locations in order to maintain our brand standards and improve our customers' shopping experience.
Brand Partnerships. We carry a wide variety of well-known brands, including adidas, Asics, Callaway Golf, Columbia, Nike, Remington, TaylorMade-adidas Golf, The North Face and Under Armour. In addition to the cost efficiencies of shared investments with our brand partners, we seek to leverage our partnerships to offer authenticity and credibility to our customers, while differentiating ourselves from our competitors. We partner with our brands on important marketing initiatives and product launches, in addition to leveraging athletes that these brands bring to us for our marketing campaigns. Our brand partnerships also provide us with access to exclusive products and allow us to differentiate our customers' shopping experience, such as our brand shops, which provide our customers with a wider and deeper selection of products from our key brands.
Private Brands. We also offer a wide variety of private brands and products through exclusive licenses such as adidas baseball, CALIA, DBX, Field & Stream, Fitness Gear, Lady Hagen, MAXFLI, Nishiki, Primed, Quest, Reebok (performance apparel), Slazenger (golf and racquets), Top-Flite, Umbro (performance equipment, footwear and apparel) and Walter Hagen. Our private brands and other exclusive products offer our customers products that they cannot find anywhere else. Our private brands also offer exceptional value and quality to our customers at each price point and obtain higher gross margins than we obtain on sales of comparable branded products. We have invested in a development and procurement staff to support our private brand business.
Retail Concept Development. In fiscal 2014, we opened eight Field & Stream stores, a specialized outdoor concept. In fiscal 2015, we plan to open approximately nine additional Field & Stream locations. Our highly specialized concept stores enable us to connect with outdoor enthusiasts in their own element, giving us valuable insight into key merchandise categories that we can apply across our entire network.
Strategic Marketing. Our marketing program is designed to build loyalty for the Dick's Sporting Goods brand while promoting our broad assortment of brand name sporting goods equipment, apparel and footwear in a specialty store environment. Our historical marketing strategy consisted largely of newspaper advertising supplemented by direct mail and seasonal use of local and national television and radio. While we continue to market our merchandise assortment through these traditional channels, we have reduced our newspaper advertising, developed brand-building marketing campaigns focused on building passion and loyalty to the Dick's Sporting Goods brand and shifted our advertising mix to include more digital marketing. We continue to optimize our media mix by shifting to more efficient and effective marketing channels and by leveraging our extensive and expanding customer relationship marketing database from our "ScoreCard Rewards", "Advantage Club", "Sportsman's Advantage Club" and "True Runner Rewards" loyalty programs. The Company is also actively involved in communities, sponsoring thousands of teams at the local level.
Merchandising
We offer a full range of sporting goods, active apparel and footwear at each price point in order to appeal to the beginner, intermediate and enthusiast sports consumer. The following table sets forth the approximate percentage of our sales attributable to the hardlines, apparel and footwear categories for the periods presented:
(1)
Includes items such as sporting goods equipment, fitness equipment, golf equipment and hunting and fishing gear.
(2)
Includes the Company's non-merchandise sales categories, including in-store services and shipping revenues.
Selling Channels
We offer products to our customers through our retail stores and online. Although we sell through both of these channels, we believe that sales in one channel are not independent of the other. Regardless of the sales channel, we seek to provide our customers with a seamless omni-channel shopping experience in our stores, online and via mobile devices.
Retail Stores:
Store Format. Each of our Dick's Sporting Goods stores unites several sports specialty stores under one roof and typically contains the following specialty shops: Footwear, Team Sports, Outdoor Lodge, Golf, Fitness and Athletic Apparel. We believe our "store-within-a-store" concept creates a unique shopping environment by combining the convenience, broad assortment and competitive prices of large format stores with the brand names, deep product selection and customer service of a specialty store. Our Golf Galaxy and Field & Stream stores are designed to create an exciting and interactive shopping environment for the sporting enthusiast that highlights our extensive product assortments and value-added services.
Our primary prototype Dick's Sporting Goods store is a single-level store of approximately 50,000 square feet. We also have a prototype two-level store of approximately 80,000 square feet for those trade areas that have sufficient in-profile customers to support it as well as a smaller-market model that is approximately 35,000 to 40,000 square feet. Our primary prototype Golf Galaxy store is a single-level store that generally ranges from 13,000 to 18,000 square feet. In addition, we also have a prototype Golf Galaxy store of approximately 35,000 square feet, which includes more services and experiential shopping. Our primary prototype Field & Stream store is a single-level store of approximately 50,000 square feet. In our Dick's Sporting Goods stores, approximately 83% of store space is used for selling and approximately 17% is used for backroom storage of merchandise, receiving and office space.
We seek to encourage cross-selling and impulse buying through the layout of our departments. We provide a bright, open shopping environment through the use of glass, lights and lower shelving that enable customers to see the array of merchandise offered throughout our stores. We avoid the warehouse store look featured by some of our large format competitors.
Store Associates and Operations. We strive to complement our merchandise selection and innovative store design with superior customer service. We seek to recruit sports enthusiasts to serve as sales associates because we believe that they are more knowledgeable and passionate about the products they sell. For example, we currently employ bicycle mechanics who sell and service bicycles and running specialists who provide expertise and perform gait analysis to match footwear to a customer’s running style. As of January 31, 2015, we employed 887 bicycle mechanics and 572 running specialists. We believe that our associates' enthusiasm and ability to demonstrate and explain the advantages of products lead to increased sales. We believe our prompt, knowledgeable and enthusiastic service fosters the confidence and loyalty of our customers and differentiates us from other large format sporting goods stores.
Our Dick's Sporting Goods stores are typically open seven days a week, generally from 9:00 a.m. to 9:30 p.m. Monday through Saturday and 10:00 a.m. to 7:00 p.m. on Sunday. Our Golf Galaxy stores are typically open seven days a week, generally from 10:00 a.m. to 9:00 p.m. Monday through Saturday and 10:00 a.m. to 6:00 p.m. on Sunday.
Support Services. At our Dick's Sporting Goods stores and Golf Galaxy stores, we offer a complete range of expert golf services, including custom club fitting, club repair and grip and shaft installation for drivers, irons and putters, and we also have certified club technicians on hand. We offer private lessons with our PGA and LPGA professionals in our Golf Galaxy Stores. Our Dick's Sporting Goods stores also feature bicycle maintenance and repair stations on the sales floor that allow our bicycle mechanics to service bicycles in addition to assisting customers. At our Dick's Sporting Goods stores, we also steam baseball gloves, string tennis racquets and lacrosse sticks, sharpen ice skates, provide home delivery and assembly of fitness equipment, provide scope mounting and bore sighting services, cut arrows, sell hunting and fishing licenses and fill CO2 tanks for paintball.
Site Selection and Store Expansion. We select geographic markets and store sites based on a variety of factors, including demographic information, quality and nature of neighboring tenants, store visibility and accessibility. Key demographics include population density, household income, age and average number of occupants per household. In addition to these demographics, golf and outdoor recreation participation rates are considered in selecting sites for our Golf Galaxy and Field & Stream stores. We seek to locate our Dick's Sporting Goods stores in primary retail centers with an emphasis on co-tenants, including major discount retailers such as Wal-Mart or Target, or specialty retailers from other categories such as Lowe's or Best Buy.
We seek to balance our expansion of Dick's Sporting Goods stores between new and existing markets. In our existing markets, we add stores as necessary to cover appropriate trade areas. Clustering stores allows us to take advantage of economies of scale in advertising, promotion, distribution and supervisory costs. We seek to locate stores within separate trade areas within each metropolitan area and expand in geographically contiguous areas, in order to establish long-term market penetration and build on our experience in the same or nearby regions. We believe that local knowledge is an important part of success. In considering new regions, we locate our stores in areas we believe are underserved. In order to achieve the same economies of scale we have in multi-store existing markets, we identify multiple locations in new markets as well. In addition to larger metropolitan areas, we also target smaller population centers in which we locate single stores, generally in shopping centers with a wide regional draw.
The following table summarizes store openings and closings for 2014 and 2013:
(1)
Includes the Company's Golf Galaxy, Field & Stream and True Runner stores.
Future openings will depend upon several factors, including but not limited to general economic conditions, consumer confidence in the economy, unemployment trends, interest rates and inflation, the availability of retail store sites on acceptable terms, real estate prices and the availability of adequate capital. Because our new store openings depend on many factors, they are subject to risks and uncertainties as described below within Item 1A.
ITEM 1A. RISK FACTORS
Risks and Uncertainties
Our business is dependent on consumer discretionary spending and reduced consumer spending may adversely affect the Company's business, operations, liquidity, financial results and stock price.
Our business depends on consumer discretionary spending, and as a result, our results are highly dependent on U.S. consumer confidence and the health of the U.S. economy. Consumer spending may be affected by many factors outside of the Company’s control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters. Decreases in consumer discretionary spending that leads to a decrease in same store sales, customer traffic or average value per transaction could negatively affect the Company's financial performance, particularly if consumer spending is depressed for a prolonged period of time. Furthermore, promotional activities and decreased demand for consumer products, particularly higher-end products, could affect profitability and margins. The impact of a prolonged decline of consumer spending could also affect the Company if the decline leads to one or more vacancies of other retailers in shopping plazas as a result of reduced traffic to our store in that location. All of the foregoing factors could have a material adverse effect on our business.
Intense competition in the sporting goods industry and in retail could limit our growth and reduce our profitability.
The market for sporting goods retailers is highly fragmented and intensely competitive. Our current and prospective competitors include many large companies, some of which have greater market presence, name recognition and financial, marketing and other resources than we do. We compete, directly or indirectly, with retailers from multiple categories, including stores and chains utilizing large format, traditional and specialty formats, mass merchants, department stores and catalog, Internet-based and direct-sell retailers. Many factors affect the extent to which competition could affect our results, including our, and our competitors' prices, quality, assortment, advertising, service, locations and reputation. Competition on these factors, aggressive pricing strategies, and continued evolution of retail sale methods, including eCommerce, could affect our long-term strategy and could have an adverse effect on our business, financial condition, results of operations and cash flows.
If we are unable to predict or effectively react to changes in consumer demand or shopping patterns, we may lose customers and our sales may decline.
Our success depends in part on our ability to anticipate and respond in a timely manner to changing consumer demand, preferences and shopping patterns regarding sporting goods. We must develop and execute merchandising initiatives with marketing programs that appeal to a broad range of consumers. Consumer preferences cannot be predicted with certainty and are subject to continual change and evolution. We often make commitments to purchase products from our vendors several months in advance of the proposed delivery. If we misjudge the market for our new merchandise our sales may decline significantly. We may overstock unpopular products and be forced to take significant inventory markdowns or miss opportunities for other products, both of which could have a negative impact on our profitability. Conversely, shortages of items that prove popular could also be detrimental to our net sales. A major shift in consumer demand away from sporting goods generally could also have a material adverse effect on our business, results of operations and financial condition. Failure to timely identify or effectively respond to changing consumer tastes, preferences and spending patterns could negatively affect our relationship with our customers, the demand for our products and services, our market share, or financial results.
Lack of available retail store sites on terms acceptable to us, rising real estate prices and other costs and risks relating to a brick & mortar retail store model could affect our results.
