Dick's Sporting Goods(DKS) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the 13 and 26 weeks ended July 29, 2023, highlighting a quarterly net income decrease and the full retirement of Convertible Senior Notes Consolidated Statements of Income Net sales increased for both the 13 and 26-week periods ended July 29, 2023, while net income and diluted EPS for the 13-week period decreased year-over-year Consolidated Statements of Income (13 and 26 Weeks Ended) | Metric (in thousands, except per share data) | 13 Weeks Ended July 29, 2023 | 13 Weeks Ended July 30, 2022 | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $3,223,643 | $3,112,419 | $6,065,823 | $5,812,624 | | Gross Profit | $1,109,476 | $1,121,382 | $2,138,092 | $2,106,096 | | Income from Operations | $311,759 | $460,178 | $637,382 | $826,699 | | Net Income | $244,331 | $318,502 | $548,980 | $579,061 | | Diluted EPS | $2.82 | $3.25 | $6.23 | $5.70 | Consolidated Balance Sheets As of July 29, 2023, total assets and stockholders' equity increased, while total liabilities and inventories decreased year-over-year Consolidated Balance Sheet Highlights (in thousands) | Metric | July 29, 2023 (in thousands) | July 30, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,901,903 | $1,895,521 | | Inventories, net | $2,851,366 | $2,995,963 | | Total Assets | $9,357,364 | $9,065,275 | | Total Liabilities | $6,712,903 | $6,891,766 | | Total Stockholders' Equity | $2,644,361 | $2,173,509 | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased for the 26 weeks ended July 29, 2023, despite net cash used in investing and financing activities Cash Flow Summary (26 Weeks Ended, in thousands) | Activity | July 29, 2023 (in thousands) | July 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $693,493 | $101,744 | | Net cash used in investing activities | ($268,779) | ($171,012) | | Net cash used in financing activities | ($447,172) | ($678,413) | | Net decrease in cash and cash equivalents | ($22,483) | ($747,684) | Notes to Unaudited Consolidated Financial Statements Key disclosures include the full retirement of Convertible Senior Notes, a lower effective tax rate, and subsequent events like a dividend declaration and a business optimization plan - The company is a leading omni-channel sporting goods retailer operating stores like DICK'S Sporting Goods, Golf Galaxy, Public Lands, and Moosejaw[22] - On April 18, 2023, the company retired the remaining $59.1 million of its Convertible Senior Notes, resulting in no outstanding notes[37] - The effective tax rate for the 26 weeks ended July 29, 2023, was 16.1%, down from 23.7% in the prior year, favorably impacted by a $48.0 million increase in excess tax benefits from employee equity awards[40] - Subsequent to the quarter's end, the company announced a business optimization plan, eliminating certain positions and expecting to incur approximately $20 million in severance expense in Q3 2023[42] - A quarterly cash dividend of $1.00 per share was declared on August 21, 2023, payable on September 29, 2023[41] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 financial performance, noting increased net sales but decreased profitability due to lower gross margins and higher inventory shrink, alongside details on a business optimization plan and capital activities Overview and Business Environment The company's business has transformed with higher sales and profitability, but faces macroeconomic uncertainty, anticipating higher inventory shrink and SG&A expenses for the remainder of 2023 - The company believes lasting lifestyle changes prioritizing health and fitness have increased demand for its products, leading to structurally higher sales[50] - Key trends affecting 2023 include higher markdowns on excess product, higher inventory shrink expected to be approximately 50 basis points higher than fiscal 2022, lower supply chain costs, and SG&A expenses expected to be over 200 basis points higher than fiscal 2022 due to strategic investments[54] Business Optimization The company is implementing a business optimization plan to streamline its cost structure, expecting to incur approximately $20 million in severance expense in Q3 2023, with potential additional charges - A business optimization plan was initiated to streamline the cost structure, resulting in the elimination of certain positions[55] - The company expects to incur approximately $20 million of severance expense in Q3 2023, with potential additional charges of $25 million to $50 million to complete the optimization[55][56] Results of Operations Q2 2023 saw net sales increase by 3.6% and comparable store sales by 1.8%, but gross profit margin declined due to higher markdowns and inventory shrink, leading to decreased income from operations Q2 2023 vs Q2 2022 Performance | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net Sales | $3.22B (+3.6%) | $3.11B | | Comparable Store Sales | +1.8% | -5.1% | | Gross Profit Margin | 34.42% | 36.03% | | Income from Operations | $311.8M | $460.2M | | Net Income | $244.3M | $318.5M | - The 1.8% increase in comparable store sales was driven by a 2.8% increase in transactions, partially offset by a 1.0% decrease in sales per transaction[65] - Gross profit margin decreased by 161 basis points, primarily due to a 254 basis point decline in merchandise margin from higher markdowns and an 84 basis point increase in inventory shrink[67] - SG&A expenses increased by $118.2 million, driven by investments in hourly wage rates and talent ($51.5 million), marketing ($25.6 million), and deferred compensation plan value changes ($20.9 million)[68] Liquidity and Capital Resources As of July 29, 2023, the company maintained strong liquidity with $1.90 billion in cash, projecting $550 million to $600 million in capital expenditures for fiscal 2023, while repurchasing shares and paying dividends - The company has $1.90 billion in cash on hand and $1.58 billion available under its revolving credit facility[82][85] - Fiscal 2023 capital expenditures are expected to be in the range of $550 million to $600 million, net of tenant allowances, focused on new stores (including DICK'S House of Sport), remodels, and technology[89] - In the first 26 weeks of 2023, the company repurchased 2.0 million shares for $260.4 million and paid $189.1 million in dividends[90][92] Cash Flow Summary (26 Weeks Ended, in thousands) | Activity | July 29, 2023 (in thousands) | July 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $693,493 | $101,744 | | Net cash used in investing activities | ($268,779) | ($171,012) | | Net cash used in financing activities | ($447,172) | ($678,413) | Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in the company's market risk exposures have occurred since the Annual Report on Form 10-K for the year ended January 28, 2023 - There have been no material changes in the Company's market risk exposures from those reported in the 2022 Annual Report[99] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of July 29, 2023, with no material changes to internal controls during Q2 2023 - Management concluded that the Company's disclosure controls and procedures were effective as of July 29, 2023[101] - No changes in internal controls over financial reporting occurred during the second quarter that materially affected or are likely to materially affect them[100] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial position or operations - The Company does not expect that any ongoing legal proceedings will have a material adverse effect on its financial position or results of operations[104] Item 1A. Risk Factors A material risk factor is elevated inventory shrink due to theft, including organized retail crime, which has adversely affected and could continue to affect financial results - A key risk factor is the company's inability to protect against inventory shrink, experiencing elevated levels of inventory loss from damage and theft, including organized retail crime[106] - This elevated inventory shrink has adversely affected, and could continue to adversely affect, the company's results of operations and financial condition[106] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's Q2 2023 common stock repurchases, totaling 1,585,901 shares at an average price of $129.28 per share, with $1.17 billion remaining for future repurchases Share Repurchases in Q2 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Apr 30 - May 27, 2023 | 1,066,917 | $129.30 | | May 28 - Jul 1, 2023 | 513,561 | $129.26 | | Jul 2 - Jul 29, 2023 | 5,423 | $128.80 | | Total | 1,585,901 | $129.28 | - As of July 29, 2023, $1.17 billion remained available for purchase under the company's share repurchase program[107] Item 5. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended July 29, 2023 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter[108] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files