Dick's Sporting Goods 2010 Annual Report Download - page 52

Gross profit increased 3% to $1,216.9 million in fiscal 2009 from $1,184.0 million in fiscal 2008. As a percentage of net sales,
gross profit decreased 109 basis points in fiscal 2009. The 109 basis point decrease in gross profit was due primarily to lower
merchandise margins and de-leverage of occupancy and freight and distribution costs. Merchandise margins decreased 71 basis
points as a percentage of net sales compared to fiscal 2008 due to promotional activities across most merchandise categories at
Dick’s and clearance activity at Golf Galaxy stores. The 15 basis point increase in occupancy expenses as a percentage of net
sales resulted from the consolidated same store sales decline in fiscal 2009. Freight and distribution costs as a percentage of net
sales were 29 basis points higher in fiscal 2009 due to the recording of costs related to the Company’s e-commerce operations.
No such costs were recorded in fiscal 2008. Excluding e-commerce operations, freight and distribution costs as a percentage of
net sales were lower in fiscal 2009 due to improved freight efficiencies.
Merchandise margin declines were impacted by lower average unit retail prices and higher markdowns to liquidate inventory and
bring levels closer to fiscal 2009 sales trends. The Company’s inventory per square foot declined 0.4% to $36.10 at January 30,
2010 compared to January 31, 2009. Every 10 basis point change in merchandise margin would have impacted fiscal 2009 earnings
before income taxes by approximately $4 million.
Selling, general and administrative expenses increased to $972.0 million in fiscal 2009 from $928.2 million in fiscal 2008, but as a
percentage of net sales, these expenses decreased 44 basis points compared to fiscal 2008. The Company recognized expenses
totaling $26.1 million during fiscal 2009 related to the Company’s e-commerce operations. No such expenses were recorded in
fiscal 2008. The Company’s store payroll expenses as a percentage of net sales leveraged by 91 basis points in fiscal 2009 as the
Company adjusted store staffing levels and operating hours in light of declining consolidated same store sales. Advertising
expenses as a percentage of net sales leveraged by 11 basis points during fiscal 2009.
In fiscal 2008, the Company recorded an impairment charge of $164.3 million related to goodwill and other intangible assets
acquired in the Golf Galaxy acquisition, before an income tax benefit of $20.4 million. Additionally, the Company recorded an
impairment charge related to certain underperforming Dick’s Sporting Goods, Golf Galaxy and Chick’s stores totaling $29.1 million,
before an income tax benefit of $11.3 million.
The Company recorded $10.1 million of merger and integration costs during fiscal 2009. These costs related to the integration of
Chick’s operations and included duplicative administrative costs and management, advertising and severance expenses associated
with the conversions from Chick’s stores to Dick’s stores. The Company recorded $15.9 million of merger and integration costs
during fiscal 2008. These costs related to the integration of the operations of Golf Galaxy and Chick’s with Dick’s pre-existing
business and included duplicative administrative costs, severance and system conversion costs.
Pre-opening expenses decreased $7.1 million to $9.2 million in fiscal 2009 from $16.3 million in fiscal 2008. Pre-opening
expenses were for the opening of 24 new Dick’s stores and one Golf Galaxy store, as well as the relocation of one Dick’s store in
fiscal 2009 compared to the opening of 43 new Dick’s stores and ten Golf Galaxy stores and the relocation of one Dick’s store in
fiscal 2008. Pre-opening expenses in any year fluctuate depending on the timing and number of store openings and relocations.
Gain on Sale of Asset
The Company exercised its early buy-out rights on an aircraft lease during the first quarter of fiscal 2008. The Company
recognized a $2.4 million pre-tax gain on the subsequent sale of the aircraft.
Interest Expense
Interest expense decreased by $12.9 million to $4.5 million in fiscal 2009 from $17.4 million in fiscal 2008. The Company’s
purchase of $172.5 million of its outstanding senior convertible notes in the first quarter of fiscal 2009 resulted in a $12.1 million
decrease in interest expense. The remaining decrease in interest expense for fiscal 2009 was primarily due to lower average
borrowing rates. The average interest rate on the Credit Agreement decreased by 215 basis points from fiscal 2008, while average
borrowings outstanding under our Credit Agreement decreased to $63.7 million for fiscal 2009 from $74.8 million for fiscal 2008.
Income Taxes
The Company’s effective tax rate was 39.3% for the year ended January 30, 2010 as compared to 388.4% for the year ended
January 31, 2009. The 2008 effective tax rate was primarily impacted by the non-deductible $111.3 goodwill impairment charge
and by non-deductible executive separation costs that increased income tax expense by $2.5 million.
32 Dick’s Sporting Goods, Inc. ¬2010 Annual Report