Dick’s Sporting Goods, Equity Valuation and Analysis

As of November 1, 2007

Presented by:

Nicholas Davis
nicholasa85@yahoo.com
Junior Ruiz
jruiz_224@hotmail.com
Joe Alvarez
joe.alvarez@ttu.edu
 Dick’s Sporting Goods

Table of Contents

Executive Summary 4
Business & Industry Analysis 9
Company Overview 10
Industry Overview 11
Five Forces Model 13
Rivalry among Existing Firms 13
Threat of New Entrants 19
Threat of Substitute Products 22
Bargaining Power of Customers 23
Bargaining Power of Suppliers 26
Value Chain Analysis 27
Firm Competitive Advantage Analysis 33
Accounting Analysis 36
Key Accounting Policies 37
Potential Accounting Flexibility 40
Actual Accounting Strategy 41
Evaluation of the Quality of Disclosure 42
Potential “Red Flags” 55
Coming Undone (Undo Accounting Distortions) 56
Financial Analysis, Forecast Financials, and
Cost of Capital Estimation 59
Financial Analysis 59
Liquidity Analysis 59
Profitability Analysis 68

2
 Capital Structure Analysis 74
IGR/SGR Analysis 76
Financial Statement Forecasting 79
Analysis of Valuations 89
Cost of Equity 89
Cost of Debt 92
Weighted Average Cost of Capital 92
Intrinsic Valuation Models 93
Discounted Free Cash Flows Model 101
Residual Income Model 103
Long Run Residual Perpetuity Model 104
Abnormal Earnings Growth Model 106
Credit Analysis 109
Analyst Recommendation 111
Appendix 113
References 135

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 Executive Summary
Investment Recommendation: Overvalued, Sell November 1, 2007
DKS -NYSE(11/1/2007): $31.18 Valuation Estimates
52 Week Range: $24.00 to $36.78 Actual Price (11/1/2007): $ 31.18
Revenue: 3114.16M
Market Capitalization: 3.39 B Financial Based Valuations
Shares Outstanding: 51.25 Mil Forward P/E: $ 20.71
Avg. Daily Trading Volume(13 wk.): 931,737 Trailing P/E: $ 19.68
Percent Institutional P/B: $ 28.32
Ownership: 107.16% P.E.G.: $ 25.57
Book Value Per Share: 8.33 P/EBITA: $ 41.68
ROE: 18.15% P/FCF: $ 36.89
ROA: 9.48% EV/EBITDA: $ 14.91
Intrinsic Valuations revised
Discount Dividend: n/a n/a
Cost of Capital est. Free Cash Flows: $ 15.84 $ 43.53
Estimated: R2 Beta Ke Residual Income: $ 11.40 $ 11.17
3-month 0.173 1.409 0.204 LR ROE: $ 14.83 n/a
1-year 0.186 1.468 0.211 AEG: $ 8.17 $ 6.90
2-year 0.195 1.559 0.221
5-year 0.196 1.678 0.235 Altman Z-score
10-year 0.186 1.696 0.237 2002 2003 2004 2005 2006
4.74 5.14 4.99 3.15 3.72
Published Beta: 1.68 EPS:
WACCBT 8.62% WACCAT 6.83% 2002 2003 2004 2005 2006
Kd BT 4.99% Kd AT 2.99% 1.30 1.35 1.44 1.47 1.28

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Industry Analysis
Dick’s Sporting Goods, is an authentic sporting goods retailer founded in 1948, by
Richard Dick Stack. Today they operate 322 stores in 34 states mainly in the eastern
parts of the United States. Their main target is to attract consumers seeking genuine
products with the latest trends and unique designs. One of Dick’s main goals is to be a
high quality retailer at competitive prices. Great customer service plays a major role to
Dick’s success and is a very important key.
The sporting goods industry consists of about 20,000 stores. This industry has
many competitors. Dick’s Sporting Good’s (DKS) direct competitors in the sporting
industry include: Big 5 Sporting Goods (BGFV), Hibbett Sport (HIB), and Cabela’s. Stores
like Wal-mart, Target, and Sears, that have sporting goods sections within the store can
also play a role in threat of substitute products. Firm’s then are forced to have price
wars in order to fight for market share. This is where economies of scale come into play.
With the sporting goods industry, becoming more and more fragmented, larger
companies have an advantage with their ability to sell a larger variety of brands and
products. Rivalry among existing firms is very high in the sporting goods industry and so
Dick’s must rely heavily on their key success factors, so that they won’t lose any market
share. Having strong customer and supplier relations is another key aspect. So really,
Dick’s has mixed strategies from both a cost leadership and differentiation strategies to
have a competitive advantage over the industry

Accounting Analysis
The valuation of the firm process begins with comparing the key success factors
from the five forces model and the key accounting policies. With generally accepted
accounting principals, accounting flexibility is allowed in many areas of reporting their
financial. This accounting flexibility can overvalue and undervalue financial statement
data. This flexibility plays an important factor, because it can influence managers to do
this for incentive purposes.
Operating and capital leases is one of the items that accounting flexibility allows in
the reporting. Most all sporting good’s retailers have operating and capital leases.

