Dick's Sporting Goods 2006 Annual Report Download - page 50

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
Proforma Proforma Proforma Proforma
Black - Scholes Valuation Assumptions12006 2005 2004 2006 2005 2004
Expected life (years)25.295.29 5 0.50.5 0.5
Expected volatility337%–39%39%–41% 52%–54% 24%–32% 27%–40% 26%–30%
Weighted average volatility 38.79%40.53% 53.32% 28.44% 35.10% 27.84%
Risk-free interest rate44.44%–4.97% 3.63%–4.44% 3.42%–3.96%5.09%–5.31% 3.38% –4.40% 1.69%–2.61%
Expected dividend yield ––––––
Weighted average fair values $16.67$15.26 $15.77 $10.24 $8.29 $7.21
1Beginning on the date of adoption of SFAS 123R, forfeitures are estimated based on historical experience, prior to the date of adoption, forfeitures were recorded
as they occurred.
2The expected life of the options represents the estimated period of time until exercise and is based on historical experience of the similar awards.
3Beginning on the date of adoption of SFAS 123R, expected volatility is based on the historical volatility of the Company’s common stock since the inception of the
Company’s shares being publicly traded in October 2002; prior to the date of adoption, expected volatility was estimated using the Company’s historical volatility
and volatility of other publicly-traded retailers.
4The risk-free interest rate is based on the implied yield available on U.S. Treasury constant maturity interest rates whose term is consistent with the expected life
of the stock options.
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market
conditions and experience. See Note 9 for additional details regarding stock-based compensation.
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 $122.9 million, $96.1 million and $78.3 million
for fiscal 2006, 2005 and 2004, respectively.
Vendor Allowances — Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors.
These funds are determined for each fiscal year and the majority are based on various quantitative contract terms. Amounts
expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction of cost of
goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded
as a reduction to the related expense in the period that the related expense is incurred. The Company records an estimate of
earned allowances based on the latest projected purchase volumes and advertising forecasts. On an annual basis at the end of the
fiscal year, the Company confirms earned allowances with vendors to determine that the amounts are recorded in accordance with
the terms of the contract.
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.
DICK’S SPORTING GOODS, INC. 2006 ANNUAL REPORT
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