Our business strategy includes opening stores in new and existing markets. We must successfully choose store sites, execute real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores. Our plans to increase our number of retail stores will depend in part on the availability of existing retail stores or store sites. A lack of available financing on terms acceptable to real estate developers may adversely affect the number or quality of retail sites available to us, and as a result, adversely affect our growth plans. Furthermore, we incur substantial financial commitments and fixed costs associated with opening new stores. The success of those stores depends on a number of factors, including the success of the shopping center where our store is located, consumer demographics and consumer shopping patterns. These factors cannot be predicted with complete accuracy. If we fail to effectively operate these new stores, or if we have to close stores locations that are not successful, our financial performance could be adversely affected.
Omni-channel growth in our business is complex and involves the development of an internal eCommerce platform.
Our business has become increasingly omni-channel so our customers are able to shop online or in-store for a seamless shopping experience. We have developed, and continue to develop and implement new customer offerings, including ship-from-store and buy-online, pick-up in-store, which requires substantial investment in technology, information systems, employees, and management time and resources. Our omni-channel strategy also includes the development of an internal eCommerce platform. Installing a new eCommerce platform involves integrating a number of information and management systems from different vendors, increasing supply chain and distribution capabilities, attracting, developing and retaining qualified personnel, and managing the customer experience. This involves substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues that can affect the successful implementation and operation of our internal eCommerce platform. If we are not able to successfully implement and operate our internal eCommerce platform, our financial performance and future growth could be materially adversely affected.
Unauthorized disclosure of sensitive or confidential customer information could harm the Company's business and standing with our customers.
The protection of our customer, associate and Company data is critical to us. The Company relies on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personally identifiable information. Increasing costs associated with information security - such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud - could negatively impact our business and results of operations. Additionally, the success of our online operations depends upon the secure transmission of confidential information over public networks, including the use of cashless payments. While we have taken significant steps to protect customer and confidential information, the intentional or negligent actions of employees, business associates or third parties may undermine our security measures. As a result, unauthorized parties may obtain access to our data systems and misappropriate confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. While we have not experienced a material data security breach, any compromise of our data security could result in a violation of applicable privacy and other laws or standards, significant legal and financial exposure beyond the scope or limits of insurance coverage, interruption of our operations, increased operating costs associated with remediation, equipment acquisitions or disposal and added personnel, and a loss of confidence in our security measures, which could harm our business or investor confidence. Data security breaches may also result from non-technical means, for example, actions by an employee. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information could attract a substantial amount of media attention, damage our reputation, expose us to risk of litigation and liability, disrupt our operations and harm our business.
Our private brand offerings and new retail concepts expose us to increased costs and certain additional risks.
In addition to brand name products, we offer our customers private brand products that are not available from other retailers. We expect to continue to grow our exclusive private brand offerings through a combination of brands that we own and brands that we license from third parties. We also evaluate and operate new retail concepts, including, for example, our Field & Stream and True Runner concepts. We invest in our development and procurement resources and marketing efforts relating to these private brand offerings and new retail concepts. There is no assurance that our private brand products or our new retail concepts will be successful, and we could curtail or abandon any of our private brands or retail concepts at any time. Factors that could cause us to curtail or abandon one of our private brands or retail concepts include unexpected or increased costs or delays in development of the brand, demands on management resources, legal or regulatory constraints, change in consumer demands, preferences and shopping patterns regarding sporting goods, or a determination that the demand does not support the brand. Additional risks relating to private brand offerings include product liability and product recalls; our ability to successfully protect our proprietary rights (e.g., defending against counterfeit or otherwise unauthorized goods); our ability to successfully navigate and avoid claims related to the proprietary rights of third parties; and our ability to successfully administer and comply with obligations under license agreements that we have with the licensors of brand. If we were to curtail or abandon a private brand or retail concept, we may be required to write off or incur substantial costs, including impairments of our trademarks, trade names or other intangible assets, lease termination costs, minimum payments under license agreements, potential costs related to accompanying litigation, or other costs, which could have a material adverse effect on our business, results of operations and financial condition.
We rely on a single third-party provider to maintain and operate certain aspects of our www.DICKS.com operations, and disruptions with the provider or in the services it provides to us could materially affect our reputation, operations or financial results.
We have contracted with a single third party to operate and host our DICKS.com eCommerce website and provide related fulfillment and customer service. We rely on that party's operational, privacy and security procedures and controls to operate and host our DICKS.com eCommerce business. Failure by such third party to adequately service these aspects of our DICKS.com eCommerce business could result in a prolonged disruption that affects our customers' ability to utilize our website or receive product in a timely manner. As a result, we may lose customer sales and / or experience increased costs, which could materially affect our reputation, operations or financial results.
Our ability to operate and expand our business and to respond to changing business and economic conditions will be
dependent upon the availability of adequate capital. The terms of our senior secured revolving credit facility impose certain restrictions that may impair our ability to access sufficient capital.
The operation and growth of our business, including opening new stores and expanding our eCommerce business, and our ability to respond to changing business and economic conditions depend on the availability of adequate capital, which in turn depends on cash flow generated by our business and, if necessary, the availability of equity or debt capital. We cannot provide assurance that our cash flow will be sufficient to meet these needs or that we would be able to obtain equity or debt capital on acceptable terms or at all. Our current senior secured revolving credit facility contains provisions that limit our ability to incur additional indebtedness or make substantial asset sales, which might otherwise be used to finance our operations. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our senior secured revolving credit facility would be entitled to payment in full from our assets before distributions, if any, were made to our stockholders.
If we are unable to generate sufficient cash flows from operations in the future, and if availability under our current senior secured revolving credit facility is not sufficient, we may have to obtain additional financing. We cannot provide assurance that we could obtain refinancing or additional financing on favorable terms or at all. Our liquidity or access to capital could also be adversely affected by unforeseen changes in the financial markets and global economy.
We are subject to costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to the sale of consumer products and firearms and ammunition.
We operate in a complex regulatory and legal environment that exposes us to compliance and litigation risks that could materially affect our operations and financial results. These laws may change, sometimes significantly, as a result of political, economic or social events. Some of the federal, state or local laws and regulations that affect us include those relating to consumer products, product liability or consumer protection; eCommerce, data protection and privacy; advertisement and marketing; labor and employment; firearms, ammunition, knives, food items or other regulated products; custom or import; and intellectual property.
The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing expansion into new markets and new channels and the fact that foreign laws occasionally conflict with domestic laws. In addition to potential damage to our reputation and brand, failure to comply with applicable federal, state and local laws and regulations such as those outlined above may result in our being subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on our business, results of operations and financial condition.
We depend on our suppliers, distributors and manufacturers to provide us with sufficient quantities of products in a timely fashion.
We purchase merchandise from approximately 1,500 vendors. In fiscal 2014, purchases from Nike and Under Armour represented approximately 19% and 12%, respectively, of our merchandise purchases. Although in fiscal 2014 purchases from no other vendor represented 10% or more of our total purchases, our dependence on our principal suppliers involves risk. We generally do not have long-term written contracts with our major suppliers that would require them to continue supplying us with merchandise. If any of our key vendors fails to supply us with products or continue to develop new products that create consumer demand, we may not be able to meet the demands of our customers and our revenue could materially decline. If there is a disruption in supply from a principal supplier or distributor, we may be unable to obtain the merchandise or obtain an adequate quantity that we desire to sell and that consumers desire to purchase. Moreover, many of our suppliers provide us with incentives, such as return privileges, volume purchasing allowances and cooperative advertising. A decline or discontinuation of these incentives could reduce or eliminate our profit margins. Further, to the extent our suppliers are affected by economic uncertainty and other concerns relating to global economic conditions, there may be an adverse impact with respect to their respective inventory and production levels, customer incentives and vendor allowances, product quality, or ability to continue operations, all of which could ultimately have an adverse impact on our supply chain.
We may be subject to various types of litigation and other claims, and our insurance may not be sufficient to cover damages related to those claims.
From time to time the Company or its subsidiaries may be involved in lawsuits or other claims arising in the ordinary course of business, including those related to federal or state wage and hour laws, product liability, consumer protection, advertising, employment, intellectual property, tort, privacy or data protection and other matters.
In addition, although we do not sell assault weapons or automatic firearms, we do sell hunting rifles, semi-automatic hunting rifles and ammunition, and in some of our stores, including Field & Stream stores, handguns. These are products that are associated with an increased risk of injury and related lawsuits with respect to our compliance with Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) or state laws or regulations. In addition, any improper or illegal use by our customers of ammunition or firearms sold by us could have a negative impact on our reputation and business.
We may incur losses relating to claims filed against us, including costs associated with defending against such claims, and there is risk that any such claims or liabilities will exceed our insurance coverage, or affect our ability to retain adequate liability insurance in the future. Even if a claim is unsuccessful or is not fully pursued, the negative publicity surrounding any such assertions could adversely affect our reputation with our customers. Due to the inherent uncertainties of litigation and other claims, we cannot accurately predict the ultimate outcome of any such matters.
If our product costs are adversely affected by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials, political instability or other reasons, our sales and profitability may suffer.
A significant portion of the products that we purchase, including those purchased from domestic suppliers, is manufactured abroad in countries such as China, Taiwan and South Korea. In addition, most of our private brand merchandise is manufactured abroad. Foreign imports subject us to risk relating to changes in import duties, quotas, loss of "most favored nation" status with the U.S., shipment delays and shipping port constraints, labor strikes, work stoppages or other disruptions, freight cost increases and economic uncertainties. In addition, the U.S. government periodically considers other restrictions on the importation of products obtained by our vendors and us. If any of these or other factors were to cause a disruption of trade from the countries in which our vendors' supplies or our private brand products' manufacturers are located, our inventory levels may be reduced or the cost of our products may increase. In addition, to the extent that any foreign manufacturers from whom we directly or indirectly purchase products utilize labor, environmental, worker safety and other practices that vary from those commonly accepted in the U.S., we could be hurt by any resulting negative publicity or, in some cases, face potential liability. Also, the prices charged by foreign manufacturers may be affected by the fluctuation of their local currency against the U.S. dollar and the price of raw materials, which could cause the cost of our products to increase and negatively impact our sales or profitability.
Our inability or failure to protect our intellectual property rights, or any claimed infringement by us of third party intellectual rights could have a negative impact on our operating results.
Our trademarks, service marks, copyrights, patents, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. Effective trademark and other intellectual property protection may not be available in every country in which our products are manufactured or may be made available. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our revenue. In addition, any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming to address, result in costly litigation, cause product delays, require us to enter into royalty or licensing agreements or result in our loss of ownership or use of the intellectual property. As a result, any such claim or our failure to protect our intellectual property could have an adverse effect on our operating results.
Problems with our information system software could disrupt our operations and negatively impact our financial results and materially adversely affect our business operations.
We utilize a number of third party information systems for core system needs of our business. For example, our Dick's Sporting Goods stores and Golf Galaxy stores utilize a suite of applications from JDA for our core merchandising, allocation and replenishment systems. These systems, if not functioning properly, could disrupt our operations, including our ability to track, record and analyze the merchandise that we sell, process shipments of goods, process financial information or credit card transactions, deliver products or engage in similar normal business activities. Any material disruption, malfunction or other similar problems in or with our core information systems could negatively impact our financial results and materially adversely affect our business operations.
We may be unable to attract, train, engage and retain qualified leaders and associates. Furthermore, the loss of Edward W. Stack as our key executive, could have a material adverse effect on our business.