5
Operating leases are not recorded on the balance sheet, making shareholders believe
that they are more cost efficient. One of the most important things about operating
leases is that companies receive tax credits by expensing their lease payments. For
Dick’s, operating leases totaled up to be 2.8 billion dollars due through 2011. Operating
leases are by far the largest owed contractual obligation, with capital leases only
amounting to 7.8 million in comparison. Reporting operating leases over capital leases in
the sporting goods industry is the most popular method.
The amount of disclosure available from the 10-K’s reflect how well an outsider
can truly understand how the firm is operating. The subsequent section will give an
outlook on the quality and quantitative analysis of a firm. The footnotes provided are
made up to clear up any information that was not clear on the financials or any of the
disclosures. Dick’s 10-Ks were really easy to read and understand. Even Dick’s
competitors’ 10-K’s were well friendly formatted and made things easy to compare with
each other. Not being able to download the financial statement on excel was the only
negative thing about the 10-K’s.
The sales and expense ratio diagnostics was another tool in the valuation of Dick’s
Sporting Goods. Dick’s seemed to be lying at the industry average in most sales and
expense diagnostics if not above the average. These ratios gave us great insight in
comparison of Dick’s to the sporting goods industry. The only potential concerns or “red
flags” were the operating and capital leases, which most sporting goods store have since
it is allowed under GAAP.

Ratio Analysis, Forecast Financials, and Cost of Capital Estimation

The liquidity, profitability, and capital structure ratios were another key aspect to
the valuation of a firm process. We used these ratios as a guide in observing trends and
structure in the ratios that were linked together with the financials. Computing these
ratios not only gave us a sense where Dick’s compares within the sporting goods
industry, but they served as a mentor tool in the forecasting of the financials. After
forecasting the financial statements, we moved on and estimated Dick’s beta by using the
CAPM model, we estimated the cost of equity (Ke) by using the regression analysis. For

6
the regression, we used the St. Louis Fed to gather the constant maturity rates to get a
fair market risk free rate. The market risk premium was then subtracted to the risk free
rate for each maturity. The outcomes for beta were fairly consistent throughout. The
estimated weighted average cost of capital (WACC) was done using the formula; on a
before and after tax.
After analyzing the liquidity ratios, we can conclude that Dick’s was below the
industry average with regards to the current ratio and quick ratio. The inventory
turnover and working capital ratios showed positive indications placing Dick’s above the
industry average. The gross profit margin showed positive indications as well with Dick’s
over the top of its competitors. These were some good signs that Dick’s is growing and
has been profitable for the past years. These ratios show the liquidity, profitability, and
capital structure for the firm in the past 5 years calculated.
The internal growth and sustainable growth rates were calculated as well to help
us decide how fast Dick’s is growing. 14.6 % was average internal growth and the
sustainable was 39.08% in the past 5 years. The growth did not seem reasonable for our
future estimates and so we decided to go with 5%. We assumed 5% because of the
actual industry growth is between 3-4 percent. Dick’s seemed to be growing a little
faster than the industry and so that is how we decided to go with 5%.

Intrinsic Valuations Models

The valuations models we used include; Discounted Dividends Model, Residual
Income, Long-run Residual Income Perpetuity, and the Abnormal Growth Model. We did
not include the Discounted Dividends model because Dick’s does not pay any dividends,
and so it did not make any sense in our valuation. All these models gave us an implied
share price. The implied price tells us what the share price should be. With this price we
can determine if Dick’s Sporting Goods is under or overvalued. The estimated prices that
we calculated are all discounted back to present values. The WACC and Ke were all used
throughout the different models to be able to come out with the share price.
All of our intrinsic valuation models were fairly consistent with the implied prices.
We observed a price of $31.18 on November 1, 2007 and was a benchmark tool to

7
evaluate if the firm was under or overvalued. We even had an 18% spread of the
observed price. All of our models indicated Dick’s Sporting Goods to be overvalued.
Taking the value of the firm for Dick’s and doing the sensitivity analysis gave us most
values calculated under the $31.18. This demonstrates Dick’s being overvalued. All of
the models we used showed the same outcomes in respect to under and overvalues. The
AEG and the residual models are the most commonly used because they are the most
reliable in terms of confidence and accuracy.
After analyzing all the models discussed, we determined that Dick’s Sporting Goods
is overvalued and recommend selling the stock as of November 1, 2007. The Altman Z-
score showed Dick’s to be above 3.1 in the past years and even higher than 5 in 2003.
This credit analysis is a measure of the probability that a company will go bankrupt.
Dick’s seems to be profitable and less likely to go bankrupt. The Altman Z-score uses 5
different ratios from balance and income statements to calculate this measure. The
higher the ratio, the better the indication is that a company is at low risk of bankruptcy.
With this credit analysis, Dick’s seems to be a grade A investment. They have been over
the top of the industry average in most of the comparisons that we did.

8
 Business and Industry Analysis
Company Overview
Dick’s Sporting Goods, is an authentic sporting goods retailer. Dick’s Sporting
Goods was founded in 1948, by Richard Dick Stack. It currently operates 322 stores in
34 states. Their stores are mainly located in the eastern parts of the United States.
Dick’s Sporting Goods main goal is to offer costumers the opportunity to “enhance
their performance and enjoyment of their sports activities.” (Dick’s 2006 10k) Its primary
focus is to attract consumers seeking genuine products rather than products on the latest
fashion trends or style. Dick’s is full line sports retailer in the specialty industry. Their
merchandise includes: sporting goods equipment, athletic apparel, footwear, outdoor
recreation equipment, fitness equipment, and fishing and hunting accessories, as well.
Dick’s goal is to be a high quality retailer offering well known brands such as Nike, North
Face, Columbia, Adidas, Callaway, and Under Armour. As well as a couple of their private
brand labels available only at their stores like Walter Hagan and Ativa. “We seek to
create a distinct look and feel for each specialty department to heighten the customer’s
interest in the products offered.” (Dick’s 2006 10k) Dick’s Sporting Goods focuses on the
customer is a key to their success.
The sporting goods industry consists of about 20,000 stores. This specialty retail
industry is very competitive and has many competitors. Dick’s Sporting Goods major
competitors consist of Cabela’s (CAB), Big 5 Sporting Goods (BGFV), and Hibbett Sporting
Goods (HIBB). Dick’s Sporting Goods has a market cap of $3.61 billion. Cabela’s is a
fierce rival to Dick’s Sporting Goods and growing fast. Cabela’s current market cap is
$1.56 billion. Hibbett is another well established sporting goods retail company with a
market cap of $765.15 million. Dick’s Sporting Goods is one of largest sporting goods
leading retailers. Dick’s Sporting Goods has been steadily increasing their sales and
profits by expanding their stores all over the United States. On July 29, 2004, Dick’s
Sporting Goods Inc. acquired all of Galyan’s Sports & Outdoor common stock and its 47
stores. Its continuous growth in sales and profits also allowed Dick’s to recently purchase

