Document/ExhibitDescriptionPagesSize 1: 10-K Dick's Sporting Goods, Inc. 10-K/Fye 1-28-06 HTML 560K
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(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of
incorporation or organization)
16-1241537 (I.R.S. Employer
Identification No.)
300 Industry Drive, RIDC Park West, Pittsburgh, Pennsylvania (Address of principal executive offices)
15275 (Zip Code)
(724) 273-3400 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value
Name of Each Exchange on which Registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Act (check one).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the
registrant was $1,436,114,016 as of July 30, 2005 based upon the closing price of the registrant’s
common stock on the New York Stock Exchange reported for July 29, 2005.
The number of shares of common stock and Class B common stock of the registrant outstanding as
of March 9, 2006 was 36,630,048 and 13,719,395, respectively.
We caution that any forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by
our management involve risks and uncertainties and are subject to change based on various important
factors, many of which may be beyond our control. Accordingly, our future performance and
financial results may differ materially from those expressed or implied in any such forward-looking
statements. Accordingly, investors should not place undue reliance on forward-looking statements
as a prediction of actual results. You can identify these statements as those that may predict,
forecast, indicate or imply future results, performance or advancements and by forward-looking
words such as “believe,”“anticipate,”“expect,”“estimate,”“predict,”“intend,”“plan,”“project,”“will,”“will be,”“will continue,”“will result,”“could,”“may,”“might” or any
variations of such words or other words with similar meanings. Forward-looking statements address,
among other things, our expectations, our growth strategies, including our plans to open new
stores, our efforts to increase profit margins and return on invested capital, plans to grow our
private label business, projections of our future profitability, results of operations, capital
expenditures or our financial condition or other “forward-looking” information and includes
statements about revenues, earnings, spending, margins, liquidity, store openings and operations,
inventory, private label products, our actions, plans or strategies.
The following factors, among others, in some cases have affected and in the future could
affect our financial performance and actual results and could cause actual results for 2006 and
beyond to differ materially from those expressed or implied in any forward-looking statements
included in this report or otherwise made by our management: the intense competition in the
sporting goods industry and actions by our competitors; our inability to manage our growth, open
new stores on a timely basis and expand successfully in new and existing markets; the availability
of retail store sites on terms acceptable to us; the cost of real estate and other items related to
our stores; our ability to access adequate capital; changes in consumer demand; risks relating to
product liability claims and the availability of sufficient insurance coverage relating to those
claims; our relationships with our suppliers, distributors or manufacturers and their ability to
provide us with sufficient quantities of products; any serious disruption at our distribution or
return facilities; the seasonality of our business; the potential impact of natural disasters or
national and international security concerns on us or the retail environment; risks related to the
economic impact or the effect on the U.S. retail environment relating to instability and conflict
in the Middle East or elsewhere; risks relating to the regulation of the products we sell, such as
hunting rifles; risks associated with relying on foreign sources of production; risks relating to
the operation and implementation of new management information systems; risks relating to
operational and financial restrictions imposed by our Credit Agreement; factors associated with our
pursuit of strategic acquisitions; risks and uncertainties associated with assimilating acquired
companies; the loss of our key executives, especially Edward W. Stack, our Chairman and Chief
Executive Officer; our ability to meet our labor needs; changes in general economic and business
conditions and in the specialty retail or sporting goods industry in particular; our ability to
repay or make the cash payments under our senior convertible notes, due 2024; changes in our
business strategies and other factors discussed in other reports or filings filed by us with the
Securities and Exchange Commission.
In addition, we operate in a highly competitive and rapidly changing environment; therefore,
new risk factors can arise, and it is not possible for management to predict all such risk factors,
nor to assess the impact of all such risk factors on our business or the extent to which any
individual risk factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement. We do not assume any obligation and do not
intend to update any forward-looking statements except as may be required by the securities laws.
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common stock of Galyan’s
Trading Company, Inc. (“Galyan’s”) which became a wholly owned subsidiary of Dick’s. Due to this
acquisition, additional risks and uncertainties arise that could affect our financial performance
and actual results and could cause actual results for 2006 and beyond to differ materially from
those expressed or implied in any forward-looking statements included in this report or otherwise
made by our management: risks associated with combining businesses and/or with assimilating
acquired companies and the fact that lease liabilities associated with store closures due to the
Galyan’s acquisition are difficult to predict with a level of certainty and may be greater than
expected.
Dick’s Sporting Goods, Inc. (referred to as the “Company” or “Dick’s” or in the first person
notations “we”, “us”, and “our” unless specified otherwise) is an authentic full-line sporting
goods retailer offering a broad assortment of brand name sporting goods equipment, apparel, and
footwear in a specialty store environment. On July 29, 2004, a wholly owned subsidiary of Dick’s
Sporting Goods, Inc. completed the acquisition of Galyan’s. The Consolidated Statements of Income
include the operation of Galyan’s from the date of acquisition forward for the year ended January29, 2005. Our core focus is to be an authentic sporting goods retailer by offering a broad
selection of high-quality, competitively-priced brand name sporting goods equipment, apparel and
footwear that enhances our customers’ performance and enjoyment of their sports activities.
As of January 28, 2006 we operated 255 stores, with approximately 14.7 million square feet, in
34 states, the majority of which are located primarily throughout the Eastern half of the United
States. Dick’s 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, upon his father’s
retirement in 1984, became President and Chief Executive Officer of the then two-store chain.
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 was relocated to 300 Industry Drive,
RIDC Park West, Pittsburgh, PA15275 during fiscal 2004, and our phone number is (724) 273-3400.
Our website is located at www.dickssportinggoods.com. The information on our website does not
constitute a part of this annual report. We include on our website, free of charge, copies of our
prior 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.
Dick’s, Dick’s Sporting Goods, DicksSportingGoods.com, Galyan’s Trading Company, Inc.,
Northeast Outfitters, PowerBolt, Fitness Gear, Ativa, Walter Hagen, DBX, Highland Games and Acuity
are our primary trademarks. Each trademark, trade name or service mark of any other company
appearing in this annual report belongs to its holder.
Acquisition of Galyan’s
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common stock of Galyan’s for
$16.75 per share in cash, and Galyan’s became a wholly owned subsidiary of Dick’s. The Company
recorded $156.6 million of goodwill as the excess of the purchase price of $369.6 million over the
fair value of the net amounts assigned to assets acquired and liabilities assumed. The Company
obtained approximately $193 million of these funds from cash, cash equivalents and investments and
the balance from borrowings under its revolving line of credit.
Business Strategy
The key elements of our business strategy are:
Authentic Sporting Goods Retailer. Our history and core foundation is as a retailer of
authentic athletic equipment, apparel and footwear, which means we offer athletic merchandise that
is high quality and 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 ultimately this merchandising
approach positions us with advantages in a market, which we believe will continue to benefit from
new product offerings with enhanced technological features.
Competitive Pricing. We position ourselves to be competitive in price, but we do not attempt
to be a price leader. We maintain a policy of matching our competitors’ advertised prices. If a
customer finds a competitor with a lower price on an item, we will match the lower price.
Additionally, under our “Right Price Promise,” if within 30 days of purchasing an item from us, a
customer finds a lower advertised price by either a competitor, or us, we
will refund the difference. We seek to offer value to our customers and develop and maintain a
reputation as a provider of value at each price point.
Broad Assortment of Brand Name Merchandise. We carry a wide variety of well-known brands,
including Nike, North Face, Columbia, Adidas, Callaway and Under Armour, as well as private label
products sold under names such as Ativa and Walter Hagen, which are available only in our stores.
The breadth of our product selections in each category of sporting goods offers our customers a
wide range of price points and enables us to address the needs of sporting goods consumers, from
the beginner to the sport enthusiast.
Expertise and Service. We enhance our customers’ shopping experience by providing
knowledgeable and trained customer service professionals and value added services. For example, we
were the first full-line sporting goods retailer to have active members of the Professional
Golfers’ Association (“PGA”) working in our stores, and as of January 28, 2006 employed 221 PGA
professionals in our golf departments. We also had 231 bike mechanics to sell and service bicycles
and 157 certified fitness trainers who provide advice on the best fitness equipment for the
individual. All of our stores also provide support services such as golf club grip replacement,
bicycle repair and maintenance and home delivery and assembly of fitness equipment.
Interactive “Store-Within-A-Store”. Our stores typically contain five stand-alone specialty
stores. We seek to create a distinct look and feel for each specialty department to heighten the
customer’s interest in the products offered. A typical store has the following in-store specialty
shops: (i) the Pro Shop, a golf shop with a putting green and hitting area and video monitors
featuring golf tournaments and instruction on the Golf Channel or other sources; (ii) the Footwear
Center, featuring hardwood floors, a track for testing athletic shoes and a bank of video monitors
playing sporting events; (iii) the Cycle Shop, designed to sell and service bikes, complete with a
mechanics’ work area and equipment on the sales floor; (iv) the Sportsman’s Lodge for the hunting
and fishing customer, designed to have the look of an authentic bait and tackle shop; and (v) Total
Sports, a seasonal sports area displaying sports equipment and athletic apparel associated with
specific seasonal sports, such as football and baseball. Our stores provide interactive
opportunities by allowing customers to test golf clubs in an indoor driving range, shoot bows in
our archery range, or run on our footwear track.
Exclusive Brand Offerings. We offer our customers high-quality products at competitive prices
marketed under exclusive brands. We have invested in a development and procurement staff that
continually sources performance-based products generally targeted to the sporting enthusiast for
sale under brands such as Ativa, Acuity, Walter Hagen, Northeast Outfitters, PowerBolt, Fitness
Gear, Highland Games and DBX. Many of our products incorporate technical features such as
GORE-TEX, a waterproof breathable fabric, and CoolMax, a fabric that wicks moisture away from the
skin to the fabric where the moisture evaporates faster, that are typically available only through
well-known brand names. Our private label products offer value to our customers at each price
point and provide us with higher gross margins than comparable products we sell. Private label
products have grown to 11.9% in fiscal 2005 from 8.6% in fiscal 2004 of net sales on a combined
company basis. We expect to continue to grow our exclusive private label offerings.
Merchandising
We offer a full range of sporting goods and active apparel at each price point in order to
appeal to the beginner, intermediate and enthusiast sports consumer. The merchandise we carry
includes one or more of the leading manufacturers in each category. Our objective is not only to
carry leading brands, but a full range of products within each brand, including the premium items
for the sports enthusiast. As beginners and intermediates move to higher levels in their sports,
we expect to be prepared to meet their needs.
We believe that the range of the merchandise we offer, particularly for the enthusiast sports
consumer, 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.
The following table sets forth the approximate percentage of sales attributable to apparel,
footwear and hardlines for the periods presented:
Includes items such as hunting and fishing gear, sporting goods equipment and golf equipment.
Apparel: This category consists of athletic apparel, outerwear and sportswear designed for a
broad range of activities and performance levels as well as apparel designed and fabricated for
specific sports, in men’s, women’s and children’s assortments. Technical and performance specific
apparel includes offerings for sports such as golf, tennis, running, fitness, soccer, baseball,
football, hockey, swimming, and licensed products. Basic sportswear includes T-shirts, shorts,
sweats and warm-ups.
Footwear: The Footwear Center, featuring hardwood floors and a track for testing athletic
shoes, offers a diverse selection of athletic shoes for running and walking, tennis, fitness and
cross training, basketball, and hiking. In addition, we also carry specialty footwear including a
complete line of cleated shoes for baseball, football, soccer and golf. Other important categories
within the footwear department are boots, socks and accessories.
Hardlines:
Exercise and Team Sports. Our product lines include a diverse selection of fitness
equipment including treadmills, elliptical trainers, stationary bicycles, home gyms, free weights,
and weight benches. A full range of equipment and accessories are available for team sports such
as football, baseball, basketball, hockey, soccer, bowling and lacrosse. Family recreation
offerings include lawn games and table games such as ping-pong, foosball, and air hockey.
Outdoor Recreation. The Sportsman’s Lodge, designed to have the look of an authentic bait and
tackle shop, caters to the outdoorsman and includes a diverse offering of equipment for hunting,
fishing, camping, and water sports. Hunting products include rifles, shotguns, ammunition, global
positioning systems, hunting apparel, boots and optics including binoculars and scopes, knives and
cutlery, archery equipment and accessories. Fishing gear such as rods, reels, tackle and
accessories are offered along with camping equipment, including tents and sleeping bags. Equipment
offerings for marine and water sports include navigational electronics, water skis, rafts, kayaks,
canoes and accessories.
Golf. The Pro Shop, a golf shop with a putting green and indoor driving range, includes a
complete assortment of golf clubs and club sets, bags, balls, shoes, teaching aids and accessories.
We carry a full range of products featuring major golf suppliers such as Taylor Made, Callaway,
Titleist, Cleveland and Nike Golf as well as our exclusive brands, Walter Hagen and Acuity.
Cycling. Our Cycle Shop, which is designed to sell and service bicycles, complete with a
mechanics’ work area, features a broad selection of BMX, all-terrain, freestyle, touring bicycles,
scooters and skateboards. In addition, we also offer a full range of cycling accessories including
helmets, bicycle carrier racks, gloves, water bottles and repair and maintenance parts.
Our Stores
Each of our stores typically contains five specialty stores. 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.
Store Design. We design our stores to create an exciting shopping environment with distinct
departments that can stand on their own as authentic sporting goods specialty shops. Our primary
prototype store is approximately 50,000 square feet. Signs and banners are located throughout the
store allowing customers to quickly locate the various departments. A wide aisle through the
middle of the store displays seasonal or special-buy merchandise. Video monitors throughout the
store provide a sense of entertainment with videos of championship games, instructional sessions or
live sports events. We also have another prototype two-level store of approximately
75,000 square feet as a growth vehicle for those trade areas that have sufficient in-profile
customers to support it.
The following table summarizes store openings and closings for 2005 and 2004:
Fiscal 2004
Fiscal 2005
Dick’s
Galyan’s
Total
Beginning stores
234
163
43
206
New:
50,000 square foot prototype
20
20
—
20
Two-level stores
6
8
—
8
Galyan’s Stores
—
—
6
*
6
*
Total new stores
26
28
6
*
34
Closed
(5
)
(3
)
(3
)
(6
)
Ending stores
255
188
46
234
Relocated stores
4
3
—
3
*
Year Ended January 29, 2005 includes 5 stores opened by Galyan’s prior to Dick’s acquisition.
In fiscal 2005, the five store closures were due to overlapping trade areas as a result
of the Galyan’s acquisition. In fiscal 2004, as a result of the acquisition, we closed three
Galyan’s stores and one Dick’s store in overlapping trade areas. The remaining store closures in
fiscal 2004 were not related to the Galyan’s acquisition. One closed as its replacement was opened
in 2003, and the second was closed due to performance. Of the 48 stores acquired in the Galyan’s
acquisition, 41 of the stores total square footage exceeded 75,000. In most of our stores,
approximately 82% of store space is used for selling and approximately 18% is used for backroom
storage of merchandise, receiving area 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
which enables 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.
Our 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.
New Store Openings. 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, real estate prices and the
availability of adequate capital. Because our new store openings rely on many factors, they are
subject to risks and uncertainties described below under Part I, Item
1A, “Risks and Uncertainties.”
Store Associates. We strive to complement our merchandise selection and innovative store
design with superior customer service. We actively recruit sports enthusiasts to serve as sales
associates because we believe that they are more knowledgeable about the products they sell. For
example, we currently employ PGA golf professionals to work in our golf departments, bike mechanics
to sell and service bicycles and certified fitness trainers to provide advice on the best fitness
equipment for the individual. We believe that our associates’ enthusiasm and ability to
demonstrate and explain the advantages of the 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.
