DICK’S SPORTING GOODS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and related notes appearing elsewhere in this
Annual Report on Form 10-K. This Annual Report on Form 10-K contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Refer to "Forward-Looking Statements" and Part I,
Item 1A. "Risk Factors".
Business Overview
We are a leading omni-channel sporting goods retailer offering an extensive
assortment of authentic, high-quality sports equipment, apparel, footwear and
accessories. In addition to DICK'S Sporting Goods stores, we own and operate
Golf Galaxy, Public Lands and Going Going Gone! specialty concept stores, and
offer our products both online and through our mobile apps. We also own and
operate DICK'S House of Sport and Golf Galaxy Performance Center, as well as
GameChanger, a youth sports mobile app for scheduling, communications, live
scorekeeping and video streaming. When used in this Annual Report on Form 10-K,
unless the context otherwise requires or specifies, any reference to "year" is
to our fiscal year, which ends on the Saturday closest to the end of January
each year.
Since 2017, we have transformed our business to drive sustainable growth in
sales and profitability. During this time, we meaningfully improved our
merchandise assortment through strong relationships with our key brand partners,
which provided access to highly differentiated product and our vertical brands.
We also enhanced our store selling culture and service model and incorporated
additional experiential elements and technology into our stores to engage our
athletes. Finally, we invested in technology and data science to improve our
pricing strategy, digital marketing and personalization capabilities. Consumers
have also made lasting lifestyle changes in recent years, increasing their focus
on health and fitness, sports and outdoor activities which has increased demand
for our products. As a result of our core strategies, foundational improvements
and these strong secular consumer trends, net sales increased 41.3% in fiscal
2022 compared to fiscal 2019, and reflects growth in our key priority categories
including footwear, athletic apparel, team sports and golf.
Our profitability is primarily influenced by growth in comparable store sales,
the strength of our merchandise margins and ability to manage operating
expenses. In addition to the structurally higher sales compared to pre-COVID
levels, our merchandise margins increased over 300 basis points as a percentage
of net sales in fiscal 2022 as compared to fiscal 2019, as we've maintained the
majority of the merchandise expansion that we drove over the prior two years
with our differentiated product assortment, combined with our disciplined
pricing strategy and favorable sales mix. We've also experienced meaningful
leverage on fixed occupancy costs and selling, general and administrative costs,
due to the significant sales increase. With our structurally higher sales,
expanded merchandise margins, and operating expense leverage, our pre-tax income
as a percentage of net sales grew from 4.7% in fiscal 2019 to 11.2% in fiscal
2022 and our earnings per diluted share grew from $3.34 in fiscal 2019 to $10.78
in fiscal 2022.
Field & Stream Exit
During the fourth quarter of 2022, we decided to exit the Field & Stream brand
(the "Field & Stream Exit"). We plan to convert the existing 17 Field & Stream
stores, the majority of which are part of a DICK'S and Field & Stream combo
store, to DICK'S House of Sport stores, expanded DICK'S Sporting Goods stores,
or other specialty concept stores. We closed twelve of these stores for
conversion during the fourth quarter of 2022 and incurred pre-tax charges
totaling $30.1 million, which included $28.5 million of non-cash impairment of
store assets, $0.8 million of severance and a $0.7 million inventory write-down.
Additionally, we sold the Field & Stream trademark in fiscal 2023 for proceeds
near its carrying value and plan to convert the remaining Field & Stream stores
by fiscal 2024.
Macroeconomic Outlook
The macroeconomic environment in which we operate remains uncertain as a result
of numerous factors, including inflationary pressures and the potential impact
of rising interest rates. In addition, disruption of supply chains, including
factory closures and port congestion, has resulted in apparel overages from late
arriving inventory and elevated container and transportation costs which began
to moderate during the second half of fiscal 2022. We took actions during the
third and fourth quarter of fiscal 2022 to address these targeted inventory
overages, and as a result, we believe our inventory is healthy and
well-positioned to meet the demands of our athletes in fiscal 2023. Although we
have successfully managed these issues thus far, the continued effect of these
challenges may impact longer-term consumer discretionary spending behavior and
the promotional landscape in which we operate. Our fiscal 2023 outlook
contemplates this uncertainty.