9
Golf Galaxy, Inc. and its 65 stores, “which became a wholly owned subsidiary of Dick’s by
means of a merger of Dick’s subsidiary with and into Golf Galaxy.” (Dick’s 2007 10K)
Dicks Sporting Goods has been increasing their sales and profits by expanding
their stores all over the United States. Their total assets and net sales have been
increasing over the past five years. This table indicates what portion has come from
sales growth and what portion has from the opening of new stores. (Invetopedia.com) As
for Dick’s, besides in year 2003 where comparable sales decrease to 2.1% it increase to
2.6% in 2004 which means that Dick’s was able to earn 2.6% more revenue compared to
year before. As for in year 2005 it remain the same and then a huge increase to 6.0% in
2006. This increase in 2006 is good because it shows that Dick’s is growing and that
consumers are willing to pay more for goods this year thus showing an increase to
revenue. The numbers are displayed below.

Total Assets, Net Sales, and Comparable Sales Growth

2002 2003 2004 2005 2006
Total
Assets $321,982 $376,226 $543,360 $1,085,048 $1,187,789
Net Sales $1,272,584 $1,470,845 $2,109,399 $2,624,987 $3,114,162
Sales
Growth 5.1% 2.1% 2.6% 2.6% 6.0%

Dick’s Sporting Goods stock price has increased from $19.20 in 2002 to $48.27 in
2007. The percentage change has really increased in the past years. If you compare the
price change from Dick’s Sporting Goods to its competitors, the price change really stands
out. Dick’s Sporting Goods direct competitors price change is not much different from the
past five years.

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www.moneycentral.msn.com

Industry Overview
The retail industry “includes establishments engaged in selling merchandise for
personal or household consumption and rendering services incidental to the sale of the
goods” (www.osha.gov). According to the U.S. Department of Labor sporting goods
retailer companies are given the Standard Industrial Classification Number of 5941. The
sporting goods retail industry consists of retailers involved in the advertising and
distributing of “new sporting goods, including bicycles and bicycle parts, camping
equipment, exercise and fitness equipment, athletic uniforms, athletic apparel for men,
women and children, specialty sports footwear and other sporting goods, equipment and
accessories”(www.ibisworld.com).
The retail sporting goods industry consists of over 20,000 companies with
combined annual revenues of approximately $25 billion each year. The major
competitors of Dick’s Sporting Goods in this industry are Big 5 Sporting Goods, Cabela’s
Incorporated, and Hibbett Sporting Goods. Due to the fragmentation of the market,
companies must rely on their merchandising and marketing skills. For example, Dick’s
Sporting Goods has been involved in sponsoring several major and regional sports teams.
Sports apparel and footwear tends to be the largest sellers in most sporting goods stores,
this is mostly due to the cyclical nature of the sporting world.

11
 There are four different types of sporting goods retailers. The first type is the
large specialty sporting goods stores and chains like Dick’s Sporting Goods, Cabela’s Inc.,
and Big 5 Sporting Goods. The second type are large discount retail stores like Wal-Mart,
Target, and Sears, that have a small sporting goods section located within them. The
third type of sporting goods stores are specialty shops that carry deeper lines of products
focused on a certain team or sport. The last type of stores is the online retail stores,
which provide a wide variety of products available for purchase over the internet. Even
though these smaller and larger companies are a part of the competition, they are not
specialized sporting goods stores with the same inventory and sales as Dick’s, so they do
not compete directly with Dick’s.

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 Five Forces Model

The five forces model is a tool used to analyze the profitability and competition in
a given market. The five segments of this model are used to evaluate an industry in
specific areas. The five forces model is made up of: rivalry among existing firms, threat
of new entrants, threat of substitute products, bargaining power of customers, and
bargaining power of suppliers. The first three parts of this model are used to analyze
potential competition in the industry. The last two parts focus on the power suppliers
and customers have in relation to the firm. Overall the model is used to evaluate
problems affecting the profitability of a firm in a market.

Sporting Goods Retail Industry

Rivalry Among Existing Firms High
Threat of New Entrants Moderate
Threat of Substitute Products High
Bargaining Power of Buyers High
Bargaining Power of Suppliers Moderate

Rivalry among Existing Firms

In general the retail industry is highly competitive, forcing most companies to
compete on price. The sporting goods retail industry is extremely competitive, with many
factors weighing into the success of any individual company. Not only does the industry
face a very low growth rate, but it also has an extremely high fragmentation of the
market. Within the sporting goods retail industry companies must compete against each
other with very little differentiation between their products. But there are other factors
that determines the profitability of a firm, such as whether or not there are switching
costs, the scale of the economies, fixed -variable costs, the capacity level, and exit
barriers. These are all variables that contribute to the overall success of the firm.