We emphasize product knowledge at both the hiring and training stages. We hire most of our
sales associates for a specific department or category. As part of our interview process, we test
each prospective sales associate for knowledge specific to the department or category in which he
or she is to work. We train new sales associates through a self-study and testing program that we
have developed for each of our categories. We also use mystery shoppers to shop at each store at
least monthly and encourage customer comments by making comment cards available for customers to
complete and return. These programs allow us to identify stores in which improvements need to be
made at the sales associate or managerial levels.
We typically staff our stores with a store manager, two sales managers, a sales support
manager, six sales
leaders, and approximately 50 full-time and part-time sales associates for a
single-level store and proportionately more supervisory roles and associates for a two-level store
depending on store volume and time of year. The operations of each store are supervised by one of
30 district managers, each of who reports to one of eight regional directors of stores who are
located in the field. The regional directors of stores report to one of two regional vice
presidents, and all of these individuals report to the senior vice president of operations.
Support Services. We believe that we further differentiate our stores from other large format
sporting goods stores by offering support services for the products we sell. We replace golf club
grips in all of our stores. Our PGA professionals offer golf lessons, generally at local ranges.
Although we do not receive a share of income from these lessons, allowing our PGA professionals to
offer lessons not only helps us in recruiting them to work for us but also provides a benefit to
our customers.
Our prototype stores feature bicycle maintenance and repair stations on the sales floor,
allowing our bicycle mechanics to service bicycles in addition to assisting customers. We believe
that these maintenance and repair stations are one of our most effective selling tools by enhancing
the credibility of our specialty store concept and giving assurance to our customers that we can
repair and tune the bicycles they purchase.
We also string tennis rackets, 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 Locations. We select geographic markets and store sites on the basis
of 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. We seek to locate our 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 Barnes & Noble, Best Buy or Staples.
We seek to balance our store expansion between new and existing markets. In our existing
markets, we add stores as necessary to cover appropriate market areas. By clustering stores, we
seek 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, in order to establish long-term market penetration. We generally seek to expand in
geographically contiguous areas to build on our experience in the same or nearby regions. We
believe that local knowledge is an important part of success. In considering new markets, we
locate our stores in areas we believe are underserved. In addition to larger metropolitan markets,
we also target smaller population centers in which we locate single stores, generally in regional
shopping centers with a wide regional draw.
Marketing and Advertising
Our marketing program is designed to promote our selection of brand name products at
competitive prices. The program is centered on newspaper advertising supplemented by direct mail
and seasonal use of local and national television and radio. The advertising strategy is focused
on weekly newspaper advertising utilizing multi-page, color inserts and standard run of press
advertising, with emphasis on key shopping periods, such as the Christmas season, Father’s Day, and
back-to-school, and on specific sales and promotional events, including our annual Golf-a-thon
sale.
We cluster stores in major markets to enable us to employ our advertising strategy on a
cost-effective basis through the use of newspaper and local and national television and radio
advertising. We advertise in major metropolitan newspapers as well as in regional newspapers
circulated in areas surrounding our store locations. Our newspaper advertising typically consists
of weekly promotional advertisements with full-color inserts. Our television advertising is
generally concentrated during a promotional event or key shopping period. Radio advertising is
used primarily to publicize specific promotions in conjunction with newspaper advertising or to
announce a public relations promotion or grand opening. Vendor payments under cooperative
advertising arrangements with us, as well as vendor participation in sponsoring sporting events and
programs, have contributed to our advertising leverage.
Our advertising is designed to create an “event” in the stores and to drive customer traffic
with advertisements promoting a wide variety of merchandise values appropriate for the current
holiday or event.
We also sponsor tournaments and amateur competitive events in an effort to align ourselves
with both the
serious sports enthusiast and the community in general.
Our “Scorecard” loyalty program provides reward certificates to customers based on purchases.
After a customer registers, reward points build as a percentage of purchases. These rewards are
systematically tracked, and once a customer reaches a minimum threshold purchase level of $300
within a program year, a merchandise credit is mailed to the customer’s home. This database is
then used in conjunction with our direct marketing program. The direct marketing program consists
of several direct mail pieces sent during holidays throughout the year. Additionally, several
customer focused mailings are sent to members based on their past purchasing history.
Information Systems
We implemented the JDA Merchandising System in the third quarter of 2004 that replaced our
previous STS Merchandising system and a new data warehouse that interfaces with all Merchandising
Systems. We also use an E-3 Replenishment and MMS Planning and Allocation retail software
operating on a mid-range system, except for E-3 which runs on an AS400. We utilize ICL-Fujitsu, HP
and Compaq point-of-sale hardware that incorporates scanning and price look-up features that are
supported by the RSA point-of-sale software. Our fully integrated management information systems
track purchasing, sales and inventory transfers down to the stock keeping unit or “SKU” level and
have allowed us to improve overall inventory management by identifying individual SKU activity and
projecting trends and replenishment needs on a timely basis. We believe that these systems enable
us to increase margins by reducing inventory investment, strengthening in-stock positions, and
creating store level perpetual inventories and automatic inventory replenishment on basic items of
merchandise.
We have a merchandise planning and allocation system that optimizes the distribution of most
products to the stores through a combination of historical sales data and forecasted data at an
individual store and item level. This minimizes markdowns taken on merchandise and improves sales
on these products. Our store operations personnel in every location have online access to product
signage, advertising information and e-mail through our wide area network.
Purchasing and Distribution
In addition to merchandise procurement, our buying staff is also responsible for determining
initial pricing and product marketing plans and working with our allocation and replenishment
groups to establish stock levels and product mix. Our buying staff also regularly communicates
with our store operations personnel to monitor shifts in consumer tastes and market trends.
Our planning, replenishment, allocation, and merchandise control groups are responsible for
merchandise allocation, inventory control, and the E-3 automatic replenishment systems. These
groups act as the central processing intermediary between our buying staff and our stores. These
groups also coordinate the inventory levels necessary for each advertising promotion with our
buying staff and our advertising department, tracking the effectiveness of each advertisement to
allow our buying staff and our advertising department to determine the relative success of each
promotional program. In addition, these groups’ other duties include implementation of price
changes, creation of vendor purchase orders and determination of the adequate amount of inventory
for each store.
We purchase merchandise from nearly 1,200 vendors, and we have no long-term purchase
commitments. During fiscal 2005, Nike, our largest vendor, represented approximately 12% of our
merchandise purchases. No other vendor represented 10% or more of our fiscal 2005 merchandise
purchases. We do not have long-term contracts with any of our vendors and all of our purchases
from vendors are done on a short-term purchase order basis.
We expanded our distribution center in Smithton, Pennsylvania from 388,000 to 601,000 square
feet in the fourth quarter of 2004 and are also expanding our distribution center in Plainfield,
Indiana from 364,000 to 725,000 square feet. The expansion in Plainfield is scheduled for
completion in February 2007. Vendors directly ship merchandise to these distribution centers,
where it is processed as necessary, applying price tickets and hangers, before being shipped to the
stores. We believe that our distribution system has the following advantages as compared to a
direct delivery or drop shipping system utilized by some other retailers: reduced individual store
inventory investment, more timely replenishment of store inventory needs, better use of store floor
space, reduced transportation costs and easier vendor returns.
We also have a 75,000 square foot return center in Conklin, New York. All damaged or
defective
merchandise being returned to vendors is consolidated for cost efficient return at this
return center. Inventory arriving at our distribution center is allocated directly to our stores,
to the distribution center for temporary storage, or to both locations.
We have contracted with a dedicated fleet for the delivery of merchandise from our Smithton
distribution center to our stores within a 300-mile radius of Smithton. We contract with common
carriers to deliver merchandise from our Plainfield distribution center to our stores as well as
any store outside of a 300-mile radius from Smithton.
Competition
The market for sporting goods retailers is highly fragmented and intensely competitive. The
retail sporting goods industry comprises five principal categories of retailers:
•
Sporting goods stores (large format stores);
•
Traditional sporting goods retailers;
•
Specialty retailers;
•
Mass merchants; and
•
Catalogue and Internet retailers.
Large Format Sporting Goods Stores. The large format stores generally range from 20,000 to
100,000 square feet and offer a broad selection of sporting goods merchandise. We believe that our
strong performance with the large format store in recent years is due in part to our unique
approach in blending the best attributes of a large format store with the best attributes of a
specialty shop.
Traditional Sporting Goods Stores. These stores generally range in size from 5,000 square
feet to 20,000 square feet and are frequently located in regional malls and multi-store shopping
centers. They typically carry a varied assortment of merchandise. Compared to our stores, they
offer a more limited product assortment. We believe these stores do not cater to the sports
enthusiast.
Specialty Stores. These stores generally range in size from approximately 2,000 to 20,000
square feet. These retailers typically focus on a specific category, such as athletic footwear, or
an activity, such as golf or skiing. While they may offer a deep selection of products within
their specialty, they lack the wide range of products that we offer. We believe prices at these
stores typically tend to be higher than prices at the large format sporting goods stores and
traditional sporting goods stores.
Mass Merchants. These stores generally range in size from approximately 50,000 to over
200,000 square feet and are primarily located in shopping centers, freestanding sites or regional
malls. Sporting goods merchandise and apparel represent a small portion of the total merchandise
in these stores and the selection is often more limited than in other sporting goods retailers. We
believe that this limited selection particularly with well-known brand names, combined with the
reduced service levels typical of a mass merchandiser, limit their ability to meet the needs of
sporting goods customers. However, Wal-Mart is by far the largest retailer of sporting goods as
measured by sales.
Catalogue and Internet-Based Retailers. We believe that the relationships that we have
developed with our suppliers and customers through our retail stores provide us with a significant
advantage over catalog-based and Internet-only retailers. These retailers sell a full line of
sporting goods through the use of catalogues and/or the Internet.
Employees
As of January 28, 2006, we had a total of approximately 7,700 full- time and approximately
10,400 part-time associates (less than 30 hours per week). Due to the seasonal nature of our
business, total employment will fluctuate during the year, which typically peaks in the fourth
quarter. None of our associates are covered by a collective bargaining agreement. We believe that
our relations with our associates are good.
Proprietary Rights
Each of “Dick’s,”“Dick’s Sporting Goods,”“DicksSportingGoods.com,”“Walter Hagen,”“Northeast Outfitters,”“PowerBolt,”“Fitness Gear,”“Ativa,”“Acuity,”“Highland Games” and “DBX”
has been registered as a service mark or trademark with the United States Patent and Trademark
Office. In addition, we have numerous pending applications for trademarks. We have entered into
licensing agreements for names that we do not own, which provide for exclusive rights to use names
such as “Slazenger”, “Field & Stream” and “Quest” for specified product categories. The earliest
that any of our licenses for these private label products expires, including
extensions, is 2007. These licenses contain customary termination provisions at the option of
the licensor including, in some cases, termination upon our failure to sell a minimum volume of
private label products covered by the
license. Our licenses are also subject to risks and
uncertainties common to licensing arrangements that are described below under the heading “Risks
and Uncertainties.”
Governmental Regulation
We must comply with federal, state and local regulations, including the federal Brady Handgun
Violence Prevention Act, which require us, as a federal firearms licensee, to perform a pre-sale
background check of purchasers of long guns. We perform this background check using either the
FBI-managed National Instant Criminal Background Check System (“NICS”), or a state
government-managed system that relies on NICS and any additional information collected by the
state. These background check systems either confirm that a sale can be made, deny the sale, or
require that the sale be delayed for further review, and provide us with a transaction number for
the proposed sale. We are required to record the transaction number on Form 4473 of the Bureau of
Alcohol, Tobacco and Firearms and retain a copy for our records for 5 years for auditing purposes
for each denied sale. After all of these procedures are complete, we complete the sale.
In addition, many of our imported products are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of products that we may import into the U.S. and
other countries or impact the cost of such products. To date, quotas in the operation of our
business have not restricted us, and customs duties have not comprised a material portion of the
total cost of our products.
The executive officers of the Company, and their prior business experience, are as follows:
Edward W. Stack, 51, has served as our Chairman and Chief Executive Officer since 1984 when
the founder and Edward Stack’s father, Richard “Dick” Stack, retired from our then two store chain.
Mr. Edward Stack has served us full time since 1977 in a variety of positions, including
President, Store Manager and Merchandise Manager.
William J. Colombo, 50, became our President and a board member in 2002 in addition to being
Chief Operating Officer. From late in 1998 to 2000, Mr. Colombo served as President of dsports.com
LLC, our Internet commerce subsidiary. Mr. Colombo served as Chief Operating Officer and an
Executive Vice President from 1995 to 1998. Mr. Colombo joined us in 1988. From 1977 to 1988, he
held various field and district positions with J.C. Penney Company, Inc. (a retailing company
listed on the NYSE). He is also on the board of directors of Gibraltar Industries (a leading
processor, manufacturer and provider of high value-added, high margin steel products and services
listed on Nasdaq).
William R. Newlin, 65, joined us in October 2003 as our Executive Vice President and Chief
Administrative Officer. Prior to that, he served as Chairman and CEO of Buchanan Ingersoll PC (law
firm) for more than five years. Mr. Newlin also is the lead director (formerly the Chairman) of
Kennametal Inc. (global manufacturer of cutting tools and systems listed on the NYSE). He also is
on the board of directors of Arvin Meritor, Inc. (vehicle modules and components listed on the
NYSE) and Calgon Carbon Corporation (solutions for making air and water safer listed on the NYSE).
Michael F. Hines, 49, has been our Executive Vice President and Chief Financial Officer since
2001 and joined us in 1995 as the Chief Financial Officer. From 1990 to 1995, Mr. Hines was
employed by Staples, Inc. (an office supply retailer listed on the NYSE), most recently as Vice
President of Finance. Prior to that, Mr. Hines spent 12 years in public accounting, the last eight
years with Deloitte & Touche LLP. He is also on the board of directors of Yankee Candle Company,
Inc. (a manufacturer and retailer of premium scented candles listed on the NYSE).
Gwendolyn K. Manto, 51, joined us in January 2006 as our Executive Vice President and Chief
Merchandising Officer. Ms. Manto was employed by Sears Holding Co. (the nation’s third largest
broadline retailer listed on the NYSE), as Executive Vice President and General Merchandise
Manager, Apparel since February 2004. Prior to joining Sears, she was Vice Chairman/Chief
Merchandising Officer of Stein Mart (an off-price specialty retailer listed on Nasdaq).
ITEM 1A. RISK FACTORS
Risks and Uncertainties
Intense competition in the sporting goods industry 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 that have substantially greater
market presence, name recognition, and financial, marketing and other resources than us. We
compete directly or indirectly with the following categories of companies:
•
large format sporting goods stores;
•
traditional sporting goods stores and chains;
•
specialty sporting goods shops and pro shops;
•
mass merchandisers, warehouse clubs, discount stores and department stores; and
•
catalog and Internet-based retailers.
Pressure from our competitors could require us to reduce our prices or increase our spending
for advertising and promotion. Increased competition in markets in which we have stores or the
adoption by competitors of innovative store formats, aggressive pricing strategies and retail sale
methods, such as the Internet, could cause us to lose market share and could have a material
adverse effect on our business, financial condition and results of operations.
Lack of available retail store sites on terms acceptable to us, rising real estate prices and
other costs and risks relating to new store openings could severely limit our growth
opportunities.
Our strategy includes opening stores in new and existing markets. We must successfully choose
store sites, execute favorable 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 the
number of our retail stores will depend in part on the availability of existing retail stores or
store sites. We cannot assure you that stores or sites will be available to us, or that they will
be available on terms acceptable to us. If additional retail store sites are unavailable on
acceptable terms, we may not be able to carry out a significant part of our growth strategy.
Rising real estate costs and acquisition, construction and development costs could also inhibit our
ability to grow. If we fail to locate desirable sites, obtain lease rights to these sites on terms
acceptable to us, hire adequate personnel and open and effectively operate these new stores, our
financial performance could be adversely affected.