26
--------------------------------------------------------------------------------
Table of Contents
How we evaluate our business
Management focuses on certain key indicators to monitor our performance, including:
•Comparable store sales performance - Our management considers comparable store sales, which includes online sales, to be an important indicator of our current performance. Comparable store sales results are important to leverage our costs, which include occupancy costs, store payroll and other store expenses. Comparable store sales also have a direct impact on our total net sales, net income, cash and working capital. A store is included in the comparable store sales calculation during the fiscal period that it commences its 14th full month of operations. Relocated stores are included in the comparable store sales calculation from the open date of the original location. Stores that were permanently closed during the applicable period have been excluded from comparable store sales results. For further discussion of our comparable store sales refer to the "Results of Operations" section herein. •Earnings before taxes and the related operating margin - Our management views operating margin and earnings before taxes as key indicators of our performance. The key drivers of earnings before taxes are comparable store sales, gross profit, and our ability to control selling, general and administrative expenses. •Cash flows from operating activities - Cash flow generation supports our general liquidity needs and funds capital expenditures for our omni-channel platform, which include investments in new and existing stores and our eCommerce channel, distribution and administrative facilities, continuous improvements to information technology tools, potential strategic acquisitions or investments that may arise from time-to-time and stockholder return initiatives, including cash dividends and share repurchases. We typically experience lower operating cash flows in our third fiscal quarter due to increased inventory purchases in advance of the holiday selling season, which typically normalizes in our fourth fiscal quarter. For further discussion of our cash flows refer to the "Liquidity and Capital Resources" section herein. •Quality of merchandise offerings - To measure effectiveness of our merchandise offerings, we monitor sell-throughs, inventory turns, gross margins and markdown rates at the department and style level. This analysis helps us manage inventory levels to reduce working capital requirements and deliver optimal gross margins by improving merchandise flow and establishing appropriate price points to minimize markdowns.
• Store Productivity – To evaluate performance at the store level, we monitor various indicators including new store productivity, sales per square foot, store operating contribution margin and store cash flow.
Summary
•Net sales increased 0.6% to $12.37 billion in fiscal 2022 versus $12.29 billion in fiscal 2021, representing a 0.5% decrease in comparable-store sales after an increase of 27.4 % included in 2021. Compared to fiscal 2019, net sales increased by 41.3%.
•We reported net income of $1.0 billion, or $10.78 per diluted share, for fiscal 2022, compared to $1.52 billion, or $13.87 per diluted share, for fiscal 2021 .
•Fiscal 2022 net income includes charges of $22.3 million, net of tax, or $0.25
per diluted share, related to the Field & Stream Exit. Additionally, earnings
per diluted share for fiscal 2022 reflects our adoption of ASU 2020-06, which
requires the assumption that our convertible senior notes due 2025 (the
"Convertible Senior Notes") will be settled in shares of our common stock. As a
result, fiscal 2022 earnings per diluted share excluded $27.1 million of
interest expense, net of tax, and included 10.8 million diluted shares related
to the Convertible Senior Notes, which together decreased earnings per diluted
share by $1.01. During fiscal 2022, we settled $515.9 million of our Convertible
Senior Notes without dilutive effect, as the related principal was settled in
cash and due to the shares received from its convertible bond hedge.
•Fiscal 2021 net income included approximately $15.0 million of pre-tax
expenses, or $0.10 per diluted share net of tax, of teammate compensation and
safety costs resulting from the COVID-19 pandemic. Additionally, fiscal 2021 net
income included $22.8 million of non-cash interest expense, net of tax, and
earnings per diluted share included 11.3 million shares related to the
Convertible Senior Notes that were designed to be offset at conversion by our
bond hedge, which together decreased earnings per diluted share by $1.83 in the
prior year.
27
--------------------------------------------------------------------------------
Table of Contents
•Furthermore, in fiscal year 2022 we:
•Terminated the proportionate amount of warrants concurrent with our exchange of $515.9 million of our Convertible Senior Notes, resulting in the issuance of 9.8 million shares of our common stock;
• Cash dividends declared and paid on a quarterly basis totaling $1.95 per share on our common stock and Class B common stock; And
• Repurchased 5.0 million shares of common stock under our share repurchase program for a total cost of $426.7 million.
•The following table summarizes store openings and closings in fiscal 2022 and
fiscal 2021:
Fiscal 2022 Fiscal 2021
DICK'S Sporting Specialty Concept Specialty Concept
Goods (1) Stores (2) Total (3) DICK'S Sporting Goods Stores (2) Total (3)
Beginning stores 730 131 861 728 126 854
New stores 4 9 13 6 8 14
Closed stores 6 15 21 4 3 7
Ending stores 728 125 853 730 131 861
Relocated stores 3 1 4 11 1 12
(1)Includes three DICK’S House of Sport stores as of January 28, 2023.
