| DICKS SPORTING GOODS INC ITEM 1A RISK FACTORS Risks and Uncertainties Intense competition in the sporting goods industry could limit our growth and reduce our profitability |
| 11 _________________________________________________________________ [45]Table of Contents 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 12 _________________________________________________________________ [46]Table of Contents 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 |
| In fiscal 2005, purchases from Nike represented approximately 12prca of our merchandise purchases |
| Although in fiscal 2005, purchases from no other vendor represented more than 10prca 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 |
| 13 _________________________________________________________________ [47]Table of Contents 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 388cmam000 to 601cmam000 square feet in the fourth quarter of 2004, and are also expanding our distribution center in Plainfield, Indiana from 364cmam000 to 725cmam000 square feet |
| The expansion in Plainfield is scheduled for completion in February 2007 |
| We also operate a 75cmam000 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 32prca of our net sales and approximately 56prca of our net income for fiscal 2005, excluding after-tax merger integration and store closing costs of dlra22dtta7 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: • interest rates and inflation; • the impact of an economic recession; • the impact of natural disasters; • consumer credit availability; • consumer debt levels; • consumer confidence in the economy; • tax rates and tax policy; • unemployment trends; and 14 _________________________________________________________________ [48]Table of Contents • 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 70prca of our eligible inventory or 85prca 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 |
| 15 _________________________________________________________________ [49]Table of Contents 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 79prca 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 |
| Stack and his relatives may also acquire additional shares of common stock upon the exercise of stock options |
| 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; 16 _________________________________________________________________ [50]Table of Contents • 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 |
| 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 |
| 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: 17 _________________________________________________________________ [51]Table of Contents 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 15prca 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 dlra172dtta5 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 |