Analysis of Investing Activities: Dick's Sporting Goods Inc.

Adam Rabon

Long-Term Assets

The long term assets section of Dick’s Sporting Goods Inc.’s (the Company) balance sheet is comprised of net property and equipment, construction in progress (leased facilities) and goodwill. There is one other long-term assets category which includes: deferred income taxes, investments and ‘other”.

Horizontal Analysis

Net property and equipment increased by $62,794, or 16.96%, from 2005 to 2006. Net property and equipment consists of buildings and land, leasehold improvements and furniture, fixtures and equipment. The Company did not purchase or sell any buildings and land during 2006, but leasehold improvements increased 19.74%, and furniture, fixtures and equipment increased 17.97%. Accumulated depreciation rose $49,391, or 19.37%, from the previous year. Construction in progress increased $5,749, or 78.35%, during 2006, and goodwill remained at the same level during 2006. Deferred income taxes rose 94.66%, from $8,959 in 2005 to $17,440 in 2006. Investments decreased $189, or 5.91%, from the previous year. The long-term assets category labeled “other” had a 14.17% increase to $31,252. A complete horizontal analysis may be found


Vertical Analysis

Net property and equipment accounted for 28.41% of total assets in 2006, which was slightly lower that the 31.17% mark in 2005. Construction in progress increased to 0.86% of assets in 2006, from 0.62% the previous year. Goodwill remained the same as a dollar figure, but decreased to 10.28%, of total assets from 13.19% the previous year. Deferred income taxes increased as a percent of total assets in 2006, while both investments and “other” decreased. Excluding the investments and goodwill accounts, all other accounts increased in dollar amount. The decrease in the percentage of assets for the long-term accounts can be attributed to a significant increase in current assets, which increased the liquidity position and drove up total assets.


Investing Cash Flows

Net cash used in investing activities increased $75,473 during 2006. The Company’s outflows from the purchase of property and equipment were $190,288 for 2006, up from $112,002 the previous year. The increase in capital expenditures can be attributed to the opening of 39 new stores and the relocation of two existing stores. The Company also had a $3,712 outflow from an increase in recoverable costs from developed properties. The lone cash inflow from investing activities was the proceeds from sale-leaseback transactions in the amount of $24,809. These proceeds consist primarily of the sale of store fixtures.


Accounting Policies

The Company’s property and equipment is recorded at cost and depreciated using the straight-line method over its useful life. Buildings are depreciated over 40 years, leasehold improvements over 10-25 years, vehicles over 5 years and furniture, fixtures and equipment over 3-7 years. For leasehold improvements and property and equipment under capital lease agreement, depreciation and amortization are calculated using straight-line over the shorter of useful lives or lease term. The Company follows SFAS No. 144 to determine periodically if the carrying value of its long-lived assets has been weakened.

The investments portion of long-term assets is comprised of unregistered GSI Commerce Inc. stock. The stock purchase was recorded at the publicly quoted equity price of GSI, less a discount used to offset the unregistered nature of the stock. The stock is carried at fair value and is valuated each year in accordance with SFAS No. 115.

The Company did not undergo any mergers and acquisitions in 2006, but did leave on the books goodwill for the July 29, 2004 purchase of all the common stock of Galyan’s for $16.75 per share. The Company recorded $156,628 of goodwill in excess of the purchase price of $369,572. The Company did not find reason to deem impairment to the amount of goodwill for 2006.


Property and Equipment

As of 2006, the original cost of the Company’s property and equipment was $737,456. Due to depreciation and amortization, $304,385, or 41.28%, of the Company’s property and equipment had been written off. Net property and equipment is valued at $433,071, or 58.73%, of original cost. The Company’s property and equipment can be considered in new to mid-life. The original cost of the asset base increased $112,185 in 2006, but accumulated depreciation and amortization only increased $49,391 which reveals the Company is still in the growth phase.


Segment Information

The Company divides its operations into three separate merchandise categories: hardlines, apparel and footwear. Because of the economic characteristics of the store formats, the similar nature of the products sold, the type of customer, and method of distribution, the operation of the Company are one reportable segment. In 2006, net sales of hardlines, apparel and footwear accounted for 56.77%, 26.04% and 17.18% of total net sales, respectively. chart


Ratio Analysis

The Company improved both its return on total assets and return on fixed assets in 2006, which showed an improvement in its efficiency. The money invested in fixed assets was beneficial to the Company’s returns. Total asset turnover decreased slightly due mainly to an increase in liquid current assets, not long-term assets, as witnessed by the fixed asset turnover which shows improvement from its already strong position in 2005. The net profit margin also increased, revealing the Company’s improved efficiency