13
Industry Growth Rate
Industry growth plays a very crucial role in the success of a firm. If the growth
rate is high, then existing firms in the market need not grab market share from each
other in order to grow. On the other hand if the market has little to no growth, then
companies must compete in order to be successful. In recent years the U.S. sporting
goods market has had moderate growth, with “sales barely matching the growth of the
economy” ( www.ita.doc.gov). According to the U.S. Department of Commerce real
apparent consumption has only grown 3 percent in recent years. This low growth rate
makes the industry extremely competitive, and many smaller companies have trouble
competing. As a result companies that already exist are forced to compete by acquiring
smaller companies that already has a consumer base. This is evident by companies like
Dick’s acquiring smaller companies like Golf Galaxy just this year.

Industry Sales Growth

4.5 4
4
3.5
2.95
3
2.33
2.5
1.973
2
1.5
1
0.5 0.23
0
2002 2003 2004 2005 2006

The comparable same store sales’ is another way to see how the company and the
industry are doing. It measures the “productivity in the revenue and sales of a store in
comparison to its operation in the previous year” (Answers.com). Basically this shows
what portion of the overall sales was due to new store openings. This analysis is

14
important because for those companies that are growing quickly and establishing many
new stores, these figures can help differentiate between sales growths that come from
new stores and growth of existing stores. So the following table illustrates what the new
store openings contribute to the overall sales growth. Along the growth at the industry
level, these percentages show what portion of growth came from opening of new stores.
In 2006, there was a huge jump the new store openings sales growth. Following the
comparable same stores sales is a chart showing the amount of stores opening by each
company each year. Due to the slow industry growth rate, the pressure of competition
increases, forcing companies to buy out smaller companies which is apparent in the
chart.

Comparable Same Store Sales

2002 2003 2004 2005 2006
Dick's Sporting Goods 5.10% 2.10% 2.60% 2.60% 6.00%
Cabela’s Inc. 3.70% 0.60% -0.10% -6.20% 1.30%
Big 5 Sporting Goods 3.90% 2.20% 3.90% 2.40% 4.00%
Hibbett’s Sporting Goods 2.70% 3.90% 5.30% 5.70% 5.60%

Store Openings

80
70
Number of Stores

60
Dick's Sporting Goods
50
Cabela's Inc.
40
Big Five Sporting Goods
30
Hibbit's Inc.
20
10
0
2002 2003 2004 2005 2006
Years

15
Concentration
Concentration is the number of companies an industry possesses, typically the
lower the number of companies in a given industry the higher the profit margins. The
retail sporting goods industry “is highly fragmented: the 50 largest companies hold less
than 50 percent of the market” (www.firstresearch.com). In recent years there has been
an over abundance of choices for consumers to choose from, with many of the large
chain superstores expanding and creating new stores. Large companies in the market
have a competitive advantage over smaller companies due to their ability to carry a wider
variety of products.

Market Share

50.00%
45.00%
Percentage Change

40.00%
35.00% Hibbett Sports
30.00%
Big 5 Sporting Goods
25.00%
20.00% Cabela's Inc.
15.00% Dick's Spoting Goods
10.00%
5.00%
0.00%
2002 2003 2004 2005 2006
Year

Differentiation and Switching Costs

Most of the products and labels sporting goods stores carry are generally the same
throughout the entire industry. This similarity in quality and price causes an increase in
competition pressure and a result; companies have to find alternative ways to
differentiate their products and services. Since there is a similarity in products within this
industry, this allows costumers to switch from one firm to next. In other words, since the
products are very similar, “costumers are ready to switch from one competitor to another
purely on the basis of price”(Business analysis and Valuation). Because of these low

16
switching costs many companies in the industry must find a way to differentiate
themselves from each other. So firms have found alternate ways of using their resources
they already have to attract the consumers. Many of the larger sporting goods stores
have begun to change their entire store format to make their shopping experience more
enjoyable by adding entertainment aspects such as climbing walls, driving ranges, and
exercise facilities (www.ita.doc.gov). Another alternate way firms have used is to offer
promotions and sale discounts on their products.

Economies of Scale

Total Assets
2002 2003 2004 2005 2006
Dick's Sporting Goods 321.98 413.53 543.36 1,085.05 1,187.79
Cabela's Inc. 521.01 581.63 728.49 694.03 954.22
Big 5 Sporting Goods 190.41 223.19 237.44 255.90 262.61
Hibbett Sporting Goods 87.68 103.19 142.26 167.35 155.48
*in millions of dollars

The size of a company can make a huge difference, especially in the highly
competitive sporting goods retail industry. With the sporting goods industries becoming
more and more fragmented, larger companies have an advantage with their ability to sell
a larger variety of brands and products. As the figure above illustrates Dick’s Sporting
Goods and Cabela’s Incorporated are the two leading companies in the industry, making
it easier for these companies to draw customers to their stores due to their ability to offer
lower prices. The chart below shows the amount of stores increasing each year and
Dick’s is one of the leading competitors.

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 Store Openings

80
70
Number of Stores

60
Dick's Sporting Goods
50
Cabela's Inc.
40
Big Five Sporting Goods
30
Hibbit's Inc.
20
10
0
2002 2003 2004 2005 2006
Years

Ratio of Fixed to Variable Costs

The ratio of fixed to variable cost is another indicator of how the company is
handling its operating costs. Fixed costs are expenses do not change despite the change
in companies activities. Common examples of fixed costs are lease payments and
salaries. Variable costs refers to expenses that do change in proportion to sales is
variable costs. This can include many things such as costs of goods sold, sales
commission, etc. If the ratio is low this indicates that companies are not locked in from
their obligation such as operating lease payments and have liberty to use their money in
different ways. But on the other hand, if the ratio is high this means that the companies
have many obligations to be met and are not so free to use their money for different
resources.
As for the sporting goods industry most of their fixed costs consists of operating
leases. As noted before companies are purchasing new stores and acquiring new leases
which require payments due for a certain amount of time. The same applies to the fix
salaries amount that companies pay their employees each year. Many companies invest
in large amounts of inventory to sell at lower prices to cover these costs. As for variable
costs, it can refer to many things such as all of cost of goods expenses, amount of fuel it
takes for a freight to distribute the goods, to the amount of packaging required for the

18
goods, etc. These variable costs vary each year relative to the amount of sales
produced.