The training and development of our future leaders and key personnel is important to our long-term success. If we do not effectively implement our strategic and business planning processes to attract, retain, train and develop future leaders, our business may suffer. In addition, stores depend significantly on our ability to hire and retain quality associates, including store managers and sales associates. We plan to expand our associate base to manage our anticipated growth. The market for non-entry level personnel, particularly for associates with retail expertise, is highly competitive. Additionally, our ability to maintain consistency in the quality of customer service in our stores is critical to our success. We are also dependent on the associates who staff our distribution centers, many of whom are skilled. We may be unable to meet our leadership needs or our labor needs. If we are unable to train and develop future leaders and key personnel, or hire and retain store-level and distribution center associates capable of providing a high level of customer service, our business could be materially adversely affected.
Furthermore, our success depends on continued service from Edward W. Stack, our Chairman and Chief Executive Officer, who has been operating the Company since 1984. Mr. Stack possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company and the industry. If we were to lose Mr. Stack, our business could be materially adversely affected.
We rely on four distribution centers, and if there is a natural disaster or other serious disruption at one or more of these facilities, we may lose merchandise and be unable to effectively deliver it to our stores.
We currently operate a 914,000 square foot distribution center near Atlanta, Georgia, a 725,000 square foot distribution center in Plainfield, Indiana, a 601,000 square foot distribution center in Smithton, Pennsylvania and a 624,000 square foot distribution center in Goodyear, Arizona. Any natural disaster or other serious disruption to one of these facilities due to fire, tornado or any other cause could damage a material portion of our inventory, impair our ability to adequately stock our stores and process returns of products to vendors, and could negatively affect our sales and profitability. In addition, as we grow, we may require additional distribution capacity, which could come in the form of expanding existing facilities or opening alternative or additional facilities. Any future expansions or other openings could affect us in ways we cannot predict.
Poor performance of professional sports teams within our core regions of operation, as well as professional team lockouts or strikes, retirement of sports superstars or scandals involving sports superstars could adversely affect our financial results.
We sell a significant amount of professional sports team merchandise, the sale of which may be subject to fluctuations based on the success or failure of such teams. The poor performance by the professional sports teams within our core regions of operations, as well as professional team lockouts and strikes, could cause our financial results to fluctuate accordingly year over year. In addition, to the extent we use sports superstars to market our products and advertise our stores, or we sell merchandise branded by one or more sports superstars, the retirement of such individuals or scandals in which they may be implicated could negatively impact our financial results.
The relative seasonality of our operations, along with the current geographic concentrations of our Dick's stores, exposes us to certain risks.
Our business is seasonal based on sports seasons. Furthermore, a majority of our Dick's Sporting Goods stores are located in the eastern half of the United States, which exposes us to various regional risks, including those relating to weather conditions. Many of our stores are located in geographic areas that experience seasonably cold weather, and we sell a significant amount of cold weather sporting goods and apparel. Our highest sales and operating income results historically occur during our fourth fiscal quarter, which is due, in part, to the holiday selling season and, in part, to our strong sales of cold weather sporting goods and apparel. Abnormally warm weather conditions could reduce our sales of these items and cause a decrease in our profitability. The fourth quarter generated approximately 32% of our net sales for fiscal 2014. Poor performance during our fourth quarter, whether because of a slow holiday selling season, unseasonable weather conditions, economic conditions or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year. Additionally, abnormally wet or cold weather in the spring or summer months could reduce our sales of golf, team sports or other merchandise and cause a decrease in our profitability.
We may pursue strategic acquisitions or investments and the failure of an acquisition or investment to produce the anticipated results or the inability to fully integrate the acquired companies could have an adverse impact on our business.
We may from time to time acquire or invest in complementary companies or businesses. The success of such acquisitions or investments is based on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors relating to the respective business. There can be no assurance that our acquisitions or investments will produce the results that we expect at the time we enter into or we complete the transaction. For example, we may not be able to capitalize on previously anticipated synergies. Furthermore, acquisitions may result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses or write-offs of goodwill or other intangibles, any of which could harm our financial condition. We also may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, supply chain and other operations, which could adversely affect our business. Acquisitions may also result in the diversion of our capital and our management's attention from other business issues and opportunities.
We are controlled by our Chairman and Chief Executive Officer and his relatives, whose interests may differ from other stockholders.
We have two classes of common stock: our common stock has one vote per share and our Class B common stock has 10 votes per share. As of January 31, 2015, Mr. Edward W. Stack, our Chairman and Chief Executive Officer, and his relatives controlled a majority of the combined voting power of our common stock and Class B common stock and would control the outcome of a vote on any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets. The interests of Mr. Stack and his relatives may differ from the interests of our other stockholders and they may take actions with which our other stockholders disagree.
Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our stockholders.
Provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. These provisions include: authorizing the issuance of Class B common stock; classifying the Board of Directors such that only one-third of directors are elected each year; authorizing the issuance of "blank check" preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt; prohibiting the use of cumulative voting for the election of directors; if our Class B common stock is no longer outstanding, prohibiting stockholder action by partial written consent and requiring all stockholder actions to be taken at a meeting of our stockholders or by unanimous written consent; and establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, the Delaware General Corporation Law, to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns 15% or more of our common stock.
We cannot provide any guaranty of future dividend payments or that we will continue to repurchase our common stock pursuant to our stock repurchase program.
Although our Board of Directors has indicated an intention to pay future quarterly cash dividends on our common stock, any determination to pay cash dividends on our common stock in the future will be based primarily upon our financial condition, results of operations, business requirements, and the continuing determination from our Board of Directors that the declaration of dividends is in the best interests of our stockholders and is in compliance with all laws and agreements applicable to the dividend. Furthermore, although we have authorized a five-year $1 billion share repurchase program, we are not obligated to make any purchases under the program and we may discontinue it at any time.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
On May 7, 2012, the Company purchased its corporate headquarters building in Coraopolis, Pennsylvania, pursuant to a purchase option included in its pre-existing lease agreement. The Company is a direct tenant of the Allegheny County Airport Authority pursuant to an underlying ground lease. The property consists of approximately 670,000 square feet of office space. On November 1, 2013, the Company entered into an additional ground lease with the Allegheny County Airport Authority for the future expansion of its corporate headquarters, adjacent to its current headquarters location. The lease provides the Company with an additional 89 acres for expansion.
We currently lease a 914,000 square foot distribution center near Atlanta, Georgia, a 725,000 square foot distribution center in Plainfield, Indiana and a 601,000 square foot distribution center in Smithton, Pennsylvania. The terms of these leases expire in 2026, 2022 and 2025, respectively. The Company also owns and operates a 624,000 square foot distribution center in Goodyear, Arizona.
We lease all of our stores. Initial lease terms are generally for 10 years, and most leases contain multiple five-year renewal options and rent escalation provisions. We believe that our leases, when entered into, are at market rate rents. We generally select a new store site nine to 18 months before its opening. Our stores are primarily located in shopping centers in regional shopping areas, as well as in freestanding locations and malls.
As of January 31, 2015, we operated 694 stores in 46 states. The following table sets forth the number of stores by state:
(1)
Includes the Company's 78 Golf Galaxy, 10 Field & Stream and three True Runner stores.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this report, 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 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION AND DIVIDEND POLICY
The shares of Dick's Sporting Goods, Inc. common stock are listed and traded on the New York Stock Exchange ("NYSE") under the symbol "DKS". The Company also has shares of Class B common stock outstanding, which are not listed or traded on any stock exchange or other market. Shares of our Class B common stock can be converted on a one-for-one basis to shares of our common stock at any time at the holder's option and are automatically converted upon certain events. The following table shows the quarterly high and low closing sale prices per share of the Company's common stock as reported by the NYSE for each quarter during the last two fiscal years and the quarterly cash dividend declared per share of our common stock during the periods indicated:
(a)
Quarterly cash dividend of $0.125 per share of common stock and Class B common stock paid on March 28, 2014, June 27, 2014, September 26, 2014 and December 26, 2014 to stockholders of record on March 7, 2014, June 6, 2014, September 5, 2014 and December 5, 2014, respectively.
(b)
Quarterly cash dividend of $0.125 per share of common stock and Class B common stock paid on March 29, 2013, June 28, 2013, September 27, 2013 and December 27, 2013 to stockholders of record on March 8, 2013, June 7, 2013, September 6, 2013 and December 6, 2013, respectively.
The number of holders of record of shares of the Company's common stock and Class B common stock as of March 23, 2015 was 271 and 25, respectively.
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 the Board of Directors, and will be dependent upon future earnings, cash flows, financial requirements and other factors.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information with respect to common stock repurchases made during the three months ended January 31, 2015:
(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.
The information set forth under Part III, Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters" is incorporated herein.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for fiscal years 2014, 2013, 2012, 2011 and 2010 presented below under the captions "Statement of Income Data", "Per Common Share Data", "Other Data" and "Balance Sheet Data" have been derived from our Consolidated Financial Statements for those periods. The selected consolidated financial data for fiscal years 2014, 2013, 2012, 2011 and 2010 presented below under the caption "Store Data" have been derived from internal records of our operations.
Our fiscal year consists of 52 or 53 weeks, ends on the Saturday nearest to the last day in January and is referenced by the calendar year ending closest to that date. All fiscal years presented include 52 weeks of operations except fiscal 2012, which included 53 weeks.
The information set forth below should be read in conjunction with other sections of this Annual Report on Form 10-K including Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Part II, Item 6, "Selected Financial Data" and our Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements" and Part I, Item 1A. "Risk Factors".
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.
As of January 31, 2015, we operated 603 Dick's Sporting Goods stores in 46 states, 78 Golf Galaxy stores in 29 states and 10 Field & Stream stores in five states, with approximately 34.2 million square feet on a consolidated basis, the majority of which are located throughout the eastern half of the United States. We also operate eCommerce websites at www.DICKS.com and www.golfgalaxy.com.
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, positive same store sales and strong gross profit margins. For example, in the last five years, the Company has grown from 419 Dick's Sporting Goods stores at the end of fiscal 2009 to 603 Dick's Sporting Goods stores at the end of fiscal 2014.
As a complement to the Company's store growth, the Company has also grown its eCommerce business year-over-year. 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 our stores and our eCommerce websites.
The Company's store network remains 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 the expansion of its store network will also drive growth in eCommerce sales as the Company continues to deliver 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 the Company's same store sales in the "Results of Operations" 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. We typically generate significant positive operating cash flows and proportionately higher net income levels in our 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" section herein.
•
Quality of merchandise offerings - To measure acceptance of its merchandise offerings, the Company monitors sell-throughs, inventory turns, gross margins and markdown rates 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.
Executive Summary
•
Net income for the 52 weeks ended January 31, 2015 increased 2% to $344.2 million, or $2.84 per diluted share, as compared to net income of $337.6 million, or $2.69 per diluted share, during the 52 weeks ended February 1, 2014.
•
Fiscal 2014 net income includes $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.
•
Fiscal 2013 net income included $4.3 million, net of tax, or $0.03 per diluted share, related to the partial recovery from the Company's previously impaired investment in JJB Sports and $4.7 million, net of tax, or $0.04 per diluted share, related to a non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to fair market value.
•
Net sales increased 10% to $6,814.5 million in fiscal 2014 from $6,213.2 million in fiscal 2013 due primarily to a 2.4% increase in consolidated same store sales and the growth of our store network.
•
eCommerce sales penetration in fiscal 2014 increased to 9.2% of total sales compared to 7.9% in fiscal 2013.
•
Gross profit decreased to 30.62% in fiscal 2014 as a percentage of net sales from 31.29% in fiscal 2013 due primarily to lower merchandise margins and higher shipping expenses, partially offset by occupancy leverage.