(2)Includes our Golf Galaxy, Field & Stream, Public Lands and Going Going Gone! stores. As of January 28, 2023, we operated 98 Golf Galaxy stores, seven Public Lands stores, 15 Going Going Gone! stores, and five Field & Stream stores. In some markets, we operate DICK'S Sporting Goods stores adjacent to our specialty concept stores on the same property with a pass-through for our athletes. We refer to this format as a "combo store" and include combo store openings within both the DICK'S Sporting Goods and specialty concept store reconciliations, as applicable. As of January 28, 2023, the Company operated 16 combo stores.
(3) Excludes 43 and 14 temporary warehouse outlet locations on January 28, 2023 and January 29, 2022, respectively.
operating results
The following table presents, for the fiscal years indicated, selected items in
the Consolidated Statements of Income as a percentage of our net sales, as well
as the basis point change in percentage of net sales from fiscal 2022 to fiscal
2021:
28
--------------------------------------------------------------------------------
Table of Contents
Basis Point
Change in
Fiscal Year Percentage of
Net Sales from
Prior Year
2022 (A) 2021 2021 - 2022(A)
Net sales (1) 100.00 % 100.00 % N/A
Cost of goods sold, including occupancy and
distribution costs (2) 65.36 61.67 369
Gross profit 34.64 38.33 (369)
Selling, general and administrative expenses (3) 22.68 21.67 101
Pre-opening expenses (4) 0.13 0.11 2
Income from operations 11.83 16.55 (472)
Interest expense 0.77 0.47 30
Other income (0.13) (0.14) 1
Income before income taxes 11.19 16.22 (503)
Provision for income taxes 2.75 3.86 (111)
Net income 8.43 % 12.36 % (393)
Other Data:
Comparable store sales (decrease) increase (5) (0.5) % 27.4 %
Number of stores at end of period (6) 853 861
Total square feet at end of period (in millions) (6) 42.6 42.4
(A) Column is not added due to rounding.
(1)Revenue from retail sales is recognized at the point of sale, net of sales
tax. Revenue from eCommerce sales, including vendor-direct sales arrangements,
is recognized upon shipment of merchandise. A provision for anticipated
merchandise returns is provided through a reduction of sales and cost of goods
sold in the period that the related sales are recorded. Revenue from gift cards
and returned merchandise credits (collectively the "cards") is deferred and
recognized upon the redemption of the cards. The cards have no expiration date.
(2)Cost of goods sold includes: the cost of merchandise (inclusive of vendor
allowances, inventory shrinkage and inventory write-downs for the lower of cost
or net realizable value); freight; distribution; shipping; and store occupancy
costs. We define merchandise margin as net sales less the cost of merchandise
sold. Store occupancy costs include rent, common area maintenance charges, real
estate and other asset-based taxes, general maintenance, utilities, depreciation
and certain insurance expenses.
(3)Selling, general and administrative expenses include store and field support
payroll and fringe benefits, advertising, bank card charges, operating costs
associated with our internal eCommerce platform, information systems, marketing,
legal, accounting, other store expenses and all expenses associated with
operating our customer support center.
(4)Pre-opening expenses, which consist primarily of rent, marketing, payroll,
recruiting and other store preparation costs are expensed as incurred. Rent is
recognized within pre-opening expense from the date we take possession of a site
through the date the store opens.
(5)Beginning in fiscal 2022, we revised our method for calculating comparable
store sales by including relocated store locations. Prior year fiscal 2021
information was revised to reflect this change for comparability purposes. See
additional details as furnished in Exhibit 99.2 of the Company's Form 8-K, which
was filed with the SEC on March 8, 2022.
(6)Includes our DICK'S Sporting Goods, Golf Galaxy, Public Lands, Going Going
Gone! and Field & Stream stores. Excludes temporary Warehouse Sale store
locations. Fiscal 2022 store count reflects the closure of twelve Field & Stream
stores for which the associated square footage of each closed store was retained
as we plan in the near-term to convert them into DICK'S House of Sport stores,
expanded DICK'S Sporting Goods stores, or other specialty concept stores.