In addition, our expansion in new and existing markets may present competitive, distribution
and merchandising challenges that differ from our current challenges, including competition among
our stores, diminished novelty of our store design and concept, added strain on our distribution
center, additional information to be processed by our management information systems and diversion
of management attention from operations, such as the control of inventory levels in our existing
stores, to the opening of new stores and markets. New stores in new markets, where we are less
familiar with the target customer and less well-known, may face different or additional risks and
increased costs compared to stores operated in existing markets, or new stores in existing markets.
Expansion into new markets could also bring us into direct competition with retailers with whom we
have no past experience as direct competitors. To the extent that we become increasingly reliant
on entry into new markets in order to grow, we may face additional risks and our net income could
suffer. To the extent that we are not able to meet these new challenges, our sales could decrease
and our operating costs could increase.
There also can be no assurance that our new stores will generate sales levels necessary to
achieve store-level profitability or profitability comparable to that of existing stores. New
stores also may face greater competition and have lower anticipated sales volumes relative to
previously opened stores during their comparable years of operation. We may not be able to
advertise cost-effectively in new or smaller markets in which we have less store density, which
could slow sales growth at such stores. We also cannot guarantee that we will be able to obtain
and distribute adequate product supplies to our stores or maintain adequate warehousing and
distribution capability at acceptable costs.
If we are unable to predict or react to changes in consumer demand, 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 and preferences regarding sporting goods. Our products must appeal to a
broad range of consumers whose preferences cannot be predicted with certainty and are subject to
change. 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 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 reduce our net sales. In addition, a major shift in consumer demand away from
sporting goods or sport apparel could also have a material adverse effect on our business, results
of operations and financial condition.
We may be subject to product liability claims and our insurance may not be sufficient to cover
damages related to those claims.
We may be subject to lawsuits resulting from injuries associated with the use of sporting
goods equipment that we sell. In addition, although we do not sell hand guns, assault weapons or
automatic firearms, we do sell hunting rifles which are products that are associated with an
increased risk of injury and related lawsuits. We may also be subject to lawsuits relating to the
design, manufacture or distribution of our private label products. We may incur losses relating to
these claims or the defense of these claims. We may also incur losses due to lawsuits relating to
our performance of background checks on hunting rifle purchasers as mandated by state and federal
law or the improper use of hunting rifles sold by us, including lawsuits by municipalities or other
organizations attempting to recover costs from hunting rifle manufacturers and retailers relating
to the misuse of hunting rifles. In addition, in the future there may be increased federal, state
or local regulation, including taxation, of the sale of hunting rifles in our current markets as
well as future markets in which we may operate. Commencement of these lawsuits against us or the
establishment of new regulations could reduce our sales and decrease our profitability. There is a
risk that claims or liabilities will exceed our insurance coverage. In addition, we may be unable
to retain adequate liability insurance in the future. Although we have entered into product
liability indemnity agreements with many of our vendors, we cannot assure you that we will be able
to collect payments sufficient to offset product liability losses or in the case of our private
label products, collect anything at all. In addition, we are subject to regulation by the Consumer
Product Safety Commission and similar state regulatory agencies. If we fail to comply with
government and industry safety standards, we may be subject to claims, lawsuits, fines and adverse
publicity that could have a material adverse effect on our business, results of operations and
financial condition.
If our suppliers, distributors or manufacturers do not provide us with sufficient quantities of
products, our sales and profitability will suffer.
We purchase merchandise from nearly 1,200 vendors. In fiscal 2005, purchases from Nike
represented approximately 12% of our merchandise purchases. Although in fiscal 2005, purchases
from no other vendor represented more than 10% of our total purchases, our dependence on our
principal suppliers involves risk. If there is a disruption in supply from a principal supplier or
distributor, we may be unable to obtain the merchandise 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 our profits.
We believe that 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, we believe most, if not all, of our private label merchandise is
manufactured abroad. Foreign imports subject us to the risks of changes in import duties, quotas,
loss of “most favored nation” or MFN status with the United States for a particular foreign
country, work stoppages, delays in shipment, freight cost increases and economic uncertainties
(including the United States imposing antidumping or countervailing duty orders, safeguards,
remedies or compensation and retaliation due to illegal foreign trade practices). If any of these
or other factors were to cause a disruption of trade from the countries in which the suppliers of
our vendors 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 purchase products
directly or indirectly utilize labor and other practices that vary from those commonly accepted in
the United States, we could be hurt by any resulting negative publicity or, in some cases, face
potential liability. To date, we have not experienced any difficulties of this nature.
Historically, instability in the political and economic environments of the countries in which
our vendors or we obtain our products has not had a material adverse effect on our operations.
However, we cannot predict the effect that future changes in economic or political conditions in
such foreign countries may have on our operations. In the event of disruptions or delays in supply
due to economic or political conditions in foreign countries, such disruptions or delays could
adversely affect our results of operations unless and until alternative supply arrangements could
be made. In addition, merchandise purchased from alternative sources may be of lesser quality or
more expensive than the merchandise we currently purchase abroad.
Countries from which our vendors obtain these new products may, from time to time, impose new
or adjust prevailing quotas or other restrictions on exported products, and the United States may
impose new duties, quotas and other restrictions on imported products. The United States Congress
periodically considers other restrictions on the importation of products obtained by our vendors
and us. The cost of such products may increase for us if applicable duties are raised, or import
quotas with respect to such products are imposed or made more restrictive.
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 suite of applications for our merchandise system that includes JDA Merchandising
and Arthur Allocation. This system, if not functioning properly, could disrupt our ability to
track, record and analyze the merchandise that we sell and cause disruptions of operations,
including, among others, an inability to process shipments of goods, process financial information
or credit card transactions, deliver products or engage in similar normal business activities,
particularly if there are any unforeseen interruptions after implementation. Any material
disruption, malfunction or other similar problems in or with this system could negatively impact
our financial results and materially adversely affect our business operations.
We rely on two distribution centers along with a smaller return facility, and if there is a
natural disaster or other serious disruption at one of these facilities, we may lose merchandise
and be unable to effectively deliver it to our stores.
We expanded our distribution center in Smithton, Pennsylvania from 388,000 to 601,000 square
feet in the fourth quarter of 2004, and are also expanding our distribution center in Plainfield,
Indiana from 364,000 to 725,000 square feet. The expansion in Plainfield is scheduled for
completion in February 2007. We also operate a 75,000 square foot return center in Conklin, New
York. Any natural disaster or other serious disruption to one of these facilities due to fire,
tornado or any other cause would damage a significant portion of our inventory, could impair our
ability to adequately stock our stores and process returns of products to vendors and could
negatively affect our sales and profitability. Our growth could cause us to seek alternative
facilities. Such expansion of the current facility or alternatives could affect us in ways we
cannot predict.
Our business is seasonal and our annual results are highly dependent on the success of our fourth
quarter sales.
Our business is highly seasonal in nature. Our highest sales and operating income
historically occur during the 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. The fourth
quarter generated approximately 32% of our net sales and approximately 56% of our net income for
fiscal 2005, excluding after-tax merger integration and store closing costs of $22.7 million. The
Company believes excluding merger integration and store closing costs provides a more accurate
understanding of the core performance of the Company. Any decrease in our 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.
Our business is dependent on the general economic conditions in our markets.
In general, our sales depend on discretionary spending by our customers. A deterioration of
current economic conditions or an economic downturn in any of our major markets or in general could
result in declines in sales and impair our growth. General economic conditions and other factors
that affect discretionary spending in the regions in which we operate are beyond our control and
are affected by:
other matters that influence consumer confidence and spending.
Increasing volatility in financial markets may cause some of the above factors to change with
an even greater degree of frequency and magnitude.
Because our stores are concentrated in the eastern half of the United States, we are subject
to regional risks.
Many of our stores are located primarily in the eastern half of the United States. Because of
this, we are subject to regional risks, such as the regional economy, weather conditions,
increasing costs of electricity, oil and natural gas, natural disasters, as well as government
regulations specific to the states in which we operate. If the region were to suffer an economic
downturn or other adverse regional event, our net sales and profitability could suffer.
Our results of operations may be harmed by unseasonably warm winter weather conditions. Many
of our stores are located in geographic areas that experience seasonably cold weather. We sell a
significant amount of winter merchandise. Abnormally warm weather conditions could reduce our
sales of these items and hurt our profitability. Additionally, abnormally wet or cold weather in
the spring or summer months could reduce our sales of golf or other merchandise and hurt our
profitability.
The terms of our senior secured revolving credit facility impose operating and financial
restrictions on us, which may impair our ability to respond to changing business and economic
conditions. This impairment could have a significant adverse impact on our business.
Our current senior secured revolving credit facility contains provisions which restrict our
ability to, among other things, incur additional indebtedness, issue additional shares of capital
stock in certain circumstances, make particular types of investments, incur liens, pay dividends,
redeem capital stock, consummate mergers and consolidations, enter into transactions with
affiliates or make substantial asset sales. In addition, our obligations under the senior secured
revolving credit facility are secured by interests in substantially all of our personal property
excluding store and distribution center equipment and fixtures. 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, we may have
to refinance all or a portion of our debt and/or obtain additional financing. We cannot assure you
that refinancing or additional financing on favorable terms could be obtained or that we will be
able to operate at a profit.
We may pursue strategic acquisitions, which could have an adverse impact on our business.
We may from time to time acquire complementary companies or businesses. Acquisitions may
result in difficulties in assimilating acquired companies, and may result in the diversion of our
capital and our management’s attention from other business issues and opportunities. We may not be
able to successfully integrate operations that we acquire, including their personnel, financial
systems, distribution, operations and general store operating procedures. If we fail to
successfully integrate acquisitions, our business could suffer. In addition, the integration of
any acquired business, and their financial results, into ours may adversely affect our operating
results. We currently do not have any agreements with respect to any such acquisitions.
Our ability to expand our business will be dependent upon the availability of adequate
capital.
The rate of our expansion will also depend on the availability of adequate capital, which in
turn will depend in large part on cash flow generated by our business and the availability of
equity and debt capital. We cannot assure you that we will be able to obtain equity or debt
capital on acceptable terms or at all. Our current senior secured revolving credit facility
contains provisions, which restrict our ability to incur additional indebtedness, to raise capital
through the issuance of equity or make substantial asset sales, which might otherwise be used to
finance our expansion. Our obligations under the senior secured revolving credit facility are
secured by interests in substantially all of our personal property excluding store and distribution
center equipment and fixtures, which may further limit our access to certain capital markets or
lending sources. Moreover, the actual availability under our credit facility is limited to the
lesser of 70% of our eligible inventory or 85% of our inventory’s liquidation value, in each case
net of specified reserves and less any letters of credit outstanding, and opportunities for
increased cash flows from reduced inventories would be partially offset by reduced availability
through our senior secured revolving credit facility. As a result, we cannot assure you that we
will be able to finance our current plans for the opening of new retail stores.
The loss of our key executives, especially Edward W. Stack, our Chairman of the Board and Chief
Executive Officer, could have a material adverse effect on our business due to the loss of their
experience and industry relationships.
Our success depends on the continued services of our senior management, particularly Edward W.
Stack, our Chairman of the Board and Chief Executive Officer. If we were to lose any key senior
executive, our business could be materially adversely affected.
Our business depends on our ability to meet our labor needs.
Our success depends on hiring and retaining quality managers and sales associates in our
stores. We plan to expand our employee base to manage our anticipated growth. Competition for
personnel, particularly for employees with retail expertise, is intense. Additionally, our ability
to maintain consistency in the quality of customer service in our stores is critical to our
success. Also, many of our store-level employees are in entry-level or part-time positions that
historically have high rates of turnover. We are also dependent on the employees who staff our
distribution and return centers, many of whom are skilled. We may be unable to meet our labor
needs and control our costs due to external factors such as unemployment levels, minimum wage
legislation and wage inflation. Although none of our employees are currently covered under
collective bargaining agreements, we cannot guarantee that our employees will not elect to be
represented by labor unions in the future. If we are unable to hire and retain sales associates
capable of providing a high level of customer service, our business could be materially adversely
affected.
Terrorist attacks or acts of war may seriously harm our business.
Among the chief uncertainties facing our nation and world and as a result our business is the
instability and conflict in the Middle East. Obviously, no one can predict with certainty what the
overall economic impact will be as a result of this. Clearly, events or series of events in the
Middle East or elsewhere could have a very serious adverse impact on our business.
Terrorist attacks may cause damage or disruption to our company, our employees, our facilities
and our customers, which could significantly impact our net sales, costs and expenses, and
financial condition. The potential for future terrorist attacks, the national and international
responses to terrorist attacks, and other acts of war or hostility may cause greater uncertainty
and cause our business to suffer in ways that we currently cannot predict. Our geographic focus in
the eastern United States may make us more vulnerable to such uncertainties than other comparable
retailers who may not have a similar geographic focus.
We are controlled by our Chief Executive Officer and his relatives, whose interests may differ
from other stockholders.
We have two classes of common stock. The common stock has one vote per share and the Class B
common stock has 10 votes per share. As of January 28, 2006, Mr. Edward W. Stack, our Chairman and
Chief Executive Officer, and his relatives controlled approximately 79% of the combined voting
power of our common stock and Class B common stock and would control the outcome of any corporate
transaction or other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets. Mr. Stack and his relatives
may also acquire additional shares of common stock upon the exercise of stock options. They will
also have the power to prevent or cause a change in control. The interests of Mr. Stack and his
relatives may differ from the interests of the other stockholders and they may take actions with
which you disagree.
Our quarterly operating results may fluctuate substantially, which may adversely affect our
business and the market price of our common stock.
Our net sales and results of operations have fluctuated in the past and may vary from
quarter-to-quarter in the future. These fluctuations may adversely affect our business, financial condition
and the market price of our common stock. A number of factors, many of which are outside our
control, may cause variations in our quarterly net sales and operating results, including:
•
changes in demand for the products that we offer in our stores;
•
lockouts or strikes involving professional sports teams;
retirement of sports superstars used in marketing various products;
•
costs related to the closures of existing stores;
•
litigation;
•
pricing and other actions taken by our competitors;
•
adverse weather conditions in our markets; and
•
general economic conditions.
Our comparable store sales will fluctuate and may not be a meaningful indicator of future
performance.
Changes in our comparable store sales results could affect the price of our common stock. A
number of factors have historically affected, and will continue to affect, our comparable store
sales results, including:
•
competition;
•
our new store openings;
•
general regional and national economic conditions;
•
actions taken by our competitors;
•
consumer trends and preferences;
•
changes in the other tenants in the shopping centers in which we are located;
•
new product introductions and changes in our product mix;
•
timing and effectiveness of promotional events;
•
lack of new product introductions to spur growth in the sale of various kinds of
sports equipment; and
•
weather.
We cannot assure you that comparable store sales will continue to increase at the rates
achieved in our last fiscal year. Moreover, our comparable store sales may decline. Our comparable
store sales may vary from quarter-to-quarter, and an unanticipated decline in revenues or
comparable store sales may cause the price of our common stock to fluctuate significantly.
The market price of our common stock is likely to be highly volatile as the stock market in
general has been highly volatile. Factors that could cause fluctuation in the stock price may
include, among other things:
•
actual or anticipated variations in quarterly operating results;
•
changes in financial estimates by securities analysts;
•
our inability to meet or exceed securities analysts’ estimates or expectations;
•
conditions or trends in our industry;
•
changes in the market valuations of other retail companies;
•
announcements by us or our competitors of significant acquisitions, strategic
partnerships, divestitures, joint ventures or other strategic initiatives;
•
capital commitments;
•
additions or departures of key personnel; and
•
sales of common stock.
Many of these factors are beyond our control. These factors may cause the market price of our
common stock to decline, regardless of our operating performance.
Our anti-takeover provisions could prevent or delay a change in control of our company, even if
such change of 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; limiting the ability of stockholders to call special meetings of
stockholders; 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, except
under specified circumstances, us from engaging in any mergers, significant sales of stock or
assets or business combinations with any stockholder or group of stockholders who own at least 15%
of our common stock.