•
In fiscal 2014, the Company:
•
Opened 46 new Dick's Sporting Goods stores, one new Golf Galaxy store and eight new Field & Stream stores. The Company also relocated five Dick's Sporting Goods stores and two Golf Galaxy stores, remodeled five Dick's Sporting Goods stores and closed one Dick's Sporting Goods store and two Golf Galaxy stores.
•
Declared and paid aggregate cash dividends of $0.50 per share of common stock and Class B common stock.
•
Repurchased approximately 4.3 million shares of common stock for $200.0 million.
•
Purchased the intellectual property rights to the Field & Stream mark in product categories that were not otherwise owned by the Company, including men's, women's and children's casual apparel, for $26.3 million.
•
Ended the period with no outstanding borrowings under our revolving senior secured credit facility (the "Credit Agreement").
Results of Operations
The following table presents for the periods indicated selected items in the Consolidated Statements of Income as a percentage of the Company's net sales, as well as the basis point change in percentage of net sales from the prior year:
(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") are deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized on the 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 and obsolescence, 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. The cost of merchandise for the 52 weeks ended January 31, 2015 includes a $2.4 million write-down of golf-related inventory 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 52 weeks ended January 31, 2015 includes a $14.4 million gain on sale of a Gulfstream G650 corporate aircraft in addition to asset impairment and severance charges relating to the Company's golf restructuring of $14.3 million and $3.7 million, respectively. Selling, general and administrative expenses for the 52 weeks ended February 1, 2014 included $7.9 million relating to a non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to fair market value.
(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)
Impairment of available-for-sale investments reflects the Company's impairment of its investment in JJB Sports.
(6)
Interest expense for the 53 weeks ended February 2, 2013 included rent payments under the Company's financing lease obligation for its corporate headquarters building, which the Company purchased on May 7, 2012.
(7)
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. During the 52 weeks ended February 1, 2014, other income included $4.3 million related to the partial recovery of its previously impaired investment in JJB Sports.
Fiscal 2014 (52 weeks) Compared to Fiscal 2013 (52 weeks)
Net Income
The Company reported net income for the year ended January 31, 2015 of $344.2 million, or $2.84 per diluted share, as compared to net income of $337.6 million, or $2.69 per diluted share, in fiscal 2013. Fiscal 2014 net income includes $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. Fiscal 2013 net income included $4.3 million, net of tax, or $0.03 per diluted share, related to the partial recovery from the Company's previously impaired investment in JJB Sports and $4.7 million, net of tax, or $0.04 per diluted share, related to a non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to fair market value.
Net Sales
Net sales increased 10% to $6,814.5 million in fiscal 2014 from $6,213.2 million in fiscal 2013 due primarily to a 2.4% increase in consolidated same store sales and the growth of our store network. The 2.4% increase in consolidated same store sales contributed $146.4 million of the increase in net sales for fiscal 2014. The remaining $454.9 million increase in the Company's noncomparable sales is primarily attributable to new stores. The 2.4% increase in consolidated same store sales consisted of a 3.1% increase at Dick's Sporting Goods and a 9.2% decrease at Golf Galaxy. eCommerce sales penetration was 9.2% of total sales during the current period compared to 7.9% of total sales during fiscal 2013, representing an approximate increase of 28% in eCommerce sales across both Dick's Sporting Goods and Golf Galaxy.
The increase in consolidated same store sales was primarily driven by increases across most of our apparel, hardlines and footwear categories, with the exception of the golf and hunting businesses. The same store sales increase at Dick's Sporting Goods was driven by an increase in sales per transaction of approximately 1.9% and an increase in transactions of approximately 1.2%. Based upon our fiscal 2014 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 fiscal 2014 by approximately $20.6 million.
Store Count
During fiscal 2014, the Company opened 46 new Dick's Sporting Goods stores, one new Golf Galaxy store and eight new Field & Stream stores. Additionally, the Company relocated five Dick's Sporting Goods stores and two Golf Galaxy stores, remodeled five Dick's Sporting Goods stores, and closed one Dick's Sporting Goods store and two Golf Galaxy stores. As of January 31, 2015, the Company operated 603 Dick's Sporting Goods stores in 46 states, 78 Golf Galaxy stores in 29 states, 10 Field & Stream stores in five states and three True Runner stores in three states, totaling approximately 34.2 million square feet on a consolidated basis.
Income from Operations
Income from operations increased $17.3 million to $554.1 million in fiscal 2014 from $536.8 million in fiscal 2013.
Gross profit increased 7% to $2,086.7 million in fiscal 2014 from $1,944.0 million in fiscal 2013, but decreased as a percentage of net sales by 67 basis points compared to fiscal 2013. The decline in the gross profit rate was driven by a decrease in merchandise margin of 58 basis points and an increase in shipping expenses of 17 basis points in fiscal 2014 compared to fiscal 2013. During fiscal 2014, the decrease in merchandise margin was primarily driven by higher promotional activity, partially offset by changes in sales mix to higher margin categories, as discussed above. The increase in shipping expenses during fiscal 2014 was the result of the growth and increased penetration of eCommerce sales as compared to the Company's total net sales. The decline in the gross profit rate was partially offset by leverage in occupancy costs, which decreased 10 basis points as a percentage of net sales. Though overall occupancy costs increased $62.3 million from fiscal 2013, these costs decreased as a percentage of net sales as occupancy costs increased at a lower rate than the 10% increase in net sales during fiscal 2014. Every 10 basis point change in merchandise margin would impact earnings before income taxes for fiscal 2014 by approximately $6.8 million.
Selling, general and administrative expenses increased approximately 8% to $1,502.1 million in fiscal 2014 from $1,386.3 million in fiscal 2013, but decreased as a percentage of net sales by 27 basis points. Fiscal 2014 includes (i) a pre-tax gain on the sale of a Gulfstream G650 corporate aircraft of $14.4 million, (ii) severance charges totaling $3.7 million and (iii) non-cash impairment charges totaling $14.3 million related to the Company's golf restructuring. Fiscal 2013 included a $7.9 million non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to fair market value. Apart from the enumerated items, the year over year change in selling, general and administrative expenses as a percentage of net sales is due primarily to lower administrative payroll and related benefit costs, which increased in fiscal 2014 by $6.1 million from fiscal 2013 but decreased as a percentage of net sales by 20 basis points.
Pre-opening expenses increased to $30.5 million in fiscal 2014 from $20.8 million in fiscal 2013. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. During fiscal 2014, the Company opened 46 new Dick's Sporting Goods stores, one new Golf Galaxy store and eight new Field & Stream stores. Additionally, the Company relocated five Dick's Sporting Goods stores and two Golf Galaxy stores in the current year. During fiscal 2013, the Company opened 40 new Dick's Sporting Goods stores, one new Golf Galaxy store, two new Field & Stream stores and one new True Runner store and relocated one Dick's Sporting Goods store and repositioned one Golf Galaxy store.
Income Taxes
The Company's effective tax rate was 38.1% for fiscal 2014 as compared to 38.2% for fiscal 2013.
Fiscal 2013 (52 weeks) Compared to Fiscal 2012 (53 weeks)
Net Income
The Company reported net income for the year ended February 1, 2014 of $337.6 million, or $2.69 per diluted share, as compared to net income of $290.7 million, or $2.31 per diluted share, in fiscal 2012. Fiscal 2013 net income included $4.3 million, net of tax, or $0.03 per diluted share, related to the partial recovery from the Company's previously impaired investment in JJB Sports and $4.7 million, net of tax, or $0.04 per diluted share, related to a non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to fair market value. Fiscal 2012 net income included a charge of $27.6 million, net of tax, or $0.22 per diluted share, related to the Company's impairment of its investment in JJB Sports. Additionally, fiscal 2012 included approximately $0.03 per diluted share for the 53rd week.
Net Sales
Net sales increased 6% to $6,213.2 million in fiscal 2013 from $5,836.1 million in fiscal 2012 due primarily to a 1.9% increase in consolidated same store sales and the growth of our store network. The 1.9% increase in consolidated same store sales on a 52-week to 52-week basis contributed $104.9 million of the increase in revenue for fiscal 2013. The remaining $272.2 million increase in the Company's noncomparable sales was primarily attributable to new stores, partially offset by the inclusion of the 53rd week of sales in fiscal 2012. Sales during the 53rd week of fiscal 2012 totaled approximately $74 million. The 1.9% consolidated same store sales increase consisted of a 2.4% increase at Dick's Sporting Goods and a 7.1% decrease at Golf Galaxy. eCommerce sales penetration was 7.9% of total sales during fiscal 2013 compared to 5.3% of total sales during the 53 weeks ended February 2, 2013, representing an approximate increase of 59% in eCommerce sales across both Dick's Sporting Goods and Golf Galaxy.
The increase in consolidated same store sales was broad based, with larger increases in athletic apparel, athletic footwear and outdoor apparel and cold weather accessories, partially offset by declines in the golf, fitness and outdoor equipment categories. The same store sales increase at Dick's Sporting Goods was driven by an increase in sales per transaction of approximately 1.8% and an increase in transactions of approximately 0.6%. Based upon our fiscal 2013 sales mix, every 1% change in consolidated same store sales, which consists of both brick and mortar and eCommerce sales, would have impacted earnings before income taxes for fiscal 2013 by approximately $18.9 million.
Store Count
During fiscal 2013, the Company opened 40 new Dick's Sporting Goods stores, one new Golf Galaxy store, two new Field & Stream stores and one new True Runner store. Additionally, the Company relocated one Dick's Sporting Goods store, repositioned one Golf Galaxy store and closed three underperforming Golf Galaxy stores. As of February 1, 2014, the Company operated 558 Dick's Sporting Goods stores in 46 states, 79 Golf Galaxy stores in 29 states, two Field & Stream stores in two states and three True Runner stores in three states, totaling approximately 31.6 million square feet on a consolidated basis.
Income from Operations
Income from operations increased $13.1 million to $536.8 million in fiscal 2013 from $523.7 million in fiscal 2012.
Gross profit increased 6% to $1,944.0 million in fiscal 2013 from $1,837.2 million in fiscal 2012, but decreased as a percentage of net sales by 19 basis points compared to fiscal 2012. Occupancy costs increased $62.8 million from fiscal 2012, and increased as a percentage of net sales by 34 basis points. Our occupancy costs are generally fixed in nature and are largely influenced by new store openings. As a percentage of net sales, occupancy costs increased at a higher rate than the 6% increase in net sales during the fiscal year and were unfavorably affected by 13 basis points due to the inclusion of sales from the 53rd week in fiscal 2012. Shipping expenses increased as a percentage of sales by 27 basis points due to the growth in eCommerce sales relative to the sales growth at our brick and mortar stores. The decrease in gross profit as a percentage of net sales was partially offset by merchandise margin expansion. Merchandise margins, which represent margins earned above the cost of the product, excluding certain other items included in cost of goods sold (vendor allowances, inventory shrinkage, freight, distribution, shipping and store occupancy costs), increased as percentage of sales by 35 basis points, due to changes in sales mix as discussed above. Every 10 basis point change in merchandise margin would have impacted earnings before income taxes for the current period by approximately $5.8 million.