Excess Capacity and Exit Barriers

Excess capacity in an industry is when supply exceeds demand, which creates an
incentive for a firm to cut prices in order to fill capacity. For larger companies in the
sporting goods retail industry, like Dick’s, Cabela’s, and Big 5 Sporting Goods, excess
capacity is very controllable, but for smaller companies it can be difficult to control due to
less pricing control. A firm within the sporting goods and retail industry could face
difficult exit barriers. For example, when a market is doing poorly, it would be costly for
firms to exit the industry. It will be an extremely challenging task to clear out their
assets. Regulation is another factor that would make it costly for any firm to leave the
industry. When a market is doing poorly some larger firms can face the problem of
turning customers off of their products if they try to leave that market, so in order to
keep a friendly customer base they must stay within the market.

Conclusion
The sporting goods retail industry is highly competitive, with a very fragmented
concentration. Because of its low growth rate companies must rely on their marketing
and merchandising skills in order to draw a bigger customer base. Larger companies
have a major advantage, because of deeper inventories and more options to choose
from.

Threat of New Entrants

New entrants are easily attracted to an industry when there is the potential for
earning major profits. New firms in an industry can add pressure to current companies
within an industry depending on how low the industry growth rate is. A key determinate
of industries profitability is the ease with which new companies can enter the market.
The major concerns when dealing with new entrants revolve around economies of scale,
distribution access, relationships between suppliers and consumers, and legal barriers.

19
Economies of Scale
It is important for any new company planning on entering an industry to first
realize the economies of scale in that industry. The sporting goods retail industry is
highly fragmented, with “50 largest companies hold less than 50 percent of the market.
Only about 150 companies have more than five stores”(www.firstresearch.com). Larger
companies do have an advantage over smaller new companies due to their ability to have
a much larger and broader inventory.
The market for sporting goods retail does have a very small growth rate however,
so newer companies must utilize their marketing and merchandising skills. Smaller
companies are able to compete if they carry a deeper line in a specialized sport, or if they
focus on a local market such as professional or college teams. New companies looking to
enter the sporting goods retail market could find it much easier to establish an online
website. Larger companies have taken advantage of internet shopping in recent years,
and have set up websites which makes it quick and easy for customers to purchase
items. According to the following chart, for a smaller company to even compete on the
same level as large companies in this industry, these are the values that they would be
up against. It is easy to conclude that smaller company’s entering in this market are at a
disadvantage.

Total Assets
2002 2003 2004 2005 2006
Dick's Sporting Goods 321.98 413.53 543.36 1,085.05 1,187.79
Cabela's Inc. 521.01 581.63 728.49 694.03 954.22
Big 5 Sporting Goods 190.41 223.19 237.44 255.90 262.61
Hibbett Sporting Goods 87.68 103.19 142.26 167.35 155.48
*in millions of dollars

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Access to Channels of Distribution and Relationships
In any industry it is important to have channels of distribution, because the cost of
new channels can dissuade a company from entering the market. In the sporting goods
retail industry it is extremely important for new firms to develop relationships with
manufacturers and customers. Larger firms have a greater advantage in this due to the
larger orders placed through certain manufacturers, and the time spent in the market
developing a personal relationship with customers. The relationship that already exists
between the firms and their costumers make it extra difficult for new companies to enter
into the market. A smaller company can try to enter into a deeper product line in
specialty products or try to serve a local market.

Legal Barriers
In general the retail industry has very few legal barriers to entrance; this is true
for the sporting goods retail industry. Smaller companies that focus on a particular team
might need to create a contract in order to distribute that teams name products,
especially if they are creating the merchandise themselves. Because of the lack in legal
barriers the sporting goods retail industry has a higher risk of new companies entering
the market.

Conclusion
Due to the sporting goods retail market being extremely fragmented, the threat of
new entrants is always possible. The difficulty that new entrants have on entering the
industry also determines the amount of profits a certain firm is able to obtain. The are a
couple of factors that new entrants face, such as the large economies of scales where the
level of competition among existing firms is to high for new entrants. Another factor is
not being able to develop an relationship with suppliers so easily due to the already
existing relationships between existing firms and their suppliers. Finally one of the few
opportunities that smaller companies do have is the few amount of lack there of legal
barriers. But in all these companies do face a hard time competing against larger
companies and generally must become specialized stores in order to compete.

21
Threat of Substitute Goods
Another form of competition in the industry is the threat of substitute products.
Substitute products can be the similarity between the products sold between the
companies or it can also refer to the products that perform the same task. Within the
sporting goods industry the threat of substitute products are low when it comes to
apparel clothes or shoes, because these products are necessary when performing any
extracurricular activities. In other words, what can one wear when performing the task of
running? But for the larger format stores that have the different level of entertainment
within the stores, i.e. wall climbing, indoor track, etc., one can easily avoid the cost of
traveling to these stores and go somewhere else to perform the same activities. But still
it is important for companies to meet all the needs of its customers if it is going to
compete in this market.