Note - As retailers vary in how they record costs of operating their stores and
supply chain between cost of goods sold and selling, general and administrative
expenses, our gross profit rate and selling, general and administrative expenses
rate may not be comparable to other retailers. For additional information
regarding the types of costs classified within cost of goods sold, selling,
general and administrative expenses or any other financial statement line items
presented herein, refer to Note 1 - Basis of Presentation and Summary of
Significant Accounting Policies included in Part IV. Item 15. Exhibits and
Financial Statement Schedules of this Annual Report on Form 10-K.
29
--------------------------------------------------------------------------------
Table of Contents
A discussion regarding our financial condition and results of operations for the
year ended January 28, 2023 (Fiscal 2022) compared to the year ended January 29,
2022 (Fiscal 2021) is presented below. A discussion regarding our financial
condition and results of operations for Fiscal 2021 compared to the year ended
January 30, 2021 (Fiscal 2020) can be found under Item 7 of Part II of our
Annual Report on Form 10-K for the fiscal year ended January 29, 2022, filed
with the SEC on March 23, 2022.
Fiscal year 2022 compared to fiscal year 2021
net sales
Net sales increased 0.6% to $12.37 billion in fiscal 2022 from $12.29 billion in fiscal 2021 due to a $131.9 million increase in net sales primarily attributable to new temporary Warehouse Sale and other stores, partially offset by $57.1 million, or 0.5%, of a decrease in comparable store sales. The decrease in comparable store sales included a 0.7% decrease in transactions offset by a 0.2% increase in sales per transaction, and reflects an anticipated sales normalization in certain categories, including fitness and outdoor equipment, along with a favorable sales impact in fiscal 2021 following government stimulus payments, partially offset by growth in footwear, team sports and athletic apparel.
income from operations
Operating income decreased to $1,463.0 million in fiscal 2022 from $2,034.5 million in fiscal 2021.
Gross profit decreased to $4,284.6 million in fiscal 2022 from $4,711.9 million in fiscal 2021 and decreased as a percentage of net sales by 369 basis points. Merchandise margins decreased 304 basis points as a result of our actions to reduce targeted apparel inventory overages, item-level deals provided to our athletes during the holiday season and higher inventory shrink due to increased theft. Occupancy costs, which after the cost of merchandise represents the largest item within our cost of goods sold, are generally fixed on a per store basis and fluctuate based on the number of stores that we operate. Our occupancy costs increased $44.1 million compared to fiscal 2021 and decreased gross profit as a percentage of net sales by 30 basis points. The remaining decrease in gross profit as a percentage of net sales was driven by an increase in eCommerce shipping expense due primarily to higher shipping rates and penetration of eCommerce sales compared to the prior year. Selling, general and administrative expenses increased to $2,805.5 million in the current year from $2,664.1 million in fiscal 2021, and increased as a percentage of net sales by 101 basis points. Fiscal 2022 included Field & Stream Exit charges of $29.3 million, and fiscal 2021 included approximately $15.0 million of COVID-related costs. The remaining $127.1 million increase was primarily driven by investments in hourly wage rates, talent and technology to support our growth strategies, offset by lower incentive compensation expense and a $31.7 million net cost reduction compared to fiscal 2021 related to changes in the investment values of our deferred compensation plans, for which the corresponding investment expense was recognized in Other Income.
interest expense
Interest expense increased to $95.2 million in fiscal 2022 compared to $57.8 million in fiscal 2021. The increase was primarily due to a $52.8 million increase in interest expense related to the aggregate $1.5 billion Senior Notes issued during the fourth quarter of 2021 and $23.3 million of inducement charges related to the exchange of $515.9 million aggregate principal amount of the Convertible Senior Notes, partially offset by a $36.2 million reduction in interest expense related to our Convertible Senior Notes, due to exchange transactions and our adoption of ASU 2020-06; Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information.
other income
Other income decreased to $15.9 million in fiscal 2022 compared to $17.8 million
in fiscal 2021. The Company recognizes investment income or investment expense
to reflect changes in deferred compensation plan investment values with an
offsetting charge or reduction to selling, general and administrative costs for
the same amount. The Company recognized $14.6 million of investment expense
during fiscal 2022 compared to investment income of $17.1 million during fiscal
2021, primarily driven by performance in equity markets which impacted the
deferred compensation plan investment values. This total $31.7 million decrease
related to our deferred compensation plan investment values was offset by a
$26.7 million increase in interest income as a result of higher average interest
rates on cash and cash equivalents during the current year.