Selling, general and administrative expenses increased approximately 7% to $1,386.3 million in fiscal 2013 from $1,297.4 million in fiscal 2012, and increased as a percentage of net sales by 8 basis points primarily due to increases in selling, general and administrative expenses that do not correlate with the net sales increase for the period. Payroll and related benefit costs increased $30.6 million in our administrative functions to support planned future growth initiatives. The Company also recorded a $7.9 million non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to fair market value. The increase in selling, general and administrative expenses was partially offset by lower incentive compensation during the 52 weeks ended February 1, 2014 due to the Company's results in comparison to the pre-determined performance targets and a contribution to the Dick's Sporting Goods Foundation during the 53 weeks ended February 2, 2013.
Pre-opening expenses increased to $20.8 million in fiscal 2013 from $16.1 million in fiscal 2012. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. During fiscal 2013, the Company opened 40 new Dick's Sporting Goods stores, one new Golf Galaxy store, two new Field & Stream stores and one new True Runner store. Additionally, the Company relocated one Dick's Sporting Goods store and repositioned one Golf Galaxy store in the current year. During fiscal 2012, the Company opened 38 new Dick's Sporting Goods stores and two new True Runner stores, relocated five Dick's Sporting Goods stores and repositioned one Golf Galaxy store.
Impairment of Available-for-Sale Investments
Impairment of available-for-sale investments was $32.4 million in fiscal 2012 resulting from the full impairment of the Company's investment in JJB Sports, as further described in Note 15 to the Consolidated Financial Statements.
Interest Expense
Interest expense totaled $2.9 million for fiscal 2013 compared to $6.0 million for fiscal 2012. Interest expense for fiscal 2012 included $2.9 million related to rent payments under the Company's financing lease for its corporate headquarters building. The decrease in interest expense year over year reflects the Company's purchase of its corporate headquarters building on May 7, 2012.
Other Income
Other income was $12.2 million for fiscal 2013 compared to $4.6 million for fiscal 2012. The Company recognizes investment income to reflect changes in the investment value of assets held in its deferred compensation plans with a corresponding charge to selling, general and administrative costs for the same amount. The Company recognized investment income totaling $6.0 million in fiscal 2013 compared to $3.2 million for fiscal 2012 due to an overall improvement in the equity markets, which impacted the deferred compensation plan investment values. During fiscal 2013, the Company recorded $4.3 million related to the partial recovery of the Company's investment in JJB Sports, which it had previously fully impaired.
Income Taxes
The Company's effective tax rate was 38.2% for fiscal 2013 as compared to 40.7% for fiscal 2012. During fiscal 2012, the Company determined that a valuation allowance totaling $7.9 million was required for a portion of the deferred tax asset related to a $32.4 million net capital loss carryforward resulting from the impairment of its investment in JJB Sports, as the Company did not believe that it was more likely than not that the Company would generate sufficient capital gains in future periods to recognize that portion of the expected net capital loss. During fiscal 2013, the Company determined that it would recover $4.3 million of its investment in JJB Sports. There was no related tax expense, as the Company reversed a portion of the deferred tax valuation allowance it recorded during fiscal 2012 for net capital loss carryforwards it did not expect to realize at that time.
Liquidity and Capital Resources
Overview
The Company's liquidity and capital needs have generally been met by cash from operating activities and the Company's 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 holiday sales and this inventory reduction, combined with proportionately higher net income, typically produces significant positive cash flow.
Net cash provided by operating activities for fiscal 2014 was $606.0 million compared to $403.9 million for fiscal 2013. Net cash from operating, investing and financing activities are discussed further below.
The Company has a $500 million revolving credit facility, including up to $100 million in the form of letters of credit, in the event further liquidity is needed. Under the Credit Agreement, subject to the satisfaction of certain conditions, the Company may request an increase of up to $250 million in borrowing availability.
The Credit Agreement, which matures on December 5, 2016, is secured by a first priority security interest in certain property and assets, including receivables, inventory, deposit accounts and other personal property of the Company and is guaranteed by the Company's domestic subsidiaries.
The annual interest rates applicable to loans under the Credit Agreement are, at the Company's option, 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 0.20% to 0.50% and for adjusted LIBOR rate loans is 1.20% to 1.50%, depending on the borrowing availability of the Company.
The Credit Agreement contains certain covenants that limit the Company's ability 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; and 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. As of January 31, 2015, the Company was in compliance with the terms of the Credit Agreement.
The Company generally utilizes its Credit Agreement for working capital needs based primarily on the seasonal nature of its operating cash flows, 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 fiscal 2014 totaled $1,401.8 million over the course of 105 days. These borrowings were repaid in full and there were no outstanding borrowings under the Credit Agreement as of January 31, 2015. The maximum daily amount outstanding at any point in time during fiscal 2014 was $323.2 million.
Funds drawn on our Credit Agreement during fiscal 2013 totaled $926.0 million over the course of 83 days. These borrowings were repaid in full and there were no outstanding borrowings under the Credit Agreement as of February 1, 2014. The maximum daily amount outstanding at any point in time during fiscal 2013 was $197.9 million.
The Company ended fiscal 2014 with $221.7 million in cash and cash equivalents as compared to $181.7 million at the end of fiscal 2013. As of January 31, 2015 and February 1, 2014, total remaining borrowing capacity, after subtracting letters of credit, was $486.0 million and $487.0 million, respectively.
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.
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 fiscal 2014, the Company repurchased 4.3 million shares of its common stock for $200.0 million. During fiscal 2013, the Company repurchased 4.8 million shares of its common stock for $255.6 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 fiscal year ended January 31, 2015, the Company paid $61.3 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 our current capital requirements through 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.
Changes in cash and cash equivalents are as follows:
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 $202.1 million in fiscal 2014 to $606.0 million. The increase in cash provided by operating activities is due primarily to an increase in cash flows provided by changes in operating assets and liabilities. The increase in operating assets and liabilities year-over-year is primarily due to the following:
•
Changes in deferred construction allowances increased operating cash flows by $53.9 million compared to last year due primarily to an increase in the number of self-developed stores where tenant allowances are provided by landlords.
•
Changes in income taxes payable / receivable for fiscal 2014 increased operating cash flows by $45.8 million compared to the same period in fiscal 2013. Income tax payments in 2014 were favorably impacted by the timing of deductions related to qualified capital expenditures.
•
Cash flows provided by changes in inventory and accounts payable increased $46.8 million compared to fiscal 2013, primarily attributable to the timing of inventory receipts.
•
Changes in accrued expenses increased $23.3 million compared to last year, primarily due to higher incentive compensation accruals at the end of fiscal 2012 that were subsequently paid in fiscal 2013.
Investing Activities
Cash used in investing activities for fiscal 2014 decreased by $34.2 million to $305.0 million from fiscal 2013. During fiscal 2014, the Company received $73.4 million of proceeds from the sale of a Gulfstream G650 corporate aircraft, compared to $11.0 million received from the sale of a Gulfstream G200 corporate aircraft during fiscal 2013. Deposits and purchases of other assets decreased $34.0 million compared to last year. Last year included $48.8 million of payments related to the acquisition of corporate aircraft, while this year includes the Company's $26.3 million acquisition of intellectual property rights to the Field & Stream mark in product categories that were not otherwise owned by the Company. These reductions in investing activity cash outflows were partially offset by a $63.3 million increase in gross capital expenditures during fiscal 2014 compared to fiscal 2013, which reflects a higher number of self-developed stores opened by the Company in fiscal 2014.
Financing Activities
Cash used in 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 used in financing activities for fiscal 2014 totaled $260.9 million compared to $228.1 million in fiscal 2013. The increase in cash used primarily reflects changes in our bank overdraft balance between years and lower cash flows from stock option exercises during fiscal 2014. These increases were partially offset by lower share repurchases in fiscal 2014.
Contractual Obligations and 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. The following table provides summary information concerning our future contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as of January 31, 2015 (in thousands):
(a)
Amounts include direct lease obligations, excluding any taxes, insurance and other related expenses.
(b)
Excludes $6,501 of accrued liability for unrecognized tax benefits as we cannot reasonably estimate the timing of settlement. These payments include interest and penalties.
(c)
The Company's purchase obligations relate primarily to marketing commitments, including naming rights, licenses for trademarks, corporate aircraft, and technology-related and other ordinary course commitments. In the ordinary course of business, the Company enters into many contractual commitments, including purchase orders and commitments for products or services, but generally, such commitments represent annual or cancellable commitments. The amount of purchase obligations shown is based on multi-year non-cancellable contracts outstanding at the end of fiscal 2014.
The Note references in the table above are to the Notes to the Consolidated Financial Statements included in Item 8 herein.
The following table summarizes the Company's other commercial commitments, including both on and off-balance sheet arrangements, in effect at January 31, 2015 (in thousands):
The Company expects to fund these commitments primarily with operating cash flows generated in the normal course of business.
Off-Balance Sheet Arrangements
The majority of our contractual obligations relate to operating leases for our stores. Future scheduled lease payments under non-cancellable operating leases as of January 31, 2015 are described under the heading "Operating lease obligations" in the table above.
Critical Accounting Policies and Use of Estimates
The Company's significant accounting policies are described in Note 1 of the Consolidated Financial Statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. Critical accounting policies are those that the Company believes are both most important to the portrayal of the Company's financial condition and results of operations, and require the Company's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.
The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.
Inventory Valuation
The Company values inventory using the lower of weighted average cost or market method. Market price is generally based on the selling price expectations of the merchandise. The Company regularly reviews inventories to determine if the carrying value of the inventory exceeds market value and the Company records a reserve to reduce the carrying value to its market price, as necessary. Changes in customer merchandise preference, consumer spending, weather patterns, economic conditions or business trends could cause the Company's inventory to be exposed to obsolescence or slow moving merchandise.
Shrink expense is accrued as a percentage of merchandise sales based on historical shrink trends. The Company performs physical inventories at its stores and distribution centers throughout the year. The reserve for shrink represents an estimate for shrink for each of the Company's locations since the last physical inventory date through the reporting date. Estimates by location and in the aggregate are impacted by internal and external factors and may vary significantly from actual results.
Vendor Allowances
Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are determined for each fiscal year and the majority are based on various quantitative contract terms. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are treated as a reduction of inventory and reduce cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction to the related expense in the period that the related expense is incurred. The Company records an estimate of earned allowances based on the latest projected purchase volumes and advertising forecasts. On an annual basis at the end of the year, the Company confirms earned allowances with vendors to ensure the amounts are recorded in accordance with the terms of the contract.
Goodwill and Intangible Assets
Goodwill, indefinite-lived and other finite-lived intangible assets are reviewed for impairment on an annual basis, or whenever circumstances indicate that a decline in value may have occurred. Our evaluation for impairment requires accounting judgments and financial estimates in determining the fair value of the reporting unit. If these judgments or estimates change in the future, we may be required to record impairment charges for these assets.
The goodwill impairment test is a two-step impairment test. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a combination of a discounted cash flow and a market value approach. The Company's estimates may differ from actual results due to, among other things, economic conditions, changes to its business models, or changes in operating performance. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect the Company's future financial results. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit's goodwill based upon the residual of the aggregate identified tangible and intangible assets and liabilities. As of January 31, 2015, the Company had no reporting unit(s) at risk for goodwill impairment.
Intangible assets that have been determined to have indefinite lives are also not subject to amortization and are reviewed at least annually for potential impairment, or more frequently as mentioned above. The fair value of the Company's intangible assets are estimated and compared to their carrying value. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future sales growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. If actual results are not consistent with our estimates and assumptions used in estimating fair value, the Company may be exposed to losses that could be material. The Company does not believe there is reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate fair value.
The Company recognizes an impairment charge when the estimated fair value of the intangible asset is less than the carrying value.
