Dick's Sporting Goods 2004 Annual Report Download - page 47

DICK’S SPORTING GOODS, INC. 2004 ANNUAL REPORT 45
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):
January 29, January 31, February 1,
Fiscal Year Ended 2005 2004 2003
(Dollars in thousands, except per share data)
Net income, as reported $ 68,905 $ 52,408 $ 38,137
Deduct: Total stock-based employee compensation
expense determined under the fair value based method
for all awards, net of related tax effects (11,761) (3,908) (1,825)
Proforma net income $ 57,144 $ 48,500 $ 36,312
Earnings per share:
Basic income applicable to common shareholders – as reported $1.44$ 1.17 $ 1.08
Basic income applicable to common shareholders – proforma $1.19$ 1.08 $ 1.02
Diluted income applicable to common shareholders – as reported $1.30$ 1.04 $ 0.93
Diluted income applicable to common shareholders – proforma $1.08$ 0.96 $ 0.89
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
2004 2003 2002 2004 2003 2002
Expected life (years) 53-5 7.5 0.5 0.5 0.02 - 0.5
Expected volatility 52% - 54% 48% - 62% 60% 26% - 30% 32% - 47% 60%
Risk-free interest rate 3.42% - 3.96% 2.20% - 3.52% 3.50% - 3.51% 1.69% - 2.61% 0.96% - 1.02% 1.23% - 1.66%
Expected dividend yield ––––––
Weighted average fair values $ 15.77 $ 10.73 $ 4.31 $7.21$ 5.02 $ 1.67
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.
AdvertisingCosts Production costs of advertising and the costs to run the advertisements are expensed the first time the advertisement
takes place. Advertising expense was $78.3 million, $54.4 million and $42.6 million for fiscal 2004, 2003 and 2002, 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 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.