We may not have the ability to purchase convertible notes at the option of the holders or upon a
change in control or to raise the funds necessary to finance the purchases.
On February 18, 2004, the Company completed a private offering of $172.5 million issue price
of senior unsecured convertible notes in transactions pursuant to Rule 144A under the Securities
Act of 1933, as amended.
On February 18, 2009, February 18, 2014 and February 18, 2019, holders of the convertible
notes may require us to purchase their convertible notes. However, it is possible that we would not
have sufficient funds at that time to make the required purchase of convertible notes or would
otherwise be prohibited under our senior secured revolving credit facility or other future debt
instruments from making such payments in cash. We may only pay the purchase price in cash and not
in shares of our common stock.
In addition, upon the occurrence of certain specific kinds of change in control events,
holders may require us to purchase for cash all or any portion of their convertible notes. However,
it is possible that, upon a change in control, we may not have sufficient funds at that time to
make the required purchase of convertible notes, and we may be unable to raise the funds necessary.
In addition, the issuance of our shares upon a conversion of convertible notes could result in a
default under our senior secured revolving credit facility to the extent that the issuance creates
a change of control event under our credit facility. Such a default under the senior secured credit
facility could in turn create a cross default under the convertible notes.
The terms of our senior secured revolving credit facility and of any future indebtedness we
incur may also restrict our ability to fund the purchase of convertible notes upon a change in
control or if we are otherwise required to purchase convertible notes at the option of the holder.
If such restrictions exist, we would have to seek the consent of the lenders or repay those
borrowings. If we were unable to obtain the necessary consent or unable to repay those borrowings,
we would be unable to purchase the convertible notes and, as a result, would be in default under
the convertible notes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters is located at 300 Industry Drive, RIDC Park West, Pittsburgh, PA15275, where we lease approximately 200,000 square feet of office space. The lease for this office
space is for a term of 20 years through 2024.
We currently lease a 601,000 square foot distribution center in Smithton, Pennsylvania and a
364,000 square foot distribution center in Plainfield, Indiana. The Plainfield distribution center
is currently being expanded to 725,000 square feet and is scheduled for completion in February
2007. The term of these leases expire in 2019 and 2020, respectively. We also lease a 75,000
square foot return center in Conklin, New York, which is utilized for freight consolidation and the
handling of damaged and defective merchandise. The term of this lease expires in 2009.
We lease all of our stores. Initial lease terms are generally for 10 to 25 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 six
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 in malls. We currently have substantially
all of our leases signed for the stores planned to open in fiscal 2006, and nine signed leases for
the stores planned to open in fiscal 2007.
As of January 28, 2006 we operated 255 stores in 34 states. The following table sets forth
the number of stores by state:
State
Alabama
3
Colorado
6
Connecticut
8
Delaware
2
Florida
1
Georgia
4
Illinois
12
Indiana
14
Iowa
1
Kansas
6
Kentucky
6
Maine
2
Maryland
8
Massachusetts
11
Michigan
12
Minnesota
3
Missouri
5
Nebraska
2
Nevada
1
New Hampshire
3
New Jersey
9
New York
25
North Carolina
17
Ohio
30
Pennsylvania
28
Rhode Island
2
South Carolina
5
Tennessee
2
Texas
2
Utah
1
Vermont
2
Virginia
13
West Virginia
4
Wisconsin
5
Total
255
ITEM 3. LEGAL PROCEEDINGS
Various claims and lawsuits arising in the normal course of business are pending against us.
The subject matter of these proceedings primarily includes commercial disputes and employment
issues. The results of these proceedings are not expected to have a material adverse effect on our
consolidated financial position or results of operations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal
year 2005 through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 shares of the Company’s Class B common stock
are neither listed nor traded on any stock exchange or other market. These shares of Class B
common stock can be converted to common stock at the holder’s option and are automatically
convertible upon other events. Our common stock began trading on October 16, 2002, following the
Company’s initial public offering. Set forth below, for the applicable periods indicated, are the
high and low closing sales prices per share of the Company’s common stock as reported by the NYSE.
The closing prices below have been adjusted to reflect the two-for-one stock split in the form of a
stock dividend distributed on April 5, 2004 to the Company’s stockholders of record as of March 19,2004.
The number of holders of record of shares of the Company’s common stock and Class B common
stock as of March 7, 2006 was 167 and 9, respectively.
We currently intend to retain our earnings for the development of our business. We have never
paid any cash dividends since our inception, and we do not anticipate paying any cash dividends in
the future.
The information set forth under Item 12 “Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters” is incorporated herein.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data for fiscal years 2005, 2004, 2003, 2002 and
2001 presented below under the captions “Statement of Income Data”, “Other Data” and “Balance Sheet
Data” have been derived from our consolidated financial statements for those periods. The
following selected consolidated financial data for fiscal years 2005, 2004, 2003, 2002 and 2001
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 named for the calendar year ending closest to that date. All fiscal years presented
include 52 weeks of operations. You should read the information set forth below in conjunction
with other sections of this report, including “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and related notes.
(Dollars in thousands, except per share and sales per square foot data)
Statement of Income Data:
Net sales
$
2,624,987
$
2,109,399
$
1,470,845
$
1,272,584
$
1,074,568
Cost of goods sold (1)
1,887,347
1,522,873
1,062,820
934,956
810,801
Gross profit
737,640
586,526
408,025
337,628
263,767
Selling, general and
administrative expenses
556,320
443,776
314,885
262,755
213,065
Merger integration and store
closing costs
37,790
20,336
—
—
—
Pre-opening expenses
10,781
11,545
7,499
6,000
5,726
Income from operations
132,749
110,869
85,641
68,873
44,976
(Gain) on sale / loss on
write-down of non-cash
investment (2) (3)
(1,844
)
(10,981
)
(3,536
)
2,447
—
Interest expense, net
12,959
8,009
1,831
2,864
6,241
Other income
—
(1,000
)
—
—
—
Income before income taxes
121,634
114,841
87,346
63,562
38,735
Provision for income taxes
48,654
45,936
34,938
25,425
15,494
Net income
$
72,980
$
68,905
$
52,408
$
38,137
$
23,241
Earnings per Common Share (4):
Net income per common share -
Basic
$
1.47
$
1.44
$
1.17
$
1.08
$
0.73
Net income per common share -
Diluted
$
1.35
$
1.30
$
1.04
$
0.93
$
0.65
Weighted average number of common
shares
outstanding (in thousands):
Basic
49,792
47,978
44,774
35,458
32,018
Diluted
53,979
52,921
50,280
40,958
35,736
Store Data:
Comparable store net sales
increase (5)
2.6
%
2.6
%
2.1
%
5.1
%
3.6
%
Number of stores at end of period
255
234
163
141
125
Total square feet at end of period
14,650,459
13,514,869
7,919,138
6,807,021
6,149,044
Net sales per square foot (6)
$
188
$
195
$
193
$
192
$
186
Other Data:
Gross profit margin
28.1
%
27.8
%
27.7
%
26.5
%
24.6
%
Selling, general and
administrative percentage
of net sales
21.2
%
21.0
%
21.4
%
20.7
%
19.8
%
Operating margin
5.1
%
5.3
%
5.8
%
5.4
%
4.2
%
Inventory turnover (7)
3.42
x
3.56
x
3.69
x
3.83
x
3.74
x
Depreciation and amortization
$
49,861
$
37,621
$
17,554
$
14,420
$
12,082
Balance Sheet Data:
Inventories
$
535,698
$
457,618
$
254,360
$
233,497
$
201,585
Working capital (8)
$
142,748
$
128,388
$
136,679
$
55,102
$
68,957
Total assets
$
1,187,789
$
1,085,048
$
543,360
$
413,529
$
365,517
Total debt including capital
lease obligations
$
181,201
$
258,004
$
3,916
$
3,577
$
80,861
Retained earnings (accumulated
deficit) -
including accretion of redeemable
preferred stock
$
202,842
$
129,862
$
60,957
$
8,549
$
(29,588
)
Total stockholders’ equity
$
414,793
$
313,667
$
240,894
$
138,823
$
61,556
(1)
Cost of goods sold includes the cost of merchandise, occupancy, freight and
distribution costs, and shrink expense.
(2)
Gain on sale of investment resulted from the sale of a portion of the Company’s
non-cash investment in its third-party Internet commerce service provider. We converted a
royalty arrangement with that provider
into an equity investment that resulted in this
non-cash investment.
(3)
The loss on write-down of non-cash investment resulted from a write-down of the
investment in our third-party Internet commerce service provider due to a decline in the
value of that company’s publicly traded stock.
(4)
Earnings per share data gives effect to the two-for-one stock split, in the form of a
stock dividend which became effective on April 5, 2004.
(5)
Comparable store sales begin in a store’s 14th full month of operations
after its grand opening. Comparable store sales are for stores that opened at least 13
months prior to the beginning of the period noted. Stores that were closed or relocated
during the applicable period have been excluded from comparable store sales. Each
relocated store is returned to the comparable store base after its 14th full
month of operations. The former Galyan’s stores will be included in the comparable store
base beginning in the second quarter of 2006.
(6)
Calculated using net sales and gross square footage of all stores open at both the
beginning and the end of the period. Gross square footage includes the storage, receiving
and office space that generally occupies approximately 18% of total store space.
(7)
Calculated as cost of goods sold divided by the average of the last five quarters’
ending inventories.
(8)
Defined as current assets less current liabilities.
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 “Selected Consolidated
Financial and Other Data” and our consolidated financial statements and related notes appearing
elsewhere in this report. This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. See PART I- “Forward
Looking Statements” and PART I-Item 1A, “Risks and Uncertainties”.
Overview
The Company is an authentic full-line sporting goods retailer offering a broad assortment of
brand-name sporting goods equipment, apparel and footwear in a specialty store environment. On
July 29, 2004, a wholly owned subsidiary of Dick’s Sporting Goods, Inc. completed the acquisition
of Galyan’s. The Consolidated Statements of Income include the operation of Galyan’s from the date
of acquisition forward for the year ended January 29, 2005.
As of January 28, 2006 we operated 255 stores, with approximately 14.7 million square feet, in
34 states, the majority of which are located primarily throughout the Eastern half of the United
States.
Executive Summary
The Company reported net income for the year ended January 28, 2006 of $73.0 million or $1.35
per diluted share as compared to net income of $68.9 million and earnings per diluted share of
$1.30 in 2004. The increase in earnings was attributable to an increase in sales as a result of a
2.6% increase in comparable store sales, new store sales and sales from the former Galyan’s stores
that were acquired on July 29, 2004 and an increase in gross profit margins partially offset by an
increase in selling, general and administrative expenses as a percentage of sales, a $5.5 million
after tax decrease in the gain on sale of investment and a $10.5 million after tax increase in
merger integration and store closing costs associated with the acquisition of Galyan’s.
Net sales increased 24% to $2,625 million in 2005 from $2,109 million in 2004. This increase
resulted primarily from a comparable store sales increase of 2.6%, or $36.7 million, and $478.9
million from the net addition of new stores in the last five quarters which are not included in the
comparable store base, and the former Galyan’s stores which will be included in the comparable
store base beginning in the second quarter of 2006.
Income from operations increased 20% to $132.7 million in 2005 from $110.9 million in 2004 due
primarily to the increase in gross profit, partially offset by an increase in merger integration
and store closing costs and an increase in selling, general and administrative costs.
As a percentage of net sales, gross profit increased to 28.10% in 2005 from 27.81% in 2004.
The gross profit percentage increased primarily due to an increase in the merchandise margin
percentage partially offset by higher occupancy costs in the former Galyan’s stores and an increase
in freight expense.
Selling, general and administrative expenses increased by 15 basis points. The increase as a
percentage of sales was due primarily to an increase in store payroll expense as the former
Galyan’s stores have higher payroll expense as a percentage of sales than the Dick’s stores,
partially offset by the leverage obtained on corporate administration expenses due to the synergies
obtained from the acquisition of Galyan’s and lower bonus expense this year.
We ended the year with no borrowings on our line of credit as compared to $76.1 million of
outstanding borrowings at January 29, 2005. The balance last year was due primarily to using the
line to fund a portion of the Galyan’s acquisition. Excess borrowing availability totaled $275.6
million as of January 28, 2006.
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’s period:
Basis Point
Basis Point
Increase /
Increase /
(Decrease) in
(Decrease) in
Percentage of
Percentage of
Net Sales
Net Sales
Fiscal Year
from Prior Year
from Prior Year
2005 A
2004 A
2003
2004-2005 A
2003-2004 A
Net sales (1)
100.00
%
100.00
%
100.00
%
N/A
N/A
Cost of goods sold, including occupancy
and distribution costs (2)
71.90
72.19
72.26
(29
)
(7
)
Gross profit
28.10
27.81
27.74
29
7
Selling, general and administrative expenses (3)
21.19
21.04
21.41
15
(37
)
Merger integration and store closing costs (4)
1.44
0.96
—
48
96
Pre-opening expenses (5)
0.41
0.55
0.51
(14
)
4
Income from operations
5.06
5.26
5.82
(20
)
(56
)
Gain on sale of investment (6)
(0.07
)
(0.52
)
(0.24
)
(45
)
28
Interest expense, net (7)
0.49
0.38
0.12
11
26
Other income
—
(0.05
)
—
(5
)
5
Income before income taxes
4.63
5.44
5.94
(81
)
(50
)
Provision for income taxes
1.85
2.18
2.38
(33
)
(20
)
Net income
2.78
%
3.27
%
3.56
%
(49
)
(29
)
A: Column does not add due to rounding
(1) Revenue from retail sales is recognized at the point of sale. Revenue from cash
received for gift cards is deferred, and the revenue is recognized upon the redemption of the gift
card. Sales are recorded net of estimated returns. Revenue from layaway sales is recognized upon
receipt of final payment from the customer.
(2) Cost of goods sold includes the cost of merchandise, inventory shrinkage, freight,
distribution and store occupancy costs. Store occupancy costs include rent, common area
maintenance charges, real estate and other asset based taxes, store maintenance, utilities, depreciation, fixture lease expenses and certain
insurance expenses.
(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.
(4) Merger integration and store closing costs all pertain to the Galyan’s acquisition and
include the expense of closing Dick’s stores in overlapping markets, advertising the re-branding of
Galyan’s stores, duplicative administrative costs, recruiting and system conversion costs.
Beginning in the third quarter of 2005, the balance of the merger integration and store closing
costs, which relate primarily to accretion of discounted cash flows on future lease payments on
closed stores, was included in rent expense.
(5) Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs
incurred prior to a new store opening.
(6) Gain on sale of investment resulted from the sale of a portion of the Company’s non-cash
investment in its third-party internet commerce provider.
(7) Interest expense, net, results primarily from interest on our senior convertible notes
and Credit Agreement borrowings partially offset by interest income.
Fiscal 2005 Compared to Fiscal 2004
Net Income
Net income increased to $73.0 million in 2005 from $68.9 million in 2004. This represented an
increase in diluted earnings per share of $0.05, or 4% to $1.35 from $1.30. The increase in
earnings was attributable to an increase in net sales and gross profit margin percentage, partially
offset by an increase in selling, general and administrative expenses as a percentage of sales, a
$5.5 million after tax decrease in the gain on sale of investment and a $10.5 million after tax
increase in merger integration and store closing costs associated with the acquisition of Galyan’s.
Net Sales
Net sales increased 24% to $2,625 million in 2005 from $2,109 million in 2004. This increase
resulted primarily from a comparable store sales increase of 2.6%, or $36.7 million, and $478.9
million from the net addition of new stores in the last five quarters which are not included in the
comparable store base and the former Galyan’s stores which will be included in the comparable store
base beginning in the second quarter of 2006.