Buyer’s Willingness to Switch

Because of the several different options a consumer has in the sporting goods
retail industry, it is important for a company to provide the consumer with the product
and price they are looking for. Since there are many types of consumers that are willing
to switch products just on price, makes for low switching cost which becomes a factor for
the sporting goods industry. But on the other hand, there are consumers that are not so
willing to incur the cost of shopping around just to find the lowest price possible also
plays a critical driver for this industry. Thus sporting goods stores must put a higher
emphasis on customer service in order to give the consumers a pleasant and enjoyable
experience. But the fact that there are costumer’s that are willing to switch becomes a
huge factor that sporting good stores must face at all times.

Relative Price and Performance

Substitute products for the consumers usually depend on whether or not they
perform the same task for the same price.( the book) As a result consumers are more
willing to switch purely on price. But when the prices are low, consumers might feel that

22
the products are low in value. So the sporting goods retail industry incorporated having
brand name products that commands a premium on price, consequently consumers feel
that these brand name products have a higher value since it costs more. Consumers are
always looking for the best quality at the lowest price. The sporting goods industry
acknowledges this area by carrying a variety of products. There are no name brands to
well known ones. It is also important that they carry high quality products sold at a
reasonable price since that is usually what consumers are looking for. In order for a
company to compete in this industry it must satisfy all of its customer’s needs by offering
these brand name products sold at a fair price. As a result, sporting goods stores have
begun a policy that allows customers to price match for their goods.

Conclusion
Because of the ease in which consumers can find a substitute product it is
important for companies in the sporting goods industry to provide a great shopping
experience for its customers. Due to the industries low switching costs it is important
that companies provide a customer friendly environment. This means providing quality
goods for a reasonable price, along with great customer service and support.

Bargaining Power for Costumers

Consumers have a bargaining power that initially creates a demand in the

industry. If the bargaining power of the consumer is high; this indicates that there are
many sellers and few buyers in the industry. On the other hand, if the bargaining power
of the buyers is low, it exemplifies that it has a limited affect on business operations. In
an industry where the concentration of buyers demonstrates that the bargaining power is
high and is sold “directly to the final customers”, this allows the industry to compete on
price.
The sporting goods retail industry consists of a market that is highly fragmented
and competitive. The companies consist of categories in large-format sporting good
stores and chain, discount and department stores, and specialty stores. These stores can

23
be located in various locations such as in the mall, or be free standing with a parking lot,
or near a recreational area. Since there are numerous of locations where a costumer
could initially purchase a sporting goods product, this reflects on the costumers
bargaining power of the companies. Also, this is an industry that consists of different
types of costumers such as enthusiast, intermediate, and a beginner level. All of these
factors determine the bargaining power of the costumer. (www.commerce.gov)

Price Sensitivity

“Price sensitivity determines the extent to which buyers care to bargain on price.”
(Business Analysis & Valuation) Consumers ultimately tend to seek the lowest price
possible. But there are certain factors that determine whether or not the consumer is
willing to incur the cost of finding the lowest price. Factors such as: the differentiation of
a product and the amount of suppliers in a certain area. When the products are similar
within the industry, costumers are more willing to switch products based entirely on
price.
In the sports goods industry products are either “sold in small quantities to the
general public” or in large quantities to major or regional sports team. At the general
public perspective there are three different types of costumers: beginning, intermediate
and enthusiast. If the costumer is at a beginning or even at an intermediate level, they
are more concern with price rather than quality. In a industry where there are low
switching cost and the product is undifferentiated, costumers are more inclined to
purchase their products at the nearest sporting goods store. This in turn impacts the
industry where they tend to compete in price wars. In retrospect, major and regional
teams usually have the resource and are more concern in purchasing sporting goods
products pertaining to their quality rather than price. The same applies to costumers who
are enthusiast. These types of costumers will incur the cost to go to the location that
offers the best type of quality. For these costumers, switching cost is relatively high and
differentiation does matter.

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Relative Bargaining Power

The relative bargaining power refers to the ability a costumer has to switch from
one supplier to the other despite the price of the product and in turn eventually impacting
the company. In the sporting goods retail industry, top companies generally sell the
same products such as top brand name apparel and equipment causing this industry to
be undifferentiated and have low switching cost. Also there is a high level of competition
and as a result, costumers have a high relative bargaining power. This in turn affects the
company where they are forced to differentiate themselves from their competitors.
Companies can lower their price but this will ultimately have a negative impact since
there are low switching costs. They are not impacted when a single costumer decides
not to purchase their product. This leads companies to develop new strategies and ideas
of attracting the costumer. “Since there are more places and choices to shop, this has
created a survival of the fittest mentality where many retailers have opted to super-size
themselves in to larger stores and even creating stores that are more of an entertainment
to costumers.” Such as creating stores that have in-store features such as: climbing
walls, exercise facilities, basketball courts, golf driving ranges, and etc.
(www.commerce.gov). In the sporting goods retail industry, there is a high level of
competition, the products are undifferentiated, and there are low switching costs and
thus allowing costumers to have a high bargaining power over these companies.

Conclusion

In this sporting goods retail industry, there is a high level of competition. As a

result, companies in this industry must consider the factors that contribute to the
bargaining power that their consumers have over them. Factors such as price sensitivity
and the relative bargaining are crucial in analyzing and applying to their business strategy
in order to become profitable.

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Bargaining Power of Suppliers
For any type of industry, there are suppliers where their business is to supply the
companies with materials or products. Companies acquire these products at a cost from
the supplier which basically determines their profitability (www.tutor2u.net). Suppliers
have a high bargaining power when there are many buyers and a few suppliers.
Subsequently, the products have a high value where companies are forced to incur cost
depending on the suppliers demand. Also the industries are not the supplier’s primary
costumer. When the bargaining power is low, this indicates that there is an ample
amount of suppliers and few costumers. Companies are able to bargain on prices with
their suppliers.