Impairment of Long-Lived Assets and Closed Store Reserves
The Company reviews long-lived assets whenever events and circumstances indicate that the carrying value of these assets may not be recoverable based on estimated undiscounted future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is the store level. The Company uses an income approach to determine the fair value of individual store locations, which requires discounting projected future cash flows over its remaining lease term. When determining the stream of projected future cash flows associated with an individual store location, the Company makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll. An impairment loss is recognized when the carrying amount of the store location is not recoverable and exceeds its fair value.
Based on an analysis of current and future store performance, management periodically evaluates the need to close underperforming stores. Reserves are established when the Company ceases to use the location for the present value of any remaining operating lease obligations, net of estimated sublease income. If the timing or amount of actual sublease income differs from estimated amounts, this could result in an increase or decrease in the related reserves.
Self-Insurance
The Company is self-insured for certain losses related to health, workers' compensation and general liability insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities associated with these losses are estimated in part by considering historical claims experience, industry factors, severity factors and other actuarial assumptions.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with fair value recognition provisions, under which the Company uses the Black-Scholes option-pricing model, which requires the input of assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the estimated volatility of the Company's common stock price over the expected term and the expected dividend yield. In addition, we estimate the number of awards that will ultimately not complete their vesting requirements ("forfeitures") and recognize expense for those stock awards expected to vest. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on the Consolidated Statements of Income.
Uncertain Tax Positions
The Company only recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized on the Consolidated Balance Sheets and Statements of Income.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company maintains a revolving credit facility to support potential liquidity and capital needs. Our interest rate under the Credit Agreement is benchmarked to, at the Company's option, a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin percentage. There were no outstanding borrowings under the Credit Agreement as of January 31, 2015 and February 1, 2014.
The Company holds highly liquid instruments purchased with a maturity of three months or less at the date of purchase that are classified as cash equivalents. The Company had cash equivalent investments at January 31, 2015 and February 1, 2014 totaling $89.0 million and $91.9 million, respectively. As these investments are short-term in nature, changes in interest rates generally would not have a material impact on the valuation of these investments. During fiscal 2014 and 2013, a hypothetical 10% increase or decrease in interest rates would not have materially affected the Consolidated Financial Statements.
Impact of Inflation
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with inflation.
Seasonality and Quarterly Results
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 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed hereunder are set forth on pages 44 through 67 of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
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 (the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of January 31, 2015, the Company's disclosure controls and procedures were effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that it is accumulated and communicated to management, including our principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes: maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of January 31, 2015.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the Company's internal control over financial reporting included on the following page of this document.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the quarter ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Inherent Limitations of Control Systems
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 error or mistake. 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 error 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dick's Sporting Goods, Inc.
Pittsburgh, Pennsylvania
We have audited the internal control over financial reporting of Dick's Sporting Goods, Inc. and subsidiaries (the "Company") as of January 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 2015 of the Company and our report dated March 27, 2015 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 27, 2015
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
Directors of the Company
Information relative to Directors of the Company is set forth under the section entitled "Item 1 - Election of Directors" in the Company's definitive Proxy Statement for the 2015 Annual Meeting of Stockholders ("2015 Proxy Statement") and is incorporated herein by reference.
(b)
Executive Officers of the Company
Information with respect to Executive Officers of the Company is set forth in Part I, Item 1.
(c)
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section entitled "Stock Ownership" in the 2015 Proxy Statement and is incorporated herein by reference.
(d)
The Company has adopted a code of ethics entitled "The Rules of the Game: The Dick's Sporting Goods Code of Ethics and Business Conduct" (the "Code of Conduct") that applies to all of its employees, including Executive Officers, and the Board of Directors, the complete text of which is available through the Investor Relations section of the Company's website at www.DICKS.com/investors. If the Company makes any amendments to the Code of Conduct other than technical, administrative, or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of the Code of Conduct applicable to the Company's principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, the Company will disclose the nature of the amendment or waiver, its effective date and to whom it applies on its website or in a Current Report on Form 8-K filed with the SEC. The Company's website does not form a part of this Annual Report on Form 10-K.
(e)
Information on our audit committee and audit committee financial expert is set forth under the section entitled "Corporate Governance" in the 2015 Proxy Statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information under the sections entitled "Executive Compensation", "Compensation Tables", "Corporate Governance" and "Item 1 - Election of Directors" in the Company's 2015 Proxy Statement. The information under the caption "Executive Compensation - Compensation Committee Report" shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into a future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent the Company specifically incorporates the information by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Part of the information required by this Item is incorporated herein by reference to the information under the caption "Stock Ownership" in the Company's 2015 Proxy Statement. The following table summarizes information, as of January 31, 2015 relating to equity compensation plans of the Company pursuant to which grants of options, restricted stock, restricted stock units or other rights to acquire shares may be granted from time to time:
(1)
Represents outstanding awards pursuant to the Company's 2002 Amended and Restated Stock and Incentive Plan, 2012 Stock and Incentive Plan and Golf Galaxy, Inc. 2004 Stock Incentive Plan.
(2)
Upon adoption of the Company's 2012 Stock and Incentive Plan, the common stock available under the 2002 Amended and Restated Stock and Incentive Plan, Golf Galaxy, Inc. 1996 Stock Option and Incentive Plan and Golf Galaxy, Inc. 2004 Stock Incentive Plan became available for issuance under the 2012 Stock and Incentive Plan. Represents shares of common stock. Shares of Class B Common Stock are not generally authorized for issuance under the 2012 Stock and Incentive Plan.
(3)
Any shares of common stock that are subject to any award (e.g. options, stock appreciation rights, restricted stock, restricted stock units or performance stock) pursuant to the 2012 Stock and Incentive Plan will count against the aggregate number of shares of common stock that may be issued as one share for every share issued.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the information under the caption "Certain Relationships and Transactions with Related Persons" and "Election of Directors - How does the Board determine which directors are considered independent?" in the Company's 2015 Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information under the caption "Ratification of Independent Registered Public Accounting Firm - Audit and Non-Audit Fees and Independent Public Accountants" in the Company's 2015 Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements. The Consolidated Financial Statements required to be filed hereunder are listed in the Index to Consolidated Financial Statements on page 42 of this Annual Report on Form 10-K.
(2)
Financial Statement Schedule. The consolidated financial statement schedule to be filed hereunder is included on page 70 of this Annual Report on Form 10-K. Other schedules have not been included because they are not applicable or because the information is included elsewhere in this report.
(3)
Exhibits. The Exhibits listed in the Index to Exhibits, which appears on pages 71 to 73 and is incorporated herein by reference, are filed as part of this Annual Report on Form 10-K. Certain Exhibits are incorporated by reference from documents previously filed by the Company with the SEC pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dick's Sporting Goods, Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying consolidated balance sheets of Dick's Sporting Goods, Inc. and subsidiaries (the "Company") as of January 31, 2015 and February 1, 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dick's Sporting Goods, Inc. and subsidiaries as of January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 27, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 27, 2015
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Operations - 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 in a specialty store environment. The Company also owns and operates Golf Galaxy, Field & Stream and True Runner specialty stores.
Fiscal Year - The Company's fiscal year ends on the Saturday closest to the end of January. Fiscal years 2014, 2013 and 2012 ended on January 31, 2015, February 1, 2014 and February 2, 2013, respectively. All fiscal years presented include 52 weeks of operations except fiscal 2012, which included 53 weeks.
Principles of Consolidation - The Consolidated Financial Statements include Dick's Sporting Goods, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications - Certain reclassifications have been made to prior year amounts within the Consolidated Statement of Cash Flows to conform to current year presentation.
Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash on hand and all highly liquid instruments purchased with a maturity of three months or less at the date of purchase. Cash equivalents are considered Level 1 investments and totaled $89.0 million and $91.9 million at January 31, 2015 and February 1, 2014, respectively. Interest income from cash equivalents was $0.1 million, $0.2 million and $1.0 million for fiscal 2014, 2013 and 2012, respectively.
Cash Management - The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at January 31, 2015 and February 1, 2014 include $105.9 million and $135.2 million, respectively, of checks drawn in excess of cash balances not yet presented for payment.
Accounts Receivable - Accounts receivable consist principally of amounts receivable from vendors and landlords. The
allowance for doubtful accounts totaled $2.7 million and $3.1 million as of January 31, 2015 and February 1, 2014, respectively.
Inventories - Inventories are stated at the lower of weighted average cost or market. Inventory costs consist of the direct cost of merchandise including freight. Inventories are net of shrinkage, obsolescence, other valuation accounts and vendor allowances totaling $100.2 million and $82.6 million at January 31, 2015 and February 1, 2014, respectively.
Property and Equipment - Property and equipment are recorded at cost and include capitalized leases. For financial reporting purposes, depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
For leasehold improvements and property and equipment under capital lease agreements, depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. Leasehold improvements made significantly after the initial lease term are depreciated over the shorter of their estimated useful lives or the remaining lease term, including renewal periods, if reasonably assured. Depreciation expense was $159.1 million, $151.5 million and $123.3 million for fiscal 2014, 2013 and 2012, respectively.
Renewals and betterments are capitalized and repairs and maintenance are expensed as incurred.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impairment of Long-Lived Assets and Closed Store Reserves - The Company evaluates its long-lived assets to assess whether the carrying values have been impaired whenever events and circumstances indicate that the carrying value of these assets may not be recoverable based on estimated undiscounted future cash flows. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus eventual net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value as determined based on quoted market prices or through the use of other valuation techniques.
The Company recognizes a liability for costs associated with closed or relocated premises when the Company ceases to use the location. The calculation of accrued lease termination and other costs 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 lease termination and other costs are evaluated on a quarterly basis.
Goodwill - Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired entities. The Company assesses the carrying value of goodwill annually or whenever circumstances indicate that a decline in value may have occurred.
The goodwill impairment test is a two-step impairment test. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a combination of a discounted cash flow and a market value approach. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. If the carrying value of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by management.
Intangible Assets - Intangible assets consist primarily of trademarks and acquired trade names with indefinite lives, which are tested for impairment annually or whenever circumstances indicate that a decline in value may have occurred. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. The Company's finite-lived intangible assets consist primarily of favorable lease assets and other acquisition related assets. Finite-lived intangible assets are amortized over their estimated useful economic lives and are reviewed for impairment when factors indicate that an impairment may have occurred. The Company recognizes an impairment charge when the estimated fair value of the intangible asset is less than the carrying value.
Self-Insurance - The Company is self-insured for certain losses related to health, workers' compensation and general liability insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities associated with these losses are estimated in part by considering historical claims experience, industry factors, severity factors and other actuarial assumptions.
Pre-opening Expenses - Pre-opening expenses, which consist primarily of rent, marketing, payroll and recruiting costs, are expensed as incurred.
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, plus the effect of dilutive potential common shares outstanding during the period, using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock and warrants.
Stock-Based Compensation - The Company has the ability to grant restricted shares of common stock, restricted stock units and stock options to purchase common stock under the Dick's Sporting Goods, Inc. 2012 Stock and Incentive Plan. The Company records stock-based compensation expenses based on the fair value of stock awards at the grant date and recognizes the expense over the related service period.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes and provides deferred income taxes for temporary differences between the amounts reported for assets and liabilities for financial statement purposes and for income tax reporting purposes, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the relevant taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that will more likely than not be realized upon ultimate settlement. Interest and penalties related to income tax matters are recognized in income tax expense.