The increase in comparable store sales is mostly attributable to sales increases in men’s and
women’s apparel, exercise, athletic and casual footwear, socks, licensed merchandise, baseball and
accessories and guns, partially offset by lower sales of paintball, in-line skates, bikes, hockey
and hunting.
Private Label Sales
For the year ended January 28, 2006, private label product sales in total for all stores
represented 11.9% of sales, an increase from last year’s 8.6% of proforma sales. These private label sales are for the merchandise developed by Dick’s, and do not include any remaining
private label products developed by Galyan’s.
Store Count
During 2005, we opened 26 stores, relocated four stores and closed five stores. The store
closures were a result of the Galyan’s acquisition. As of January 28, 2006 we operated 255 stores,
with approximately 14.7 million square feet, in 34 states.
Income from Operations
Income from operations increased 20% to $132.7 million in 2005 from $110.9 million in 2004 due
primarily to the increase in gross profit, partially offset by an increase in merger integration
and store closing costs and an increase in selling, general and administrative costs.
Gross profit increased 26% to $737.6 million in 2005 from $586.5 million in 2004. As a
percentage of net sales, gross profit increased to 28.10% in 2005 from 27.81% in 2004. The gross profit
percentage increased primarily due to improved merchandise margins in the majority of the Company’s
product categories, partially offset by higher occupancy costs as a percentage of sales (50 basis
points) due primarily to higher occupancy costs in the former Galyan’s stores, and higher freight
expense as a percentage of sales (39 basis points). The increase in
freight expense was primarily
due to an increase in the fuel surcharge charged by our carriers.
Selling, general and administrative expenses increased to $556.3 million in 2005 from $443.8
million in 2004 due primarily to an increase in store count and continued investment in corporate
and store infrastructure.
The 15 basis point increase over last year was due primarily to an increase in store payroll
costs (64 basis points), a portion of which is due to the negative leverage from lower sales in the
former Galyan’s stores, partially offset by lower bonus expense (28 basis points) and a decrease in
corporate payroll expense (12 basis points), a portion of which is due to the synergies obtained
from the acquisition of Galyan’s.
Merger integration and store closing costs associated with the purchase of Galyan’s increased
to $37.8 million in 2005 from $20.3 million in 2004. The increase is primarily due to closing
Dick’s stores in overlapping markets and advertising the re-branding and re-grand opening of the
former Galyan’s stores.
Pre-opening expenses decreased by $0.7 million to $10.8 million in 2005 from $11.5 million in
2004. Pre-opening expenses were for the opening of 26 new stores and relocation of four stores in
2005 compared to the opening of 29 new stores and relocation of three stores in 2004. Pre-opening
expenses in any year fluctuate depending on the timing and number of store openings and
relocations.
Gain on Sale of Investment
Gain on sale of investment was $1.8 million in 2005 as compared to $11.0 million in 2004. The
gain resulted from the sale of a portion of the Company’s non-cash investment in its third-party
internet commerce provider.
Interest Expense, Net
Interest expense, net, increased by $5.0 million to $13.0 million in 2005 from $8.0 million in
2004 due primarily to higher interest rates and higher average borrowings on the Company’s senior
secured revolving credit facility.
Other Income
Other income in 2004 included a $1.0 million break-up fee related to our unsuccessful effort
to acquire the assets of a bankrupt retailer.
Fiscal 2004 Compared to Fiscal 2003
Net Income
Our net income increased by $16.5 million to $68.9 million from $52.4 million in 2003. This
represented an increase in diluted earnings per share of $0.26 to $1.30 from $1.04. The increase
was due primarily to higher sales, a decrease in selling, general and administrative expenses as a
percentage of sales and gain on sale of investment partially offset by merger integration and store
closing costs associated with the acquisition of Galyan’s.
Net Sales
Net sales increased by $638.6 million, or 43%, to $2,109.4 million from $1,470.8 million in
2003. This increase resulted primarily from a comparable store sales increase of 2.6%, or $31.9
million and $606.7 million from the net addition of new Dick’s stores in the last five quarters
which are not included in the comparable store base, and the acquired Galyan’s stores which will
not be included in the comparable store base until 13 months after the completion of the
re-branding and re-merchandising effort expected to occur by the end of the first half of 2005.
The increase in comparable store sales is mostly attributable to sales increases in men’s,
women’s and kid’s apparel, men’s, women’s and kid’s footwear, golf, licensed product and bikes,
partly offset by lower sales of boots, in-line skates and hunting.
Private Label Sales
For the year ended January 29, 2005, private label product sales (excluding Galyan’s private
label brands), represented 8.6% of proforma sales, an increase from last year’s 7.1% of proforma
sales. These private label sales are for the merchandise developed by Dick’s, and do not
include any remaining private label products developed by Galyan’s.
During 2004, we opened 29 stores, relocated three stores, acquired 48 Galyan’s stores, closed
three Dick’s stores and closed three Galyan’s stores, resulting in an ending store count of 234
stores in 33 states. Two of the Dick’s store closures were not related to the Galyan’s
acquisition. One was closed as its replacement was opened in 2003, and the second was closed due
to poor performance.
Income from Operations
Income from operations increased 30%, or $25.3 million to $110.9 million from $85.6 million in
2003 due primarily to increased sales partially offset by $20.3 million of merger integration and
store closing costs, an increase in selling, general and administrative costs and an increase in
pre-opening expenses.
Gross profit increased by $178.5 million, or 44%, to $586.5 million from $408.0 million in
2003. As a percentage of net sales, gross profit increased to 27.81% in 2004 from 27.74% in 2003.
The gross profit percentage increased primarily due to improved selling margins in the majority of
the Company’s product categories, a larger portion of cooperative advertising funds classified as a
reduction of cost of goods sold as opposed to a reduction of advertising expense (20 basis points)
as fewer funds were tied directly to advertising expense, partially offset by lower selling margins
in the Galyan’s stores due to the liquidation of non-go-forward product, and higher occupancy costs
as a percentage of sales (52 basis points).
Selling, general and administrative expenses increased by $128.9 million to $443.8 million
from $314.9 million in 2003 due primarily to an increase in store count and continued investment in
corporate and store infrastructure.
As a percentage of net sales, selling, general and administrative expenses decreased from
21.41% in 2003 to 21.04% in 2004. The decrease as a percentage of sales was due primarily to
decreased advertising expense (27 basis points), decreased corporate payroll expense due to the
synergies obtained from the acquisition of Galyan’s (13 basis points) and last year containing
higher information systems costs (14 basis points). These decreases were partially offset by the
classification of a larger portion of cooperative advertising funds as a reduction of cost of goods
sold as discussed above (20 basis points).
Merger integration and store closing costs associated with the purchase of Galyan’s were $20.3
million in 2004. These costs consisted primarily of $7.9 million of expenses related to the Dick’s
stores that are closing; $5.2 million of duplicative administrative costs; $1.9 million of costs
incurred during the four-day closing of all Galyan’s stores; and $5.3 million of other costs
comprised primarily of system conversion costs, advertising and relocation costs.
Pre-opening expenses increased by $4.0 million to $11.5 million from $7.5 million in 2003.
Pre-opening expenses were for the opening of 29 new stores and relocation of three stores in 2004
compared to the opening of 22 new stores and relocation of one store in 2003.
Gain on Sale of Investment
Gain on sale of investment was $11.0 million in 2004 as compared to $3.5 million in 2003. The
gain resulted from the sale of a portion of the Company’s non-cash investment in its third-party
internet commerce provider.
Interest Expense, Net
Interest expense, net, increased by $6.2 million to $8.0 million from $1.8 million in 2003 due
primarily to interest expense on our amended credit facility associated with the Galyan’s
acquisition and senior convertible notes offset by interest income of $1.2 million from our
investments in marketable securities and held-to-maturity investments which were sold in 2004.
Other Income
Other income in 2004 included a $1.0 million break-up fee related to our unsuccessful effort
to acquire the assets of a bankrupt retailer.
Our primary capital requirements are for working capital, capital improvements and to support
expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing
infrastructure improvements. The Company’s main source of liquidity in 2005 was our net cash
provided from operations. The main sources of liquidity in 2004 were our cash provided from
operations; borrowings under the credit facility; and net proceeds from the issuance of the
convertible notes.
The change in cash and cash equivalents is as follows:
Net cash (used in) provided by financing activities
(58,134
)
232,143
29,449
Net increase (decrease) in cash and cash equivalents
$
17,678
$
(74,788
)
$
82,554
Operating Activities
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-Christmas
inventory increase being the largest. In the fourth quarter, inventory levels are reduced in
connection with Christmas sales and this inventory reduction, combined with proportionately higher
net income, typically produces significantly positive cash flow.
Cash provided by operating activities increased by $61.7 million in 2005 to $169.5 million,
which consists primarily of higher net income of $4.1 million and an increase in the change in
assets and liabilities of $53.7 million.
Changes in Assets and Liabilities
The primary factors contributing to the increase in the change in assets and liabilities were
the change in accounts receivable, accounts payable and income taxes payable, partially offset by
an increase in the change in inventory.
The change
in accounts receivable was primarily a result of the decrease in the income tax
receivable due to the net operating losses acquired as a result of the Galyan’s transaction. The
increase in the change in accounts payable was primarily due to the increase in holiday receipts
remaining in accounts payable as compared to the prior year along with an increase in inventory
in-transit at year-end 2006 compared to 2005. The increase in the change in income taxes payable
was primarily related to the usage of the net operating losses in the current year as noted above.
Partially offsetting these cash inflows was the increase in inventory
which was primarily due to the
increase in inventory in-transit.
The cash flows from operating the Company’s stores is a significant source of liquidity, and
will continue to be used in 2006 primarily to purchase inventory, make capital improvements and
open new stores. All of the Company’s revenues are realized at the point-of-sale in the stores.
Investing Activities
Cash used in investing activities decreased by $321.1 million in 2005 to $93.7 million due
primarily to the acquisition of Galyan’s in 2004, which cost $369.6 million. Net capital
expenditures increased $23.9 million due to an increase in capital expenditures of $7.1 million and
a decrease in sale-leaseback proceeds of $16.8 million. We use cash in investing activities to
build new stores and remodel or relocate existing stores. Furthermore, net cash
used in investing activities includes purchases of information technology assets and
expenditures for distribution facilities and corporate headquarters. The following table presents
the major categories of capital expenditure activities:
During 2005, we opened 26 stores and relocated four stores compared to opening 29 stores and
the relocation of three stores during 2004. Sale-leaseback transactions covering store fixtures,
buildings and information technology assets also have the effect of returning to the Company cash
previously invested in these assets. There were no building sale-leasebacks during 2005. During
2004, we completed four building sale-leaseback transactions that generated proceeds of $21.7
million, of which $15.2 million of the capital expenditures were incurred in 2003.
The decrease in new, relocated and remodeled stores capital expenditures is primarily due to a
decrease in the number of stores with construction allowances in 2005 and last year’s conversion of
the Galyan’s stores to Dick’s stores. The increase in future store capital spend is due primarily
to the greater number of stores expected to open in 2006. Existing store capital spend increased
as a result of exterior sign conversions for the former Galyan’s stores along with updated
information technology assets in the existing stores as we continue to upgrade our infrastructure
and technology.
The Company also generated $1.9 million in proceeds from the sale of a portion of the
Company’s non-cash investment in its third-party Internet commerce service provider during 2005 as
compared to $12.0 million in proceeds during 2004.
Financing Activities
Cash used in financing activities increased by $290.3 million to $58.1 million primarily
reflecting higher payments under the Credit Agreement in 2005, and the impact of the net proceeds
from the senior convertible notes in 2004. Financing activities consisted primarily of the net
payments under the Credit Agreement and proceeds from transactions in the Company’s common stock.
The Company received proceeds of $11.1 million and $8.3 million from transactions in the Company’s
stock option and employee stock purchase plan in 2005 and 2004, respectively.
The Company’s liquidity and capital needs have generally been met by cash from operating
activities, the proceeds from the convertible notes and borrowings under the $350 million Credit
Agreement. Borrowing availability under the Credit Agreement is generally limited to the lesser of
70% of the Company’s eligible inventory or 85% of the Company’s inventory’s liquidation value, in
each case net of specified reserves and less any letters of credit outstanding. Interest on
outstanding indebtedness under the Credit Agreement currently accrues, at the Company’s option, at
a rate based on either (i) the prime corporate lending rate or (ii) at the LIBOR rate plus 1.25% to
1.75% based on the level of total borrowings during the prior three months. The Credit Agreement’s
term expires May 30, 2008.
There were no outstanding borrowings under the Credit Agreement as of January 28, 2006.
Borrowings under the Credit Agreement were $76.1 million as of January 29, 2005. Total remaining
borrowing capacity, after subtracting letters of credit as of January 28, 2006 and January 29, 2005
was $275.6 million and $184.1 million, respectively.
The Credit Agreement contains restrictions regarding the Company’s and related subsidiary’s
ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur
certain specified types of indebtedness or liens in excess of certain specified amounts, to pay
dividends or make distributions on the Company’s stock, to make certain investments or loans to
other parties, or to engage in lending, borrowing or other
commercial transactions with subsidiaries, affiliates or employees. Under the Credit
Agreement, the Company is obligated to maintain a fixed charge coverage ratio of not less than 1.0
to 1.0 in certain circumstances. The obligations of the Company under the Credit Agreement are
secured by interests in substantially all of the
Company’s personal property excluding store and
distribution center equipment and fixtures. As of January 28, 2006, the Company was in compliance
with the terms of the Credit Agreement.
Cash requirements in 2006, other than normal operating expenses, are expected to consist
primarily of capital expenditures related to the addition of new stores, enhanced information
technology and improved distribution infrastructure. The Company plans to open 40 new stores and
relocate two stores during 2006. The Company also anticipates incurring additional expenditures
for remodeling or relocating certain existing stores. While there can be no assurance that current
expectations will be realized, the Company expects capital expenditures, net of deferred
construction allowances and proceeds from sale leaseback transactions, to be approximately $90
million in 2006.
The Company believes that cash flows generated from operations and funds available under our
credit facility will be sufficient to satisfy our capital requirements through fiscal 2006. Other
new business opportunities or store expansion rates substantially in excess of those presently
planned may require additional funding.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet contractual obligations and commercial commitments as of
January 28, 2006 relate to operating lease obligations, future minimum guaranteed contractual
payments and letters of credit. The Company has excluded these items from the balance sheet in
accordance with generally accepted accounting principles.
Contractual Obligations and Other Commercial Commitments
The following table summarizes the Company’s material contractual obligations, including both
on- and off-balance sheet arrangements in effect at January 28, 2006, and the timing and effect
that such commitments are expected to have on the Company’s liquidity and capital requirements in
future periods:
Payments Due by Period
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
(Dollars in thousands)
Contractual obligations:
Senior convertible notes, net of discount (see Note 7)
$
172,500
$
—
$
—
$
—
$
172,500
Capital lease obligations (see Note 7)
7,909
97
240
413
7,159
Other long-term debt (see Note 7)
792
84
94
101
513
Interest payments
22,083
4,888
9,748
1,494
5,953
Operating lease obligations (see Note 8)
2,881,538
218,824
464,294
453,289
1,745,131
Future minimum guaranteed contractual
payments (see Note 14)
31,850
500
2,250
3,200
25,900
Total contractual obligations
$
3,116,672
$
224,393
$
476,626
$
458,497
$
1,957,156
The note references above are to the Notes to Consolidated Financial Statements.
The following table summarizes the Company’s other commercial commitments, including both
on- and off-balance sheet arrangements, in effect at January 28, 2006:
Less than
Total
1 year
(Dollars in thousands)
Other commercial commitments:
Documentary letters of credit
$
4,356
$
4,356
Standby letters of credit
13,430
13,430
Total other commercial commitments
$
17,786
$
17,786
The Company expects to fund these commitments primarily with operating cash flows generated in
the normal course of business.