Price Sensitivity

As mentioned before, price sensitivity refers to the particular costumer willing to

look for the lowest price. In the case of suppliers, it is their willingness to allow
companies to bargain with their prices. In the sporting goods retail industry, companies
purchase their merchandise from different type of vendors since they carry a wide range
of products. Their products vary from top quality brand name goods to lower qualities
and for the average costumer they usually seek to get the best quality for the lowest
price. As a result, the bargaining power for suppliers is low. Since suppliers also use
sporting goods companies to sell their products and sell in larger bulk, they tend to allow
companies to bargain for their price.

Relative Bargaining Power

The relative bargaining power of suppliers deals with if they are able to sell their
products at the highest possible price. This depends on the amount of suppliers and
buyers in the industry, product differentiation, and the importance of their product
relative to the costumer. Analyzing these factors, determines the level of bargaining
power a supplier has over their costumer. In this industry there is an ample amount of

26
suppliers competing for retailer’s shelf space. But there are some suppliers that are able
to have a higher bargaining power than others. Sporting good retail stores incur
additional cost in order to have brand name products in their shelves. Therefore these
types of suppliers have been able to achieve differentiation within their products and sell
at a higher price. Since costumers do seek value in products, companies do find it
important that they carry top name products in their line. Although companies do carry
other similar products but a lesser value, the relative bargaining power for suppliers
would be moderate.

Value Chain of the Industry

The Overall Classification of the Industry

In order for a company to be successful, the industry has to have an available

niche that a company can grab and run with. Each company has two available strategies
that can eventually yield a more attractive competitive advantage: cost leadership or
product differentiation. While considering both, a company has to decide if they want to
distribute a mass produced product at a lower cost or select a unique product or style
that creates attraction to the public. In this type of industry, the majority of companies
incorporate a mixed strategy of cost leadership and product diversity to gain market
share or a competitive advantage. Surprisingly, if it were this easy sporting good stores
would enter the market consistently across the country.
Previously considered factors such as high rivalry among existing firms, moderate
threats of new entrants, high bargaining power of buyers, and low bargaining power of
suppliers lay out the difficulty in maintaining a competitive advantage in the considered
industry. Therefore, it is best to consider a two-headed strategy that in some way
incorporates both a low cost advantage and a unique approach. The sporting good retail
market is similar to any other retail market because established outlets already have
advantages. These advantages include good relationships with suppliers, an established
client base, and experience. Being a major competitor such as Dick’s Sporting Goods or

27
Foot Locker requires more than just a low cost strategy; a value chain is necessary to
fulfill an entrance. Although both strategies are necessary, a cost leadership strategy is
the focus with an emphasis of differentiation. In order to compete with the specialty
stores that only cater to a certain spectrum, lower cost driven stores have the ability to
diversify selection and compete on prices. Thus, “large chains have an advantage in
stocking a wide variety of goods” (www.hoovers.com). With an extensive selection of
products, competition is limited and profit margins potentially grow.
The decision to enter the sporting good retail industry breaks down into many
factors that add up to form a value chain. This chain consists of components involving
economies of scale, lower input costs, superior product variety, research and
development, and tight cost control systems. Also, an “aggressive pursuit of a creative,
optimistic strategy can propel a firm into a leadership position, paving the way for its
products and services to become the industry standard” (www.allbusiness.com). Without
some of these elements, the chain breaks and competitive advantage weakens against
the rest of the market.

Economies of Scale and Scope

Emphasizing economies of scale in this industry is proactively the best

consideration, but is hard to do as a newcomer to the market. Economies of scale refers
to when a as a company grows and amount of production increases, these companies will
then have a better opportunity of decreasing its costs. (investopedia.com) Therefore, big
companies already have a competitive advantage in lower costs and customer purchasing
price. The economies of scale can arise in by making large investments in the in
company’s size and products. By expanding its store size, opening more stores, and
purchasing larger quantities of products, companies are able to have more available
products thus reducing their costs in the long run. For example, companies like Dick’s
and Big Five sporting goods have been able expand their companies by creating larger
format stores and creating a chain of stores throughout the country either by merging
with another company or by acquisition. As for other companies like Hibbett’s, they have

28
been able to establish 202 of their stores in enclosed malls around the country (Hibbett’s
2007 10-K). As for economies of scope which is similar to economies of scale, it is
associated by the demand-side of changes by increasing scope of marketing and
distribution. For example, some companies promote and sell their products through
catalogs like Cabela’s, in which each year they mail out about 135 million catalogs in and
out of this country. (Cabela’s 2007 10-K) In all, each company has also been able to
advertise and sell their products through the internet. Being able to have products more
widely available to the consumers, allows companies the opportunity to decrease its costs
thus achieving the theories of economies of scales and scope thus having economic
growth.

Lower Input Costs

Without a cost advantage, the sporting good retail industry would only offer
specialty stores that cater to very specific needs. Certain aspects of the market require a
low cost input, which stems off the economies of scale philosophy. If agreements
between suppliers and stores do not form through contracts then cost can become an
issue. In order to sustain a profit margin, cost needs to be the main area of focus. Input
costs are minimized by eliminating overhead and maintaining a valuable relationship with
suppliers. When purchasing products in bulk, suppliers typically reduce price due to a
mass quantity. In order to create a reliable connection with a supplier the firm has to
move product in a timely manner. In addition, just as the firm has to sell its products, the
suppliers have to deliver their end of the bargain within a respectable period.