30
--------------------------------------------------------------------------------
Table of Contents Income Taxes Our effective tax rate increased to 24.6% in the current year from 23.8% in fiscal 2021. The current year effective tax rate was unfavorably impacted by eliminated tax deductions from our bond hedge following our Convertible Senior Notes exchange transactions, which impacted our income tax expense by $21.5 million, partially offset by the favorable rate impact of the vesting of employee equity awards on lower pre-tax income.
liquidity and capital resources
Our cash on hand as of January 28, 2023 was $1.9 billion. We believe that we have sufficient cash flows from operations and cash on hand to operate our business for at least the next twelve months, supplemented by funds available under our unsecured $1.6 billion Credit Facility, if necessary. We may require additional funding should we pursue strategic acquisitions, undertake share repurchases, pursue other investments or engage in store expansion rates in excess of historical levels. We had no revolving credit facility borrowings at any point during fiscal 2022.
The following sections describe the potential short- and long-term impact on our liquidity and capital requirements.
leases
We lease substantially all of our stores, three of our distribution centers, and certain equipment and storage under non-cancellable operating leases that expire at various dates through 2035. Approximately three-quarters of our DICK'S Sporting Goods stores will be up for lease renewal at our option over the next five years, and we plan to leverage the significant flexibility within our existing real estate portfolio to capitalize on future real estate opportunities. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 7 - Leases for further information.
Revolving Credit Facility
We have a $1.6 billion Credit Facility, which includes a maximum amount of $75 million to be issued in the form of letters of credit. Loans under the Credit Facility bear interest at an alternate base rate or an adjusted secured overnight financing rate plus, in each case, an applicable margin percentage. As of January 28, 2023, there were no borrowings outstanding under the Credit Facility, and we have total remaining borrowing capacity, after adjusting for $16.1 million of standby letters of credit, of $1.58 billion. We were in compliance with all covenants under the Credit Facility agreement at January 28, 2023. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 8 - Revolving Credit Facility for further information.
Older Notes
As of January 28, 2023, we have $750 million principal amount of senior notes due 2032 (the "2032 Notes") and $750 million principal amount of senior notes due 2052 outstanding (the "2052 Notes" and together with the 2032 Notes, the "Senior Notes"). Cash interest accrues at a rate of 3.15% per year on the 2032 Notes and 4.10% per year on the 2052 Notes, each of which are payable semi-annually in arrears on January 15 and July 15. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 9 - Senior Notes for further information.
Since January 28, 2023, our senior notes have had a long-term credit rating of Baa3 and BBB from the rating agencies Moody’s and Standard & Poor’s, respectively.
Convertible Senior Notes
Following our exchanges totaling $515.9 million principal amount in cash during fiscal 2022, we have an aggregate remaining principal amount of $59.1 million of Convertible Senior Notes outstanding as of January 28, 2023. On February 9, 2023, the Company provided irrevocable notice to the noteholders of our Convertible Senior Notes of our election to redeem the remaining principal in shares. The Company intends to offset share dilution from this settlement through share repurchases using excess cash, free cash flow or borrowings on our Credit Facility. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 16 - Subsequent Events for further information.
investments
Our capital expenditures are primarily allocated toward the development of our
omni-channel platform, including investments in new and existing stores and
eCommerce technology, while we have also invested in our supply chain and
corporate technology capabilities. In fiscal 2022, capital expenditures totaled
$364.1 million on a gross basis and $328.0 million on a net basis, which
includes tenant allowances provided by landlords.
31
--------------------------------------------------------------------------------
Table of Contents
We anticipate that fiscal 2023 capital expenditures will be in a range of $550
to $600 million, net of tenant allowances provided by landlords. We expect our
capital expenditures to be concentrated on new store development, relocations
and remodels, including nine DICK'S House of Sport stores and eleven Golf Galaxy
Performance Centers, improvements within our existing stores including
converting over 100 stores to premium full-service footwear decks, and continued
investments in technology to enhance our store fulfillment, in-store pickup and
other foundational capabilities.