Full Year 2006 – (53-Week Year) Comparisons to Fiscal 2005 – (52-Week Year)
•
Based on an estimated 55 million shares outstanding, the Company anticipates
reporting earnings per share of approximately $1.77 – 1.81 (which includes $0.27 of stock
option expense per share).
•
The earnings per share outlook includes the effect of the Company’s adoption
of SFAS 123R as of January 29, 2006. During 2006, the Company expects to incur
approximately $25 million of stock option expense on a pre-tax basis, or $0.27 per share
after tax.
•
Comparable store sales are expected to increase approximately 3% on a 52-week
to 52-week comparative basis. The converted Galyan’s stores will be included in the
comparable store base beginning in the second quarter of fiscal 2006.
•
The Company expects to open 40 new stores and relocate two stores in 2006.
First Quarter 2006
•
Based on an estimated 55 million shares outstanding, the Company anticipates
reporting earnings per share of $0.15 – 0.17 (which includes $0.07 of stock option expense
per share and $0.04 of store relocation expense per share).
•
Comparable store sales are expected to increase approximately 3-5%.
•
The Company expects to open seven new stores and relocate two stores in the first quarter.
Newly Issued Accounting Standards
In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which is a
revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” As permitted by FASB
No. 123, the Company currently accounts for share-based payments to employees using APB No. 25’s
intrinsic value method and, as such, recognizes no compensation cost for employee stock options or
our employee stock purchase plan. Accordingly, the adoption of SFAS 123R’s fair value method will
have an impact on the Company’s results of operations, although it will have no impact on the
Company’s overall financial position or cash flows. Had the Company adopted SFAS 123R in prior
periods, the impact of that standard for years ended January 28, 2006 and January 29, 2005 would
have approximated the impact of FASB No. 123 as described in the disclosure of proforma net income
and earnings per share in Note 1 of the Consolidated Financial Statements. SFAS 123R also requires
the benefits of tax deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized for such excess tax deductions were $14.7 million, $15.9 million
and $29.9 million during fiscal 2005, 2004 and 2003, respectively. The Company will adopt the new
requirements using the modified prospective transition method beginning in fiscal 2006.
In October 2005, the FASB issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental
Costs Incurred during a Construction Period.” This FSP requires rental costs associated with
operating leases that are incurred during a construction period to be recognized as rental expense.
The Company historically capitalized rental costs incurred during a construction period. The
guidance permits either retroactive or prospective treatment for periods beginning after December15, 2005. We will prospectively change our policy from capitalization to expensing beginning in
fiscal 2006. The adoption of this FSP will not have a material effect on the Company’s
consolidated financial statements.
In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No.
43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies that abnormal inventory costs such as costs of
idle facilities, excess freight and handling costs, and wasted materials are required to be
recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years
beginning after June 15, 2005. The adoption of SFAS 151 in fiscal 2006 is not expected to have a
material effect on the Company’s consolidated financial statements.
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 current selling price 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. Historically, the Company has rarely experienced significant occurrences of
obsolescence or slow moving inventory. However, future changes such as customer merchandise
preference, unseasonable weather patterns, 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 the 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 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 year, the Company confirms earned
allowances with vendors to ensure the amounts are recorded in accordance with the terms of the
contract.
Goodwill, Intangible Assets and Impairment of Long-Lived Assets
Goodwill and other intangible assets are tested for impairment on an annual basis. Our
evaluation of goodwill for impairment requires accounting judgments and financial estimates in
determining the fair value of such assets. If these judgments or estimates change in the future,
we may be required to record impairment charges for these assets.
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. In determining future cash flows, significant estimates are made by the Company
with respect to future operating results of each store over its remaining lease term. If such
assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Business Combinations
Our acquisition of Galyan’s was accounted for under the purchase method of accounting. The
assets and liabilities of Galyan’s were adjusted to their fair values and the excess of the
purchase price over the net assets acquired was recorded as goodwill. The determination of fair
value involved the use of an independent appraisal, estimates and assumptions which we believe
provided a reasonable basis for determining fair value.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company’s net exposure to interest rate risk will consist primarily of borrowings under
the senior secured revolving credit facility. The Company’s senior secured revolving credit
facility bears interest at rates that are benchmarked either to U.S. short-term floating rate
interest rates or one-month LIBOR rates, at the Company’s election. There were no borrowings
outstanding under the senior secured revolving credit facility as of January 28, 2006. Outstanding
borrowings under the senior secured revolving credit facility were $76.1 million as of January 29,2005. The impact on the Company’s annual net income of a hypothetical one percentage point
interest rate change on the average outstanding balances under the senior secured revolving credit
facility would be approximately $0.8 million based upon fiscal 2005 average borrowings.
Credit Risk
In February 2004, the Company sold $172.5 million issue price of senior unsecured convertible
notes due 2024 (“convertible notes”). In conjunction with the issuance of these convertible notes,
we also entered into a five-year convertible bond hedge and a five-year separate warrant
transaction with one of the initial purchasers (“the counterparty”) and/or certain of its
affiliates. Subject to the movement in our common stock price, we could be exposed to credit risk
arising out of net settlement of the convertible bond hedge and separate warrant transaction in our
favor. Based on our review of the possible net settlements and the credit strength of the
counterparty and its affiliates, we believe that we do not have a material exposure to credit risk
as a result of these share option transactions.
Impact of Inflation
The Company does not believe that operating results have been materially affected by inflation
during the preceding three fiscal years. There can be no assurance, however, that operating
results will not be adversely affected by inflation in the future.
Tax Matters
Presently, the Company does not believe that there are any tax matters that could materially
affect the consolidated financial statements.
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 our sales of cold
weather sporting goods and apparel. Any decrease in fiscal fourth quarter sales, whether because
of a slow holiday selling season, unseasonable weather conditions, or otherwise, could have a
material adverse effect on our business, financial condition and operating results for the entire
fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed hereunder are set forth on pages 36 through 56
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
ACCOUNTING AND FINANCIAL DISCLOSURE
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 the Company’s disclosure controls and procedures are effective, as of the
end of the period covered by this Report (January 28, 2006), 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 SEC rules and forms. There were
no changes in the Company’s internal control over financial reporting during the quarter ended
January 28, 2006, that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
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, 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 28, 2006. Management’s
assessment of the effectiveness of our internal control over financial reporting as of January 28,2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Board of Directors and Stockholders of
Dicks Sporting Goods, Inc.
We have audited management’s assessment, included in the accompanying Report of Management
on Internal Control Over Financial Reporting, that Dick’s Sporting Goods, Inc. and
subsidiaries (the “Company”) maintained effective internal control over financial reporting as of
January 28, 2006, based on criteria established in Internal Control—Integrated Framework 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. Our responsibility
is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
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, management’s assessment that the Company maintained effective internal control over
financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on
the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of January 28,2006, based on the criteria established in Internal Control—Integrated Framework 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 and financial statement schedule as of
and for the fiscal year ended January 28, 2006 of the Company and our reports dated March 20, 2006
expressed an unqualified opinion on those financial statements and financial statement schedule.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item other than the following information concerning the
Company’s code of ethics is incorporated by reference to the information under the captions
“Election of Directors- Directors Standing for Election”, “ Election of Directors – Other Directors
Not Standing for Election at this Meeting”, “Election of Directors- What Committees Has the Board
Established”, “Election of Directors- Does the Company Have a Code of Ethics” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s 2006 Proxy Statement.
The Company adopted a Code of Business Conduct and Ethics applicable to its associates,
officers and directors, which is a “code of ethics” as defined by applicable rules of the
Securities and Exchange Commission. The Company has also adopted charters for its audit committee,
compensation committee and governance and nominating committee, as well as corporate governance
guidelines. The code of ethics, committee charters and corporate governance guidelines are publicly
available on the Company’s website at http://www.dickssportinggoods.com/ and are available in
print, free of charge, to any stockholder who requests it. If the Company makes any amendments to
this code other than technical, administrative, or other non-substantive
amendments, or grants any waivers, including implicit waivers, from a provision of this code
applicable to the Company’s principal executive officers, 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 report on Form 8-K filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the information under
the caption
“Executive Compensation- Report of the Compensation Committee”, “Executive
Compensation- Severance and Other Arrangements”, “Executive Compensation- Summary Executive
Compensation Table”, “Executive Compensation- Option Grants in Fiscal 2005”, “Executive
Compensation- Option Exercises and Values for Fiscal 2005”, “Comparison of Cumulative Total
Returns”, “Compensation Committee Interlocks and Insider Participation”, and “Election of
Directors- How are Directors Compensated” in the Company’s 2006 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS
Part of the information required by this Item is incorporated by reference to the information
under the caption “Stock Ownership” in the Company’s 2006 Proxy Statement. The following table
summarizes information, as of January 28, 2006, 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.
Equity Compensation Plan Information
Number of Securities
Remaining Available
Number of Securities
for Future Issuance
to be Issued Upon
Weighted Average
Under Equity
Exercise of
Exercise Price of
Compensation Plans
Outstanding Options,
Outstanding Options,
(Excluding Securities
Warrants and Rights
Warrants and Rights
Reflected in Column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders (1)
11,639,387
(2)
$
15.32
9,606,303
(2)
Equity compensation plans
not approved by security holders
—
—
Total
11,639,387
9,606,303
(1)
Includes the 1992 Stock Option Plan, 2002 Stock Plan and Employee Stock Purchase Plan.
(2)
Represents shares of common stock. Under the 2002 Stock Plan and the Employee Stock Purchase
Plan, no options have been granted that are exerciseable for Class B common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the information under
the caption “Certain Relationships and Related Transactions” in the Company’s 2006 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the information under
the caption “Audit and Non-Audit Fees and Independent Public Accountants” in the Company’s 2006
Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements. The Financial Statements required to be filed hereunder are listed in
the Index to Consolidated Financial Statements on page 36 of this Form 10-K.
(2) Financial Statement Schedules. The consolidated financial statement schedule to be filed
hereunder is included on page 59 of this Form 10-K.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED
FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of
Dick’s Sporting Goods, Inc.
We have audited the accompanying consolidated balance sheets of Dick’s Sporting Goods, Inc. and
subsidiaries (the “Company”) as of January 28, 2006 and January 29, 2005, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash
flows for each of the three fiscal years in the period ended January 28, 2006. 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 28, 2006 and
January 29, 2005, and the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 28, 2006, 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 effectiveness of the Company’s internal control over financial reporting
as of January 28, 2006, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 20, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of
the Company’s internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Current portion of other long-term debt and capital leases
181
635
Total current liabilities
471,269
402,667
LONG-TERM LIABILITIES:
Senior convertible notes
172,500
172,500
Revolving credit borrowings
—
76,094
Other long-term debt and capital leases
8,520
8,775
Non-cash obligations for construction in progress — leased facilities
7,338
15,233
Deferred revenue and other liabilities
113,369
96,112
Total long-term liabilities
301,727
368,714
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, par value $.01 per share, authorized shares 5,000,000; none issued and outstanding
—
—
Common stock, par value $.01 per share, authorized shares 200,000,000; issued and outstanding
shares 36,545,332 and 34,790,358, at January 28, 2006 and January 29, 2005, respectively
365
348
Class B common stock, par value $.01 per share, authorized shares 40,000,000; issued and
outstanding shares 13,730,945 and 14,039,529, at January 28, 2006 and January 29, 2005, respectively
Operations —Dick’s Sporting Goods, Inc. (together with its subsidiaries, the “Company”) is a
specialty retailer selling sporting goods, footwear and apparel through its 255 stores, the
majority of which are located throughout the Eastern half of the United States. On July 29, 2004,
a wholly owned subsidiary of Dick’s Sporting Goods, Inc. completed the acquisition of Galyan’s
Trading Company, Inc (“Galyan’s). The Consolidated Statements of Income include the operation of
Galyan’s from the date of acquisition forward for the year ended January 29, 2005.
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.
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 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.
Interest income was $0.1 million, $1.2 million and $0.1 million for fiscal 2005, 2004 and 2003,
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 28, 2006 and
January 29, 2005 include $68.0 million and $60.6 million, respectively, of checks drawn in excess
of cash balances not yet presented for payment.
Accounts Receivable — Accounts receivable consists principally of amounts receivable from
vendors. The allowance for doubtful accounts totaled $1.9 million and $4.8 million, as of January28, 2006 and January 29, 2005, respectively.
Inventories — Inventories are stated at the lower of weighted average cost or market.
Inventory cost consists of the direct cost of merchandise including freight. Inventories are net
of shrinkage, obsolescence, other valuations and vendor allowances totaling $38.2 million and $37.7
million at January 28, 2006 and January 29, 2005, 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:
Buildings
40 years
Leasehold improvements
10-23 years
Furniture, fixtures and equipment
3-7 years
Vehicles
5 years
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.
Renewals and betterments are capitalized and repairs and maintenance are expensed as incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company periodically evaluates its long-lived assets to assess whether the carrying values
have been impaired, using the provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Goodwill and Intangible Assets - In accordance with SFAS No. 142, “Accounting for Goodwill and
Other Intangible Assets,”the Company will continue to assess on an annual basis whether goodwill
acquired in the acquisition of Galyan’s is impaired. Additional impairment assessments may be
performed on an interim basis if the Company deems it necessary. Finite-lived intangible assets
are amortized over their estimated useful economic lives and are periodically reviewed for
impairment. No impairment of goodwill or intangible assets was recorded during the years ended
January 28, 2006 and January 29, 2005.
Investments — Investments consist of shares of unregistered common stock and is carried at
fair value within other assets in accordance with SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities.” Fair value at the acquisition date was based upon the publicly
quoted equity price of GSI Commerce Inc. (“GSI”) stock, less a discount resulting from the
unregistered character of the stock. This discount was based on an independent appraisal obtained
by the Company. Unrealized holding gains and losses on the stock are included in other
comprehensive income and are shown as a component of stockholders’ equity as of the end of each
fiscal year (see Note 12).
Deferred Revenue and Other Liabilities - Deferred revenue and other liabilities is primarily
comprised of gift cards, deferred rent, which represents the difference between rent paid and the
amounts expensed for operating leases, deferred liabilities related to construction allowances,
unamortized capitalized rent during construction that was previously required to be capitalized
prior to the adoption of FSP 13-1, amounts deferred relating to the investment in GSI (see Note 12)
and advance payments under the terms of building sale-leaseback agreements. Deferred liabilities
related to construction allowances and capitalized rent, net of related amortization, was $73.3
million at both January 28, 2006 and January 29, 2005. Deferred revenue related to gift cards at
January 28, 2006 and January 29, 2005 was $58.1 million and $47.0 million, respectively.
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.
Merger Integration and Store Closing Costs – Merger integration and store closing costs
include the expense of closing Dick’s stores in connection with the Galyan’s acquisition,
advertising the re-branding of Galyan’s stores, duplicative administrative costs, recruiting and
system conversion costs. These costs were $37.8 million, $20.3 and $0 for fiscal 2005, 2004 and
2003 respectively.
Stock Split - On February 10, 2004, the Company’s Board of Directors approved a two-for-one
stock split, in the form of a stock dividend of the Company’s common shares for stockholders of
record as of March 19, 2004. The split was affected by issuing our stockholders of record one
additional share of common stock for every share of common stock held, and one additional share of
Class B common stock for every share of Class B common stock held. The applicable share and
per-share data for periods prior to fiscal 2004 included herein have been restated to give effect
to this stock split.
Earnings Per Share – The computation of basic earnings per share is based on the weighted
average number of shares outstanding during the period. The computation of diluted earnings per
share is based on the weighted
average number of shares outstanding plus the incremental shares that would be outstanding
assuming the exercise of dilutive stock options and warrants, calculated by applying the treasury
stock method.