Revenue Recognition - 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") are deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized on the 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.
Cost of Goods Sold - Cost of goods sold includes the cost of merchandise, vendor allowances, inventory shrinkage and obsolescence, freight, distribution, shipping and store occupancy costs. Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation, fixture lease expenses and certain insurance expenses.
Selling, General and Administrative 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.
Advertising Costs - Production costs of advertising and the costs to run the advertisements are expensed the first time the advertisement takes place. Advertising expense, net of cooperative advertising, was $248.7 million, $223.9 million and $201.0 million for fiscal 2014, 2013 and 2012, respectively.
Vendor Allowances - Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are determined for each fiscal year and the majority are based on various quantitative contract terms. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction of cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction to the related expense in the period that the related expense is incurred. The Company records an estimate of earned allowances based on the latest projected purchase volumes and advertising forecasts. On an annual basis at the end of the fiscal year, the Company confirms earned allowances with vendors to determine that the amounts are recorded in accordance with the terms of the contract.
Segment Information - The Company is a specialty omni-channel retailer that offers a broad range of products in its specialty retail stores primarily in the eastern United States. Given the economic characteristics of the store formats, the similar nature of the products sold, the type of customer and method of distribution, the Company's operating segments are aggregated within one reportable segment. The following table sets forth the approximate amount of net sales attributable to hardlines, apparel and footwear for the periods presented (in millions):
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Construction Allowances - All of the Company's store locations are leased. The Company may receive reimbursement from a landlord for some of the cost of the structure, subject to satisfactory fulfillment of applicable lease provisions. These reimbursements may be referred to as tenant allowances, construction allowances or landlord reimbursements ("construction allowances").
The Company's accounting for construction allowances differs if the Company is deemed to be the owner of the asset during the construction period. Some of the Company's leases have a cap on the construction allowance, which places the Company at risk for cost overruns and causes the Company to be deemed the owner during the construction period. In cases where the Company is deemed to be the owner during the construction period, a sale and leaseback of the asset occurs when construction of the asset is complete and the lease term begins, if relevant sale-leaseback accounting criteria are met. Any gain or loss from the transaction is included within deferred revenue and other liabilities on the Consolidated Balance Sheets and deferred and amortized as rent expense on a straight-line basis over the term of the lease. The Company reports the amount of cash received for the construction allowance as construction allowance receipts within the financing activities section of its Consolidated Statements of Cash Flows when such allowances are received prior to completion of the sale-leaseback transaction. The Company reports the amount of cash received from construction allowances as proceeds from sale leaseback transactions within the investing activities section of its Consolidated Statements of Cash Flows when such amounts are received after the sale-leaseback accounting criteria have been achieved.
In instances where the Company is not deemed to be the owner during the construction period, reimbursement from a landlord for tenant improvements is classified as an incentive and included within deferred revenue and other liabilities on the Consolidated Balance Sheets. The deferred rent credit is amortized as rent expense on a straight-line basis over the term of the lease. Landlord reimbursements from these transactions are included in cash flows from operating activities as a change in deferred construction allowances.
Leases - Escalating rent payments, rent abatements and rent holidays are considered in the calculation of minimum lease payments in the Company's capital lease tests and in determining straight-line rent expense for operating leases. The Company records any difference between the straight-line rent amount and amounts payable under the lease as part of deferred rent within long-term deferred revenue and other liabilities on the Consolidated Balance Sheets.
Contingent payments based upon sales and future increases determined by inflation related indices cannot be estimated at the inception of the lease and accordingly, are charged to operations as incurred. The Company records contingent rent within accrued expenses on the Consolidated Balance Sheets.
Recently Issued Accounting Pronouncement - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and permits the use of either the retrospective or cumulative effect transition method. Early application is not permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on the Company’s Consolidated Financial Statements.
2. Goodwill and Other Intangible Assets
At January 31, 2015 and February 1, 2014, the Company reported goodwill of $200.6 million net of accumulated impairment charges of $111.3 million. There was no change in the carrying value of goodwill during fiscal 2014 or fiscal 2013. No impairment charges were recorded for goodwill in fiscal 2014, 2013 or 2012.
The Company had indefinite-lived and finite-lived intangible assets of $103.8 million and $6.3 million, respectively, as of January 31, 2015 and $89.5 million and $8.8 million, respectively, as of February 1, 2014. During fiscal 2014, the Company recorded a $12.4 million non-cash impairment charge for a trademark and trade name related to the Company's golf restructuring to reduce the carrying value of the respective assets to their estimated fair value. The impairment charge is included within selling, general and administrative expenses on the Consolidated Statement of Income. No impairment charges were recorded for the Company's intangible assets in fiscal 2013 or 2012.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On October 1, 2014, the Company purchased the intellectual property rights to the Field & Stream mark in product categories that were not otherwise owned by the Company for $26.3 million. The Company previously owned the intellectual property rights to the Field & Stream mark in the hunt, camp, fish and paddle product categories. These Field & Stream intellectual property assets are indefinite-lived intangible assets, which are not being amortized.
The components of intangible assets were as follows (in thousands):
Amortization expense for the Company's finite-lived intangible assets was $2.5 million, $2.3 million and $2.0 million for fiscal 2014, 2013 and 2012, respectively. The annual estimated amortization expense of the finite-lived intangible assets recorded as of January 31, 2015 is expected to be as follows (in thousands):
3. Store Closings
The following table summarizes the activity of the Company's store closing reserves (in thousands):
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 Consolidated Balance Sheets. The related expense is recorded within selling, general and administrative expenses on the Consolidated Statements of Income.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Property and Equipment
Property and equipment are recorded at cost and consist of the following as of the end of the fiscal periods (in thousands):
The amounts above include construction in progress of $113.4 million and $101.1 million for fiscal 2014 and 2013, respectively.
5. Accrued Expenses
Accrued expenses consist of the following as of the end of the fiscal periods (in thousands):
6. Deferred Revenue and Other Liabilities
Deferred revenue and other liabilities consist of the following as of the end of the fiscal periods (in thousands):
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Debt
The Company's outstanding debt consists of the following as of the end of the fiscal periods (in thousands):
Revolving Credit Agreement - On December 5, 2011, the Company entered into a five-year credit agreement with Wells Fargo Bank, National Association (the "Credit Agreement"), which replaced the Company's then existing credit facility that was terminated. The Credit Agreement provides for a $500 million revolving credit facility, including up to $100 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 in borrowing availability to the extent that existing or new lenders agree to provide such additional revolving commitments.
The Credit Agreement, which matures on December 5, 2016, is secured by a first priority security interest in certain property and assets, including receivables, inventory, deposit accounts and other personal property of the Company, and is guaranteed by the Company's domestic subsidiaries.
The annual interest rates applicable to loans under the Credit Agreement are, at the Company's option, 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 0.20% to 0.50% and for adjusted LIBOR rate loans is 1.20% to 1.50%, depending on the borrowing availability of the Company.
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; and 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. As of January 31, 2015, the Company was in compliance with the terms of the credit agreement.
There were no borrowings under the Credit Agreement as of January 31, 2015 and February 1, 2014, respectively. As of January 31, 2015, the Company had outstanding letters of credit and total borrowing capacity under the Credit Agreement of $14.0 million and $486.0 million, respectively. The Company had $13.0 million of outstanding letters of credit and $487.0 million of total borrowing capacity as of February 1, 2014.
Capital Lease Obligations - The gross and net carrying values of assets under capital leases were $7.3 million and $0.8 million, respectively, as of January 31, 2015, and $30.3 million and $16.3 million, respectively, as of February 1, 2014. The Company also leases two buildings from an entity that is a related party to its Chairman and Chief Executive Officer, under a capital lease entered into May 1, 1986 that expires in April 2021.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Scheduled lease payments under capital lease obligations as of January 31, 2015 are as follows (in thousands):
8. Operating Leases
The Company leases substantially all of its stores, three distribution centers and equipment under non-cancellable operating leases that expire at various dates through 2030. Initial lease terms are generally for 10 to 15 years and most store leases contain multiple five-year renewal options and rent escalation provisions. The lease agreements provide primarily for the payment of minimum annual rentals, costs of utilities, property taxes, maintenance, common areas and insurance, and in some cases, contingent rent stated as a percentage of gross sales over certain base amounts. Rent expense under these operating leases totaled approximately $441.5 million, $411.5 million and $388.3 million for fiscal 2014, 2013 and 2012, respectively. The Company entered into sale-leaseback transactions related to store fixtures, buildings and equipment that resulted in cash receipts of $3.4 million for fiscal 2012.
Scheduled lease payments due under non-cancellable operating leases as of January 31, 2015 are as follows (in thousands):
The Company has subleases related to certain of its operating lease agreements. The Company recognized sublease rental income of $0.6 million, $0.7 million and $0.9 million in fiscal 2014, 2013 and 2012, respectively.
9. Stockholders' Equity
Common Stock, Class B Common Stock and Preferred Stock - The Company's Amended and Restated Certificate of Incorporation authorizes the issuance of 200,000,000 shares of common stock, par value $0.01 per share, and the issuance of 40,000,000 shares of Class B common stock, par value $0.01 per share. In addition, the Company's Amended and Restated Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock.
Holders of common stock generally have rights identical to holders of Class B common stock, except that holders of common stock are entitled to one vote per share and holders of Class B common stock are entitled to ten votes per share. A related party, relatives of the related party and trusts held by them hold all of the Class B common stock. These shares can only be held by members of this group and are not publicly tradable. Each share of Class B common stock can be converted at any time into one share of common stock at the holder's option.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Dividends per Common Share - The Company declared and paid cash dividends of $0.50, $0.50 and $2.50 per share of common stock and Class B common stock during fiscal 2014, 2013 and 2012, respectively. Fiscal 2012 included a special cash dividend of $2.00 per share of common stock and Class B common stock.
Treasury Stock - 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 fiscal 2014, the Company repurchased 4.3 million shares of its common stock for $200.0 million. During fiscal 2013, the Company repurchased 4.8 million shares of its common stock for $255.6 million.
10. Stock-Based Compensation and Employee Stock Plans
The Company has the ability to grant restricted shares of common stock, restricted stock units and options to purchase common stock under the Dick's Sporting Goods, Inc. 2012 Stock and Incentive Plan (the "Plan"). As of January 31, 2015, shares of common stock available for future issuance pursuant to the Plan were 10,862,360 shares.
The following represents total stock-based compensation recognized in the Consolidated Statements of Income for the fiscal years presented (in thousands):
Stock Option Plans - Stock options are generally granted on an annual basis, vest 25% per year over four years and have a seven-year maximum term.
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes ("Black-Scholes") option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's experience. These options are expensed on a straight-line basis over the vesting period, which is considered to be the requisite service period. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Company's historical experience and future expectations.
The fair value of stock-based awards to employees is estimated on the date of grant using the Black-Scholes valuation with the following assumptions:
(1)
The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior.
(2)
Expected volatility is based on the historical volatility of the Company's common stock over a timeframe consistent with the expected life of the stock options.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3)
The risk-free interest rate is based on the implied yield available on U.S. Treasury constant maturity interest rates whose term is consistent with the expected life of the stock options.
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience.