share buybacks
From time-to-time, we may opportunistically repurchase shares of our common stock. In fiscal 2022, we repurchased approximately 5.0 million shares of our common stock for $426.7 million. During fiscal 2022, we also paid $31.7 million for shares repurchased during fiscal 2021. We currently operate under a $2.0 billion share repurchase program that was authorized by the Board of Directors in December 2021. As of January 28, 2023, the available amount remaining under the December 2021 authorization was $1.4 billion. Any future share repurchase programs are subject to authorization by our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
dividends
In fiscal 2022, we paid $163.1 million of dividends to our stockholders. On March 6, 2023, our Board of Directors declared a 105% increase in our quarterly cash dividend compared to the previous quarterly per share amount. The dividend of $1.00 per share of common stock and Class B common stock is payable on March 31, 2023 to stockholders of record as of the close of business on March 17, 2023. During fiscal 2021, we paid $603.0 million in dividends, which included quarterly dividends and a special dividend in the amount of $5.50 per share, on our common stock and Class B common stock. The declaration of future dividends and the establishment of the per share amount, record dates and payment dates for any such future dividends are subject to authorization by our Board of Directors and are dependent upon multiple factors including future earnings, cash flows, financial requirements and other considerations. Supply Chain Financing We have entered into supply chain financing arrangements with several financial institutions, whereby suppliers have the opportunity to settle outstanding payment obligations early at a discount. In turn, we settle invoices with the financial institutions in accordance with the original supplier payment terms. Our rights and obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. Our liability associated with the funded participation in the arrangements, which is presented within accounts payable on the Consolidated Balance Sheet, was $40.1 million and $76.0 million as of January 28, 2023 and January 29, 2022, respectively.
cash flows
Changes in cash and cash equivalents for the last three fiscal years are as
follows (in thousands):
Fiscal Year Ended
January 28,
2023 January 29, 2022 January 30, 2021
Net cash provided by operating activities $ 921,881 $ 1,616,872 $ 1,552,769
Net cash used in investing activities (392,894) (343,979) (224,164)
Net cash (used) from financing activities (1,247,636)
(287,722) 260,057 Effect of exchange rate changes on cash and cash equivalents (170) (33) 71
Net (decrease) increase in cash and cash equivalents $(718,819)
$ 985,138 $ 1,588,733
Operating Activities
Cash flows provided by operating activities decreased $695.0 million in fiscal
2022 compared to fiscal 2021. The decrease was primarily due to a $476.7 million
decrease in earnings and a $213.1 million increase in cash payments for
inventory and accounts payable to replenish inventory levels after a 28.3% sales
increase in fiscal 2021 and supply chain disruptions following the emergence of
COVID-19, which resulted in inventory growth to support our 41.3% sales growth
in fiscal 2022 when compared to fiscal 2019. The remaining decrease in cash
provided by operating activities was primarily driven by a $135.5 million
decrease from accrued expenses as a result of year-over-year changes in
incentive compensation accruals and corresponding payments, and the timing of
marketing and deferred compensation plan payments, offset by an increase from
changes in operating lease assets and liabilities of $70.1 million due to the
timing of rent payments at the end of fiscal 2022.
32
--------------------------------------------------------------------------------
Table of Contents Investing Activities Cash used in investing activities for fiscal 2022 increased $48.9 million to $392.9 million, due to an increase in gross capital expenditures. Gross capital expenditures for fiscal 2022 included higher investments in our stores and technology, offset by last year's investments in merchandise presentation and improving the fitting and lesson experience in our golf business. Cash used in investing activities also included progress payments for the purchase of corporate aircraft and investments in organizations that focus on innovation and improving local communities through sport.
financing activity
Financing activities have historically consisted of capital return initiatives, including share repurchases and cash dividend payments, cash flows generated from stock option exercises and cash activity associated with our Credit Facility, or other financing sources. Cash used in financing activities increased $959.9 million during fiscal 2022 compared to fiscal 2021. Fiscal 2022 included the exchange of $515.9 million aggregate principal amount of our Convertible Senior Notes and $458.5 million in share repurchases. Fiscal 2021 included over $1.1 billion in share repurchases and the payment of a special dividend of $5.50 per share, which was partially offset by our issuance of the Senior Notes that provided net proceeds of approximately $1.5 billion.
Contractual Obligations and Business Obligations
We are party to contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. Our future contractual obligations primarily consist of payments for operating leases, long-term debt and related interest payments, and other purchase obligations. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 7 - Leases, Note 9 - Senior Notes and Note 10 - Convertible Senior Notes for amounts outstanding as of January 28, 2023 related to operating leases and long-term debt. Other purchase obligations are for marketing commitments to promote our brand and products, including media and naming rights, technology-related commitments, licenses for trademarks, and other ordinary course commitments. In the ordinary course of business, we enter into many contractual commitments, including purchase orders and commitments for products or services, but generally, such commitments represent annual or cancellable commitments. The amount of non-cancellable purchase commitments as of January 28, 2023 were approximately $265 million.