Stock-Based Compensation – The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no
compensation expense has been recognized where the exercise price of the option was equal to or
greater than the market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to
stock-based employee compensation (see Note 9) (dollars in thousands, except per share data):
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects
(13,484
)
(11,761
)
(3,908
)
Proforma net income
$
59,496
$
57,144
$
48,500
Earnings per share:
Basic income applicable to common shareholders — as reported
$
1.47
$
1.44
$
1.17
Basic income applicable to common shareholders — proforma
$
1.19
$
1.19
$
1.08
Diluted income applicable to common shareholders — as reported
$
1.35
$
1.30
$
1.04
Diluted income applicable to common shareholders — proforma
$
1.10
$
1.08
$
0.96
The fair value of stock-based awards to employees is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average assumptions:
Employee Stock Options
Employee Stock Purchase Plan
2005
2004
2003
2005
2004
2003
Expected life (years)
5.29
5
3 - 5
0.5
0.5
0.5
Expected volatility
39% - 41
%
52% - 54
%
48% - 62
%
27% - 40
%
26% - 30
%
32% - 47
%
Risk-free interest rate
3.63% - 4.44
%
3.42% - 3.96
%
2.20% - 3.52
%
3.38% - 4.40
%
1.69% - 2.61
%
0.96% - 1.02
%
Expected dividend yield
—
—
—
—
—
—
Weighted average fair values
$
15.26
$
15.77
$
10.73
$
8.29
$
7.21
$
5.02
Income Taxes — The Company utilizes the asset and liability method of accounting for income
taxes under the provisions of SFAS No. 109, “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.
Revenue Recognition — Revenue from retail sales is recognized at the point-of-sale. Revenue
from cash received for gift cards is deferred, and the revenue is recognized upon the redemption of
the gift card. Sales are recorded net of estimated returns. Revenue from layaway sales is
recognized upon receipt of final payment from the customer.
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 $96.1 million, $78.3 million and $54.4 million for fiscal 2005, 2004 and 2003,
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Fair Value of Financial Instruments —The Company has financial instruments, which include
long-term debt and revolving debt. The carrying amounts of the Company’s debt instruments
approximate their fair value, estimated using the Company’s current incremental borrowing rates for
similar types of borrowing arrangements.
Segment Information — The Company is a specialty retailer that offers a broad range of
products in its specialty retail stores 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 operations of the Company are one reportable segment.
The following table sets forth the approximate amount of net sales attributable to hardlines,
apparel and footwear for the periods presented (dollars in millions):
Fiscal Year
Merchandise Category
2005
2004
2003
Hardlines
$
1,497
$
1,216
$
865
Apparel
672
530
340
Footwear
456
363
266
Total net sales
$
2,625
$
2,109
$
1,471
Newly Issued Accounting Pronouncements – In December 2004, the FASB issued Statement No. 123R,
“Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation.” As permitted by FASB No. 123, the Company currently accounts for share-based
payments to employees using APB No. 25’s intrinsic value method and, as such, recognizes no
compensation cost for employee stock options or our employee stock purchase plan. Accordingly, the
adoption of SFAS 123R’s fair value method will have an impact on the Company’s results of
operations, although it will have no impact on the Company’s overall financial position or cash
flows. Had the Company adopted SFAS 123R in prior periods, the impact of that standard for years
ended January 28, 2006 and January 29, 2005 would have approximated the impact of FASB No. 123 as
described in the disclosure of proforma net income and earnings per share in Note 1 of the
Consolidated Financial Statements. SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after adoption. While the
Company cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating cash flows recognized
for such excess tax deductions were $14.7 million, $15.9 million and $29.9 million during fiscal
2005, 2004 and 2003, respectively. The Company will adopt the new requirements using the modified
prospective transition method beginning in fiscal 2006. During 2006, the Company expects to incur
approximately $25 million of stock option expense on a pre-tax basis, or $0.27 per share after tax.
In October 2005, the FASB issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental
Costs Incurred during a Construction Period.” This FSP requires rental costs associated with
operating leases that are incurred during a construction period to be recognized as rental expense.
The Company historically capitalized rental costs incurred during a construction period. The
guidance permits either retroactive or prospective treatment for periods beginning after December15, 2005. We will prospectively change our policy from capitalization to
expensing beginning in fiscal 2006. The adoption of this FSP is not expected to have a
significant effect on the Company’s consolidated financial statements.
In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No.
43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies that abnormal inventory costs such as costs of
idle facilities, excess freight and handling costs, and waste materials are required to be
recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years
beginning after June 15, 2005. The adoption of SFAS 151 in fiscal 2006 is not expected to have a
material effect on the Company’s consolidated financial statements.
2. Acquisition
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common stock of Galyan’s for
$16.75 per share in cash, and Galyan’s became a wholly owned subsidiary of Dick’s. The Company has
recorded $156.6 of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
goodwill as the excess of the purchase price of $369.6 million over the fair value of the net
amounts assigned to assets acquired and liabilities assumed. The Company received an independent
appraisal for certain assets to determine their fair value. The purchase price allocation is
final, except for any potential income tax changes that may arise. The following table summarizes
the fair values of the assets acquired and liabilities assumed (in thousands):
Inventory
$
158,780
Other current assets
65,603
Property and equipment, net
157,211
Other long-term assets, excluding goodwill
4,458
Goodwill
156,628
Favorable leases
5,310
Accounts payable
(93,944
)
Accrued expenses
(61,223
)
Other current liabilities
(9,937
)
Long-term debt
(5,859
)
Other long-term liabilities
(7,455
)
Fair value of net assets acquired, including intangibles
$
369,572
As of January 28, 2006, the Company had accrued expenses of $0.1 million related to Galyan’s
associate severance and relocation, and a net receivable of $0.6 million as our projected sublease
cash flows exceed our anticipated rent payments for two of the closed former Galyan’s stores.
These costs were accounted for under Emerging Issues Task Force No. 95-3, “Recognition of
Liabilities in Connection with a Purchase Business Combination”.
The following table summarizes the activity in fiscal 2005 and fiscal 2004 (in thousands):
Inventory
Liabilities Established
Reserve
Associate Severance,
for the Closing
for Discontinued
Retention and
of Galyan’s Stores and
Galyan’s
Relocation
Corporate Headquarters
Merchandise
Total
Liabilities and reserves established
in conjunction with the Galyan’s
acquisition at July 31, 2004
The $6.3 million and $16.4 million of inventory reserve utilized for the clearance of
discontinued Galyan’s merchandise in fiscal 2005 and 2004, respectively, was recorded as a
reduction of cost of sales.
The following unaudited proforma summary presents information as if Galyan’s had been acquired
at the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
beginning of each period presented. The proforma amounts include certain reclassifications to
Galyan’s amounts to conform them to the Company’s presentation, and an increase in interest expense
of $3.9 million and $7.7 million for the years ended January 29, 2005 and January 31, 2004,
respectively, to reflect the increase in borrowings under the amended credit facility to finance
the acquisition as if it had occurred at the beginning of each period presented.
The proforma amounts do not reflect any benefits from economies which may be achieved from
combining the operations.
The proforma information does not necessarily reflect the actual results that would have
occurred had the companies been combined during the periods presented, nor is it necessarily
indicative of the future results of operations of the combined companies (unaudited, in thousands,
except per share amounts).
In connection with the acquisition of Galyan’s on July 29, 2004, the Company recorded goodwill
and other intangible assets in accordance with SFAS No. 141,
“Business Combinations.”The Company
recorded $156.6 million of goodwill as the excess of the purchase price of $369.6 million over the
fair value of the net amounts assigned to assets acquired and liabilities assumed. In accordance
with SFAS No. 142, “Accounting for Goodwill and Other
Intangible Assets,”the Company will continue
to assess, on an annual basis, whether goodwill is impaired. Additional impairment assessments may
be performed on an interim basis if the Company deems it necessary. Finite-lived intangible assets
are amortized over their estimated useful economic lives and periodically reviewed for impairment.
No amounts assigned to any intangible assets are deductible for tax purposes. The $0.6 million
decrease in goodwill during 2006 was a result of income tax adjustments.
Acquired intangible assets subject to amortization at January 28, 2006 were as follows (in
thousands):
2005
2004
Intangible Assets Subject to
Accumulated
Accumulated
Amortization:
Gross Amount
Amortization
Gross Amount
Amortization
Favorable leases
$
5,310
$
(45
)
$
5,310
$
1
The estimated weighted average economic useful life is 11 years. The annual amortization
expense of the favorable leases recorded as of January 28, 2006 is expected to be as follows (in
thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Store and Corporate Office Closings
As a result of the Galyan’s acquisition, the Company closed six Dick’s Sporting Goods stores
and four Galyan’s stores, the Galyan’s clearance center and the Galyan’s corporate headquarters.
See Note 2 for a summary of the activity of the Galyan’s store closing reserves during fiscal 2005
and 2004.
The following table summarizes the activity of the Dick’s store closing reserves and
write-offs established due to store closings as a result of the
Galyan’s acquisition (in thousands):
Of the $21.5 million of expense charged to earnings, essentially all was recorded in merger
integration and store closing costs in the Consolidated Statements of Income. Of the $20.2 million
total liability, $4.8 million is recorded in accrued expenses and $15.4 million is recorded in
long-term deferred revenue and other liabilities in the Consolidated Balance Sheets. The amounts
above relate to store rent, common area maintenance and real estate taxes, and other contractual
obligations.
5. 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):
2005
2004
Buildings and land
$
31,820
$
34,280
Leasehold improvements
313,075
290,236
Furniture, fixtures and equipment
280,376
255,318
625,271
579,834
Less accumulated depreciation and amortization
(254,994
)
(230,736
)
Net property and equipment
$
370,277
$
349,098
6. Accrued Expenses
Accrued expenses consist of the following as of the end of the fiscal periods (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2005
2004
Senior convertible notes
$
172,500
$
172,500
Revolving line of credit
—
76,094
Capital leases
7,909
8,427
Third-party debt
752
793
Related party debt
40
190
Total debt
181,201
258,004
Less: current portion
(181
)
(635
)
Total long-term debt
$
181,020
$
257,369
Senior Convertible Notes — On February 18, 2004, the Company completed a private offering of
$172.5 million issue price of senior unsecured convertible notes due 2024 (“senior convertible
notes”) in transactions pursuant to Rule 144A under the Securities Act of 1933, as amended. Net
proceeds of $145.6 million to the Company are net of transaction costs associated with the offering
of $6.2 million, and the net cost of a convertible bond hedge and a separate warrant transaction.
The hedge and warrant transactions effectively increase the conversion price associated with the
senior convertible notes during the term of these transactions from 40% to 100%, or from $39.31 to
$56.16 per share, thereby reducing the potential dilutive economic effect to shareholders upon
conversion.
The senior convertible notes bear interest at an annual rate of 2.375% of the issue price
payable semi-annually on August 18th and February 18th of each year until
February 18, 2009, with the first interest payment made on August 18, 2004. After February 18,2009, the senior convertible notes will not pay cash interest, but the initial principal amount of
the notes will accrete daily at an original issue discount rate of 2.625%, until maturity on
February 18, 2024, when a holder will receive $1,000 per note. The senior convertible notes are
convertible into the Company’s common stock (the “common stock”) at an initial conversion price in
each of the first 20 fiscal quarters following issuance of the notes of $39.31 per share, upon the
occurrence of certain events. Thereafter, the conversion price per share of common stock increases
each fiscal quarter by the accreted original issue discount for the quarter. Upon conversion of a
note, the Company is obligated to pay cash in lieu of issuing some or all of the shares of common
stock, in an amount up to the accreted principal amount of the note, and whether any shares of
common stock are issuable in addition to this cash payment would depend upon the then market price
of the Company’s common stock. The senior convertible notes will mature on February 18, 2024,
unless earlier converted or repurchased. The Company may redeem the notes at any time on or after
February 18, 2009, at its option, at a redemption price equal to the sum of the issue price,
accreted original discount and any accrued cash interest, if any. The total face amount of the
senior convertible notes was $255.1 million prior to the original discount of $82.6 million.
Concurrently, with the sale of the senior convertible notes, the Company purchased a bond hedge
designed to mitigate the potential dilution to shareholders from the conversion of the senior
convertible notes. Under the five year terms of the bond hedge, one of the initial purchasers
(“the counterparty”) will deliver to the Company upon a conversion of the bonds a number of shares
of common stock based on the extent to which the then market price exceeds $39.31 per share. The
aggregate number of shares that the Company could be obligated to issue upon conversion of the
senior convertible notes is 4,388,024 shares.
The cost of the purchased bond hedge was partially offset by the sale of warrants (the
“warrants”) to acquire up to 8,775,948 shares of the common stock to the counterparty with whom the
Company entered into the bond hedge. The warrants are exercisable in year five at a price of
$56.16 per share. The warrants may be settled at the Company’s option through a net share
settlement or a net cash settlement, either of which would be based on the extent to which the then
market price exceeds $56.16 per share.
The net effect of the purchased bond hedge and the warrants is to either reduce the potential
dilution from the conversion of the senior convertible notes if the Company elects a net share
settlement or to increase the net cash proceeds of the offering if a net cash settlement is elected
if the senior convertible notes are converted at a time when the market price of the common stock
exceeds $39.31 per share. There would be dilution from the conversion of the senior convertible
notes to the extent that the then market price per share of the common stock exceeds $56.16 at the
time of conversion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revolving Credit Agreement — On July 28, 2004, the Company executed its Second Amended and
Restated Credit Agreement (the “Credit Agreement”), between Dick’s and lenders named therein. The
Credit Agreement became effective on July 29, 2004 and provides for a revolving credit facility in
an aggregate outstanding principal amount of up to $350 million, including up to $75 million in the
form of letters of credit. The Credit Agreement’s term was extended to May 30, 2008.
As of January 28, 2006 and January 29, 2005, the Company’s total remaining borrowing capacity,
after subtracting letters of credit, under the Credit Agreement was $275.6 million and $184.1
million, respectively. Borrowing availability under the Company’s Credit Agreement is generally
limited to the lesser of 70% of the Company’s eligible inventory or 85% of the Company’s
inventory’s liquidation value, in each case net of specified reserves and less any letters of
credit outstanding. Interest on outstanding indebtedness under the Credit Agreement is based upon
a formula at either (a) the prime corporate lending rate or
(b) the one-month London Interbank Offering Rate (“LIBOR”), plus the applicable margin of 1.25% to 1.75% based on the level of excess
borrowing availability. Borrowings are collateralized by the assets of the Company, excluding
store and distribution center equipment and fixtures that have a net carrying value of $98.4
million as of January 28, 2006.
At January 28, 2006 and January 29, 2005, the prime rate was 7.25% and 5.25%, respectively,
and LIBOR was 4.57% and 2.59%, respectively. There were no outstanding borrowings at January 28,2006. The borrowings outstanding at January 29, 2005 were $76.1 million.
The Credit Agreement contains restrictive covenants including the maintenance of a certain
fixed charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances and prohibits payment of
any dividends.
The Credit Agreement provides for letters of credit not to exceed the lesser of (a) $75
million, (b) $350 million less the outstanding loan balance and (c) the borrowing base minus the
outstanding loan balance. As of January 28, 2006 and January 29, 2005, the Company had outstanding
letters of credit totaling $17.8 million and $17.1 million, respectively.
The following table provides information about the Credit Agreement borrowings as of and for
the periods (dollars in thousands):
2005
2004
Balance, fiscal period end
$
—
$
76,094
Average interest rate
4.76
%
3.30
%
Maximum outstanding during the year
$
251,963
$
290,755
Average outstanding during the year
$
134,610
$
94,682
Other Debt — Other debt, exclusive of capital lease obligations, consists of the following as
of the end of the fiscal periods (dollars in thousands):
2005
2004
Third-Party:
Note payable, due in monthly installments of approximately
$3, including interest at 4%, through 2020
$
752
$
793
Related Party:
Note payable to a former principal stockholder, due in monthly installments
of approximately $14, including interest at 12%, through May 1, 2006
40
190
Total debt
792
983
Less current portion of:
Third-party
(44
)
(41
)
Related party
(40
)
(149
)
Total Long-Term Debt
$
708
$
793
Certain of the agreements pertaining to long-term debt contain financial and other restrictive
covenants, none of which are more restrictive than those of the Credit Agreement as discussed
herein.