The stock option activity from January 28, 2012 through January 31, 2015 is presented in the following table:
The aggregate intrinsic value reported in the table above is based on the Company's closing stock prices for the last business day of the period indicated. The total intrinsic value for stock options exercised during 2014, 2013 and 2012 was $34.3 million, $67.2 million and $186.5 million, respectively. The total fair value of options vested during 2014, 2013 and 2012 was $8.2 million, $14.9 million and $7.1 million, respectively. The nonvested stock option activity for the year ended January 31, 2015 is presented in the following table:
As of January 31, 2015, unrecognized stock-based compensation expense related to nonvested stock options was approximately $13.2 million, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 2.31 years.
The Company issues new shares of common stock upon exercise of stock options.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Additional information regarding options outstanding as of January 31, 2015 is as follows:
Restricted Stock - The Company issues shares of restricted stock to eligible employees, which are subject to forfeiture until the end of an applicable vesting period. The awards generally vest on the third anniversary of the date of grant, subject to the employee's continuing employment as of that date.
The restricted stock activity from January 28, 2012 through January 31, 2015 is presented in the following table:
As of January 31, 2015, total unrecognized stock-based compensation expense related to nonvested shares of restricted stock, net of estimated forfeitures, was approximately $23.3 million before income taxes, which is expected to be recognized over a weighted average period of approximately 1.99 years.
During 2013, the Company issued a special grant of 1,185,793 shares of performance-based restricted stock in support of the Company's five-year strategic plan. The Company issued an additional 118,095 shares of performance-based restricted stock during 2014. As of January 31, 2015, nonvested restricted stock outstanding included 862,655 shares of these performance-based awards, which vest at the end of a five-year period based upon the achievement of certain pre-established financial performance metrics at the end of the performance period, with an opportunity for earlier vesting if the target metrics are achieved at the end of any fiscal year within the performance period. As of January 31, 2015, these awards were not deemed probable of achieving the pre-established financial performance metrics.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Income Taxes
The components of the provision for income taxes are as follows for the fiscal periods ended (in thousands):
The provision for income taxes differs from the amounts computed by applying the federal statutory rate as follows for the following periods:
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Components of deferred tax assets (liabilities) consist of the following as of the fiscal periods ended (in thousands):
In 2014, of the $9.0 million net deferred tax asset, $51.6 million is included within current assets, $1.9 million is included within other long-term assets and $44.5 million is included within other long-term liabilities on the Consolidated Balance Sheets. In 2013, of the $2.7 million net deferred tax asset, $38.8 million was included within current assets, $2.5 million was included within other long-term assets and $38.6 million was included within other long-term liabilities on the Consolidated Balance Sheets.
The Company determined that a valuation allowance of $7.9 million was required for a portion of the deferred tax asset recorded in fiscal 2012 relating to a $32.4 million net capital loss carryforward resulting from the impairment of its investment in JJB Sports, plc ("JJB Sports"). During the first quarter of 2013, the Company determined that it would recover $4.3 million of its investment in JJB Sports, which it had previously impaired. There was no related tax expense for this recovery as the Company reversed a portion of the deferred tax valuation allowance it had previously recorded for net capital loss carryforwards it did not expect to realize at the time its investment in JJB Sports was fully impaired. The Company has received, and may receive in future periods, additional immaterial recoveries related to its investment in JJB Sports.
As of January 31, 2015, the total liability for uncertain tax positions, including related interest and penalties, was approximately $10.1 million.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents a reconciliation of the Company's total balance of unrecognized tax benefits, excluding interest and penalties (in thousands):
The balance at January 31, 2015 includes $5.4 million of unrecognized tax benefits that would impact our effective tax rate if recognized. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.
As of January 31, 2015, the liability for uncertain tax positions includes $1.8 million for the accrual of interest and penalties. During fiscal 2014, 2013 and 2012, the Company recorded $0.3 million, $0.9 million and $0.8 million, respectively, for the accrual of interest and penalties in the Consolidated Statements of Income. The Company has federal, state and local examinations currently ongoing. It is possible that these examinations may be resolved within 12 months. Due to the potential for resolution of these examinations, and the expiration of various statutes of limitation, it is reasonably possible that $3.6 million of the Company's gross unrecognized tax benefits and interest at January 31, 2015 could be recognized within the next 12 months. The Company does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Consolidated Statements of Income during fiscal 2015.
The Company participates in the Internal Revenue Service ("IRS") Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2013 and all prior tax years. The Company is no longer subject to examination in any of its major state jurisdictions for years prior to 2007.
12. Earnings per Common Share
The computations for basic and diluted earnings per common share are as follows (in thousands, except per share data):
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Retirement Savings Plans
The Company's retirement savings plan, established pursuant to Section 401(k) of the Internal Revenue Code, covers regular status full-time hourly and salaried employees as of their date of hire and part-time regular employees who have worked 1,000 hours or more in a year. Employees must be 21 years of age to participate. Under the terms of the retirement savings plan, the Company may make a discretionary matching contribution equal to a percentage of each participant's contribution, up to 10% of the participant's compensation. The Company's discretionary matching contribution percentage is typically 50%. Total employer contributions recorded under the plan, net of forfeitures, was $6.1 million, $6.4 million and $5.3 million for fiscal 2014, 2013 and 2012, respectively.
The Company also has non-qualified deferred compensation plans for highly compensated employees whose contributions are limited under qualified defined contribution plans. Amounts contributed and deferred under the deferred compensation plans are credited or charged with the performance of investment options offered under the plans and elected by the participants. In the event of bankruptcy, the assets of these plans are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company's plans was $52.2 million and $49.4 million as of January 31, 2015 and February 1, 2014, respectively, and is included within long-term liabilities on the Consolidated Balance Sheets. Total employer contributions recorded under these plans, net of forfeitures, was $1.5 million, $1.0 million and $0.9 million for fiscal 2014, 2013 and 2012, respectively.
14. Commitments and Contingencies
Marketing and Naming Rights Commitments
Within the ordinary course of business, the Company enters into contractual commitments in order to promote the Company's brand and products, including media and naming rights extending through 2026. The aggregate payments under these commitments were $52.1 million, $29.0 million and $25.8 million during fiscal 2014, 2013 and 2012, respectively. The aggregate amount of future minimum payments at January 31, 2015 is as follows (in thousands):
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Licenses for Trademarks
Within the ordinary course of business, the Company enters into licensing agreements for the exclusive or preferential rights to use certain trademarks extending through 2020. Under specific agreements, the Company is obligated to pay annual guaranteed minimum royalties. Also, the Company is required to pay additional royalties when the royalties that are based on qualified purchases or retail sales (dependent upon the agreement) exceed the guaranteed minimum. The aggregate payments under these commitments were $16.4 million, $16.8 million and $17.8 million during fiscal 2014, 2013 and 2012, respectively. The aggregate amount of future minimum payments at January 31, 2015 is as follows (in thousands):
Other
The Company also has other non-cancellable contractual commitments, including corporate aircraft and technology-related commitments extending through 2019. The aggregate payments under these commitments were $8.7 million, $43.9 million and $9.6 million during fiscal 2014, 2013 and 2012, respectively. The aggregate amount of future minimum payments at January 31, 2015 is as follows (in thousands):
The Company is involved in legal proceedings incidental to the normal conduct of its business. Although the outcome of any pending legal proceedings cannot be predicted with certainty, management believes that adequate insurance coverage is maintained and that the ultimate resolution of these matters will not have a material adverse effect on the Company's liquidity, financial position or results of operations.
15. Investment in JJB Sports
On April 27, 2012, the Company invested an aggregate of £20 million in JJB Sports, a retail sports company based in the United Kingdom, consisting of junior secured convertible notes ("Convertible Notes") in the principal amount of £18.75 million and 12.5 million ordinary shares ("Ordinary Shares") of JJB Sports for £1.25 million, for a total cash outlay of $32.0 million. The Company classified its investments in JJB Sports as available-for-sale investments, which were recorded at fair value. As of July 28, 2012, the Company recorded an other-than-temporary impairment charge of $30.4 million on the Convertible Notes and $2.0 million on the Ordinary Shares within the Consolidated Statements of Income, fully impairing the carrying value of its investment as of July 28, 2012.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's initial fair value of its investment in the Convertible Notes was determined using a binomial lattice model with Level 2 inputs, including JJB Sports' stock price, the expected stock price volatility, the interest rate on the Convertible Notes, the risk-free interest rate based upon appropriate government yield curves and option-adjusted spreads for comparable securities. Due to the use of discounted expected future cash flows to derive the fair value of the Convertible Notes, the Company reclassified its investment as a Level 3 investment during the fiscal quarter ended July 28, 2012 (see Note 16).
During the first quarter of 2013, the Company recorded $4.3 million related to the partial recovery of its previously impaired investment in JJB Sports. The Company has received, and may receive in future periods, additional immaterial recoveries.
16. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC 820, "Fair Value Measurement and Disclosures", outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value 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 January 31, 2015 and February 1, 2014 are set forth in the table below:
(1)
Consists of investments in various mutual funds made by eligible individuals as part of the Company's deferred compensation plan (See Note 13).
The fair value of cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximated book value due to the short-term nature of these instruments at both January 31, 2015 and February 1, 2014.
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 of the fair value hierarchy during the fiscal year ended January 31, 2015 and February 1, 2014. Additionally, the Company did not hold any Level 3 financial assets or liabilities as of January 31, 2015 and February 1, 2014.
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides a reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs (in thousands):
Realized losses are included within impairment of available-for-sale investments on the Consolidated Statements of Income.
17. Related Party Transaction
On July 17, 2013, the Company entered into a purchase agreement (the "Purchase Agreement") with SP Aviation, LLC, an entity 50% owned by its Chairman and Chief Executive Officer. Pursuant to the Purchase Agreement, the Company sold a Gulfstream G200 corporate aircraft to SP Aviation, LLC for $11.0 million, paid in cash, representing the Company's carrying value of the asset at the time of sale. The transaction was approved pursuant to the Company's Related Party Transaction Policy.
18. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for fiscal 2014 and 2013 is as follows (in thousands, except earnings per share data):
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1)
Quarterly results for fiscal 2014 and 2013 do not add to full year results due to rounding.
(2)
Includes gain on sale of a Gulfstream G650 corporate aircraft of $8.7 million.
(3)
Includes golf restructuring charges of $12.2 million.
(4)
Includes the partial recovery of a previously impaired asset of $4.3 million.
(5)
Includes asset impairment charge of $4.7 million.
19. Subsequent Event
On February 18, 2015, our Board of Directors declared a quarterly cash dividend in the amount of $0.1375 per share of common stock and Class B common stock payable on March 31, 2015 to stockholders of record as of the close of business on March 13, 2015.
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 its behalf by the undersigned, thereunto duly authorized.
DICK'S SPORTING GOODS, INC.
(Registrant)
By: /s/ ANDRÉ J. HAWAUX
André J. Hawaux
Executive Vice President - Chief Operating Officer / Chief Financial Officer
Date: March 27, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dick's Sporting Goods, Inc.
Pittsburgh, Pennsylvania
We have audited the consolidated financial statements of Dick's Sporting Goods, Inc. and subsidiaries (the "Company") as of January 31, 2015 and February 1, 2014, and for each of the three years in the period ended January 31, 2015, and the Company's internal control over financial reporting as of January 31, 2015, and have issued our reports thereon dated March 27, 2015; such consolidated financial statements and reports are included in this Annual Report on Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 27, 2015
DICK'S SPORTING GOODS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Index to Exhibits
Attached as Exhibits 101 to this report are the following financial statements from the Company's Annual Report on Form 10-K for the year ended January 31, 2015 formatted in XBRL ("eXtensible Business Reporting Language"): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes to these Consolidated Financial Statements.