Critical Accounting Principles and Use of Estimates
Our significant accounting policies are described in Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 1 - Basis of Presentation and Summary of Significant Accounting Policies. Critical accounting policies are those that we believe are both 1) most important to the portrayal of our financial condition and results of operations and 2) require our 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 such policies may result in materially different amounts being reported under different conditions or using different assumptions.
We consider the following guidelines to be most critical in understanding the judgments required in the preparation of our consolidated financial statements.
inventory
We value inventory using the lower of weighted average cost and net realizable value, which is generally based on the selling price expectations of the merchandise. We regularly review inventories to determine if the carrying value of the inventory exceeds net realizable value and, when determined necessary, record a reserve to reduce the carrying value to net realizable value. Changes in customer merchandise preference, current and anticipated demand, consumer spending, weather patterns, economic conditions, business trends or merchandising strategies could cause our inventory to be exposed to obsolescence or slow-moving merchandise. A 10% change in our obsolete inventory reserves as of January 28, 2023, would have affected income before income taxes by approximately $5.1 million in fiscal 2022.
Shrinkage costs are accrued as a percentage of sales based on historical shrinkage trends. We conduct physical inventories at our stores and distribution centers year-round. The Attrition Reserve represents the cumulative loss estimate for each of our locations from the date of the last physical inventory to the reporting date. Estimates by location and overall are influenced by internal and external factors and may differ materially from actual results. A 10% change in our withholding reserve as of January 28, 2023 would have impacted income before income taxes for fiscal 2022 by approximately $1.8 million.
33
--------------------------------------------------------------------------------
Table of Contents
Goodwill and intangible assets
Goodwill, indefinite-lived and other finite-lived intangible assets are reviewed for impairment on an annual basis, or whenever circumstances indicate that a decline in value may have occurred. Our evaluation for impairment requires accounting judgments and financial estimates in determining the fair value of the reporting unit or asset. If these judgments or estimates change in the future, we may be required to record impairment charges for these assets. Our goodwill impairment test compares the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using a combination of an income approach and a market approach. Estimates may differ from actual results due to, among other things, economic conditions, changes to our business models, or changes in operating performance. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect our future financial results. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, an impairment charge is recorded to reduce the carrying value of the reporting unit to its fair value. As of January 28, 2023, we had no reporting units at risk of impairment and a 10% change in the fair value of our reporting units would not indicate a potential impairment of goodwill. The fair value of our reporting unit has remained substantially in excess of its carrying value over the last three fiscal years. Similar to our test for impairment of goodwill, the impairment test for indefinite-lived intangible assets involves comparing their estimated fair values to their carrying values. We estimate the fair value of indefinite-lived intangible assets, which are comprised primarily of trademarks and trade names, based on an income approach using the relief-from-royalty method, which assumes that, in lieu of ownership, a third-party would be willing to pay a royalty in order to derive a benefit from these types of assets. This approach is dependent on a number of factors, including estimates of future sales projections and growth, royalty rates in the category of intellectual property, discount rates and other variables. If actual results are not consistent with our estimates and assumptions used in estimating fair value, we may be exposed to material losses. We recognize an impairment charge when the estimated fair value of the intangible asset is less than its carrying value. We recorded no such impairments in fiscal 2022 or 2021.
Impairment of long-lived assets
We review 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 independent cash flows can be identified, which is typically the store
level. We use an income approach to determine the fair value of individual store
locations, which requires discounting projected future cash flows over each
store's remaining lease term. When determining the stream of projected future
cash flows associated with an individual store location, we make assumptions
about key store variables that incorporate local market conditions, including
sales growth rates, gross margin and controllable expenses, such as store
payroll. An impairment loss is recognized when the carrying amount of the store
location is not recoverable and exceeds its fair value. During fiscal 2022, we
recorded a non-cash impairment charge of $28.5 million for store asset disposals
at twelve Field & Stream stores that we closed in the period for conversion into
DICK'S House of Sport stores or expanded DICK'S Sporting Goods stores. There
were no other significant long-lived assets impairment charges recognized during
fiscal 2022, 2021 or 2020.
34
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, Source Insights