Scheduled principal payments on other long-term debt as of January 28, 2006 are as follows (in
thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal Year
2006
$
84
2007
46
2008
48
2009
49
2010
52
Thereafter
513
$
792
Capital Lease Obligations —The Company leases two buildings from the estate of a former
stockholder, who is related to current stockholders of the Company, under a capital lease entered into May 1,
1986 which expires in April 2021. In addition, the Company has a capital lease for a store
location with a fixed interest rate of
10.6% that matures in 2024. The gross and net carrying values of assets under capital leases are
approximately $8.2 million and $4.6 million, respectively as of January 28, 2006 and $9.0 million
and $5.3 million, respectively as of January 29, 2005.
Scheduled lease payments under capital lease obligations as of January 28, 2006 are as follows
(in thousands):
Fiscal Year
2006
$
888
2007
888
2008
905
2009
953
2010
953
Thereafter
13,113
17,700
Less:
amounts representing interest
9,791
Present value of net scheduled lease payments
7,909
Less: amounts due in one year
97
$
7,812
8. Operating Leases
The Company leases substantially all of its stores, office facilities, distribution centers
and equipment, under noncancelable operating leases that expire at various dates through 2027.
Certain of the store lease agreements contain renewal options for
additional periods of five-to-ten
years and contain certain rent escalation clauses. 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 was approximately $196.3 million, $144.0
million and $97.1 million for fiscal 2005, 2004 and 2003, respectively. The Company entered into
sale-leaseback transactions related to store fixtures, buildings and equipment that resulted in
cash receipts of $18.8 million, $35.7 million and $14.7 million for fiscal 2005, 2004 and 2003,
respectively.
Scheduled lease payments due (including lease commitments for 47 stores not yet opened at
January 28, 2006) under noncancelable operating leases as of January 28, 2006 are as follows (in
thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal Year
2006
$
218,824
2007
232,051
2008
232,243
2009
228,970
2010
224,319
Thereafter
1,745,131
$
2,881,538
The Company has subleases related to certain of its operating lease agreements. During each
of fiscal 2005, 2004 and 2003, the Company recognized sublease income of $1.0 million.
9. Stockholders’ Equity and Employee Stock Plans
Stock Option Plans —At January 28, 2006, the aggregate number of common shares reserved for
grant under the Company’s 2002 Stock Option Plan (the “Plan”) is 19,866,000 shares. The stock
option activity during the fiscal years ended is as follows:
Stock options generally vest over four years in 25% increments from the date of grant and
expire 10 years from the date of grant. As of January 28, 2006, there were 9,606,303 shares of
common stock available for issuance pursuant to future stock option grants.
Additional information regarding options outstanding as of January 28, 2006, is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Weighted
Remaining
Average
Average
Range of
Contractual
Exercise
Exercise
Exercise Prices
Shares
Life (Years)
Price
Shares
Price
$1.08 - $2.17
2,068,498
4.17
$
1.93
2,068,498
$
1.93
$6.00 - $10.48
3,867,821
6.74
6.51
740,939
7.73
$15.29 - $22.87
2,501,255
7.71
21.69
468,219
18.36
$25.07 - $36.17
3,201,813
8.47
29.64
594,084
26.03
$1.08 - $36.17
11,639,387
6.97
$
15.32
3,871,740
$
8.72
Employee Stock Purchase Plan – The Company has an employee stock purchase plan, which provides
that eligible employees may purchase shares of the Company’s common stock. There are two offering
periods in a fiscal year, one ending on June 30 and the other on December 31, or as otherwise
determined by the Company’s compensation committee. The employee’s purchase price is 85% of the
lesser of the fair market value of the stock on the first business day or the last business day of
the semi-annual offering period. Employees may purchase shares having a fair market value of up to
$25,000 for all purchases ending within the same calendar year. No compensation expense is
recorded in connection with the plan. The total number of shares issuable under the plan is
2,310,000.
There were 125,989 and 137,240 shares issued under the plan during fiscal 2005 and 2004 and
940,877 shares available for future issuance.
Common Stock, Class B Common Stock and Preferred Stock – During fiscal 2002, the Company
amended its corporate charter to, among other things, provide for the authorization of the issuance
of up to 100,000,000 shares of common stock, 20,000,000 shares of Class B common stock, and
5,000,000 shares of preferred stock.
The 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 and relatives of the related
party hold all of the Class B common stock. These shares can only be held by members of this group
and are not publicly tradeable. Class B common stock can be converted to common stock at the
holder’s option.
During fiscal 2004, the Company amended and restated its Certificate of Incorporation to
increase the number of authorized shares of our common stock, par value $0.01 per share from
100,000,000 to 200,000,000 and Class B common stock, par value $0.01 per share from 20,000,000 to
40,000,000.
10. Income Taxes
The components of the provision for income taxes are as follows (in thousands):
2005
2004
2003
Current:
Federal
$
41,961
$
22,645
$
21,543
State
7,295
7,280
3,696
49,256
29,925
25,239
Deferred:
Federal
(928
)
15,603
8,491
State
326
408
1,208
(602
)
16,011
9,699
Total provision
$
48,654
$
45,936
$
34,938
The provision for income taxes differs from the amounts computed by applying the federal
statutory rate as follows for the following periods:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2005
2004
2003
Federal statutory rate
35.0
%
35.0
%
35.0
%
State tax, net of federal benefit
4.6
%
4.3
%
5.0
%
Other permanent items
0.4
%
0.7
%
0.0
%
Effective income tax rate
40.0
%
40.0
%
40.0
%
Components of deferred tax assets (liabilities) consist of the following as of the fiscal
periods ended (in thousands):
2005
2004
Store closings expense
$
14,269
$
3,614
Employee benefits
8,454
6,356
Other accrued expenses not currently deductible for tax purposes
8,273
12,035
Deferred rent
7,709
6,232
Insurance
3,491
2,892
State net operating loss carryforwards
2,242
4,203
Total deferred tax assets
44,438
35,332
Property and equipment
(16,288
)
(14,530
)
Inventory
(18,762
)
(11,965
)
Total deferred tax liabilities
(35,050
)
(26,495
)
Net deferred tax asset
$
9,388
$
8,837
The gross deferred tax asset from tax loss carryforwards of $2.2 million represents
approximately $49.3 million of state net operating loss carryforwards, of which $1.9 million
expires in the next ten years. The remaining $47.4 million expires between 2019 and 2025. In
2005, of the $9.4 million net deferred tax asset, $0.4 million is recorded in current assets and
$9.0 million is recorded in other long-term assets in the Consolidated Balance Sheets. In 2005, of
the $8.8 million net deferred tax asset, $8.0 million is recorded in current assets and $0.8
million is recorded in other long-term assets in the Consolidated Balance Sheets.
11. Earnings per Common Share
Earnings per common share is calculated using the principles of SFAS No. 128, “Earnings Per
Share” (“EPS”). The number of incremental shares from the assumed exercise of stock options is
calculated by applying the treasury stock method. The aggregate number of shares, totaling
4,388,024, that the Company could be obligated to issue upon conversion of our $172.5 million issue
price of senior convertible notes was excluded from the 2005 calculation as they were
anti-dilutive. The earnings per share calculations are as follows (in thousands, except per share
data):
Fiscal Year Ended
2005
2004
2003
Earnings per common share — Basic:
Net income
$
72,980
$
68,905
$
52,408
Weighted average common shares outstanding
49,792
47,978
44,774
Earnings per common share
$
1.47
$
1.44
$
1.17
Earnings per common share — Diluted:
Net income
$
72,980
$
68,905
$
52,408
Weighted average common shares outstanding — basic
49,792
47,978
44,774
Stock options
4,187
4,943
5,506
Weighted
average common shares outstanding — diluted
53,979
52,921
50,280
Earnings per common share
$
1.35
$
1.30
$
1.04
12. Investments
In April 2001, the Company entered into an Internet commerce agreement with GSI. Under the
terms of this 10-year agreement, GSI is responsible for all financial and operational aspects of
the Internet site, which
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
operates under the domain name “DicksSportingGoods.com,” which name has been licensed to GSI by the
Company. The Company and GSI entered into a royalty arrangement that was subsequently converted
into an equity ownership at a price that was less than the GSI market value per share. The equity
ownership consists of unregistered common stock of GSI and warrants to purchase unregistered common
stock of GSI (see Note 1). The Company recognized the difference between the fair value of the GSI
stock and its cost as deferred revenue to be amortized over the 10-year term of the agreement.
Deferred revenue at January 28, 2006 and January 29, 2005 was $2.3 million and $2.8 million,
respectively. In total, the number of shares the Company holds represents less than 5% of GSI’s
outstanding common stock.
During fiscal 2005, 2004 and 2003, the Company realized a pre-tax gain of $1.8 million, $11.0
million and $3.5 million, respectively, resulting from the sale of a portion of the Company’s
investment in GSI.
13. Retirement Savings Plan
The Company’s retirement savings plan, established pursuant to Section 401(k) of the Internal
Revenue Code, covers all employees who have completed one year of service and have attained 21
years of age. Under the terms of the retirement savings plan, the Company provides a matching
contribution equal to 50% of each participant’s contribution up to 10% of the participant’s
compensation, and may make a discretionary contribution. Total expense recorded under the plan was
$2.6 million, $1.8 million and $1.9 million for fiscal 2005, 2004 and 2003, respectively. The
fiscal 2003 expense included a discretionary contribution of $0.6 million.
14. Commitments and Contingencies
The Company enters into licensing agreements for the exclusive rights to use certain
trademarks extending through 2020. Under specific agreements, the Company is obligated to pay an
annual guaranteed minimum royalty. The aggregate amount of required payments at January 28, 2006
is as follows (in thousands):
Fiscal Year
2006
$
500
2007
1,000
2008
1,250
2009
1,500
2010
1,700
Thereafter
25,900
$
31,850
In addition, certain agreements require the Company to pay additional royalties if the
qualified purchases are in excess of the guaranteed minimum. There were no payments made under
agreements requiring minimum guaranteed contractual amounts during fiscal 2005.
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. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information in fiscal years 2005 and 2004 is as follows (in
thousands, except earnings per share):
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.
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.
We have audited the consolidated financial statements of Dick’s Sporting Goods, Inc. and
subsidiaries (the “Company”) as of January 28, 2006 and January 29, 2005, and for each of the three
fiscal years in the period ended January 28, 2006, management’s assessment of the effectiveness of
the Company’s internal control over financial reporting as of January 28, 2006, and the
effectiveness of the Company’s internal control over financial reporting as of January 28, 2006,
and have issued our reports thereon dated March 20, 2006; such consolidated financial statements
and reports are included in this Form 10-K. Our audits also included the consolidated financial
statement schedule of the Company listed in Item 15 of Part IV. 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.
Second Amended and Restated Credit Agreement
dated as of July 28, 2004 among Dick’s Sporting
Goods, Inc., the Lenders Party thereto and
General Electric Capital Corporation
Registration Rights Agreement among the
Registrant, Merrill Lynch, Pierce, Fenner Smith
Incorporated, Banc of America Securities LLC and
UBS Securities LLC dated as of February 18, 2004
Senior Convertible Notes due 2024, Purchase
Agreement among Dick’s Sporting Goods, Inc.,
Merrill Lynch, Pierce, Fenner Smith Incorporated,
Banc of America LLC and UBS Securities LLC, dated
as of February 11, 2004
Consent to Second Amended and Restated Credit
Agreement, dated as of December 23, 2004, between
the Registrant and General Electric Capital
Corporation
Incorporated by
reference to
Exhibit 10.4 to the
Registrant’s
Statement on Form
S-1, File No.
333-96587, filed on
July 17, 2002
10.3
Registrant’s 2002 Stock Plan, as amended
Incorporated by
reference to
Exhibit 4.1 to the
Registrant’s
Registration
Statement on Form
S-8, File No.
333-102385, filed
on January 7, 2003
10.4
Registrant’s Employee Stock Purchase Plan
Incorporated by
reference to
Exhibit 10.4 to the
Registrant’s
Statement on Form
S-1, File No.
333-96587, filed on
July 17, 2002
10.5
Dick’s Sporting Goods, Inc. (successor in interest
to Dick’s Acquisition Corp.) 12% Subordinated
Debenture, dated May 1, 1986 issued to Richard J.
Stack
Offer Letter between the Company and William R.
Newlin, Chief Administrative Officer and Executive
Vice President
Incorporated by
reference to Exhibit 10.1 to the
Registrant’s Form 10-Q, File No.
001-31463, filed on December 9, 2003
10.14
Form of Confirmation of OTC Convertible Note Hedge,
Amended and Restated as of February 13, 2004
Incorporated by
reference to Exhibit 10.6 to the
Registrant’s Form 8-K, File No.
001-31463, filed on February 23, 2004
10.15
Shareholder Tender Agreement, dated as of June 21,2004, by and among the Registrant, Diamondbacks
Acquisition Inc. and certain shareholders of Galyan’s Trading Company, Inc.
Incorporated by
reference to Exhibit 10.1 to the
Registrant’s Form 8-K, File No.
001-31463, filed on June 22, 2004.
Amended and Restated Lease Agreement, originally
dated February 4, 1999, for distribution center
located in Smithton, Pennsylvania, effective as
of May 5, 2004
Incorporated by
reference to Exhibit 10.5 to the
Registrant’s Form
10-Q, File No.
001-31463, filed on
September 9, 2004.
10.17
Description of Compensation Payable to Non-
Management Directors
Incorporated by
reference to
Exhibit 10.1 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
March 8, 2005.
10.18
Consent and Waiver to the Amended and Restated
Credit Agreement, dated as of June 14, 2004,
among Dick’s Sporting Goods, Inc., the lending
party thereto and General Electric Capital
Corporation, as agent for the lenders
Incorporated by
reference to
Exhibit 10.2 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
June 22, 2004
10.19
Lease Agreement dated August 31, 1999, between
CP Gal Plainfield, LLC and Galyan’s Trading
Company, Inc
Incorporated by
reference to
Exhibit 10.16 to
Galyan’s Trading
Company, Inc.’s
Form S-1, File No.
333-57848, filed
May 7, 2001
10.20
Amendment No. 1 to First Amendment to Lease
Agreement, dated December 21, 2000, between
CP Gal Plainfield, LLC and Galyan’s Trading
Company, Inc.
Incorporated by
reference to
Exhibit 10.17 to
Galyan’s Trading
Company, Inc.’s
Form S-1, File No.
333-57848, filed
May 7, 2001
10.21
Waiver of Confirmation of OTC Convertible Note
Hedge Agreement entered into among the Registrant
and Merrill Lynch International on February 13, 2004
Incorporated by
reference to
Exhibit 10.1 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
December 9, 2004.
10.22
Amended and Restated Lease Agreement originally
dated August 31, 1999, for distribution center
located in Plainfield, Indiana, effective as of
November 30, 2005, between CP Gal Plainfield,
LLC and Dick’s Sporting Goods, Inc.
Certification of Edward W. Stack, Chairman and
Chief Executive Officer, dated as of March 23,2006 and made pursuant to Rule 13a-14(a)
of the Securities
Exchange Act of 1934, as amended.
Certification of Michael F. Hines, Executive
Vice President and Chief Financial Officer,
dated as of March 23, 2006 and made pursuant
to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
Certification of Edward W. Stack, Chairman and
Chief Executive Officer, dated as of March 23,2006 and made pursuant to Section 1350, Chapter
63 of Title 18,
United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
Certification of Michael F. Hines, Executive
Vice President and Chief Financial Officer,
dated as of March 23, 2006 and made pursuant
to Section 1350, Chapter
63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002