Superior Product Variety

The sporting goods retail industry in general has high demands for a selection of
the best products available on the market. Customers’ personal preferences and tastes
are segmented into different categories that a successful firm should be able to fulfill on a
consistent basis. As mention before, there are three types of costumers for the sporting

29
goods industry which includes costumer at a beginner, intermediate, and at a enthusiast
level. Since there are intermediate and enthusiast costumers, they tend to seek top
private labels offered at premium prices. Each company differs on what exclusive brand
offering they have to offer the costumer but each try to incorporate a line of these
products for the consumers. Furthermore, customers always want the best product at
their price; thus, a superior product variety yields more customer satisfaction. Happy
customers equal a positive return on investment. With superior products, competitors
face more market decisions and are forced to compete on selection. Knowing what type
of product to sell at the right time when comparing seasonal sports is important. In fact,
without any research into product popularity or customer taste a superior product variety
might not exist. Factors such as what type of costumers would purchase these products,
the time of year to sell a certain product, and as well as role of the economy, all come
into play on deciding the type of product quality and variety to offer to the consumers.

Research and Development

Through investing in research and development, firms can discover their ability to
market product more efficiently. In order to maintain an appropriate selection of product,
firms have to know the customer’s preference, willingness to buy at a price, and the
popularity of a product. Companies also need to be up to date with the following trends
and styles in order to appeal to their consumer base. Without knowledge of the market,
a firm cannot proactively accomplish any of these factors. In the sporting goods industry,
companies have invested in having a personal staff that continually searches for the
latest products out in the market. Companies have also been able to establish costumer
feedback either through their own personal website or catalogs. On each of the
company’s website, one is able to set up an account and be informed on the latest
products as well as giving back personal feedback. This is also an important tool for
companies to use on determining what products to have available.

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Tight Cost Control Systems
Companies that try to achieve cost leadership generally focus on tight cost
controls. Companies have to develop a system that beneficial to their own company that
allows them to control their costs and maintain a competitive advantage in the industry in
other words, companies will have to find ways to monitor and lower their costs while still
maintaining a profit. One way that this is achieved is by having accessible distribution
centers that allows for stores to have their merchandise more readily available with out
incurring the cost of expensing extra money to receive the goods. Another way is having
inventory control where companies can set up a system at each store that will allow them
to know which items are out and which items are coming in. Also, being able to know
which stores are producing profits and ones that profits are declining also helps in
minimizing costs.
In the sporting goods industry, all of the companies in this industry
currently have more than two distribution centers that have products readily available to
be shipped to the stores. These distribution centers are usually equipped with mass
quantities of products that can facilitate one to two hundred stores. Among these
companies like Dick’s, Cabela’s, Big 5, and Hibbett’s, each have operating system that
allows them to track all of the inventory that has been purchased and sold. Over the past
years, most of these companies have grown in considerable portions, some being able to
establish about 20 to 30 stores per year. While old stores are still producing an desirable
amount of profits some are not. Therefore companies are shutting down these stores in
order to upgrade their existing stores. Companies in this industry are establishing on
average 40 to 50 stores per year, closing down not so profitable stores has been a huge
factor in minimizing costs. In this industry, companies must focus on economies of scale,
lower distribution and input costs, and maintaining an appropriate tight cost control
system to successfully achieve cost leadership.

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 Store Openings

80
70
Number of Stores 60
Dick's Sporting Goods
50
Cabela's Inc.
40
Big Five Sporting Goods
30
Hibbit's Inc.
20
10
0
2002 2003 2004 2005 2006
Years

Conclusion

Overall, the sporting good retail industry requires a mixture of a cost leadership
principle with an emphasis on differentiation of product. In order to maintain a
competitive firm, companies have to take necessary actions to avoid an eventual exit
from the market. Through consistent addition to the value chain, firms can gain their own
competitive advantage in the market and contribute to the firms overall productivity, both
to profit and popularity. Thus, maintaining economies of scale strategy, controlling costs,
providing a superior brand, researching market trends and potential acquisitions, and
implementing cost systems that address inventory are all components designated in
controlling an elite sport retail store. Without key factors, interruptions in the process
occur, leaving firms without a much-needed competitive advantage.

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 Firm Competitive Advantage Analysis

Dick’s Sporting Goods is in an industry of high competition. Therefore, their main

business strategies to stay competitive have been unique. This lead Dick’s to adapt the
“store-within –a-store” feature which consists of larger format stores containing five
specialty stores within the store. They have achieved cost leadership by using strategies
such as economies of scale and scope, and lowering input costs. They have also
differentiated themselves by supplying great customer service and investing in brand
image. So really they mixed strategies from both a cost leadership and differentiation
strategies to become competitive advantage over the industry. Using these strategies
their profits have increased during the past five years.

Economies of Scale and Scope

Dick’s Sporting Goods have been expanding all over the United States, now with
stores in 34 states. They went from 22 stores in 1994 to 322 stores today and recently
this year acquiring Golf Galaxy and its 65 stores on February 13, 2007. They have
become America’s largest full-line sporting goods company. Dick’s Sporting Goods direct
competitors are much smaller with fewer stores. Dick’s Sporting Goods competitors
consist of Cabelas, Big 5 Sporting Goods, Hibbett Sporting Goods, and other smaller
privately owned stores. Wal-Mart could be a competitor, but we don’t use them as
competitors because their focus on sporting goods is not very large. Dick’s main concern
is their direct competitors that concentrate on sporting goods. Dick’s Sporting Goods
main advantage is that they have over 1,200 vendors they use. Disruption to supplies
could lead to losses in this retail industry, so Dick’s Sporting Goods has all these vendors
to prevent losses and to make sure they are getting the best prices for their merchandise.
Having all these vendors has enabled Dick’s Sporting Goods to acquire high quality
brands at discount prices to stay competitive. Dicks Sporting Goods does not have one
supplier that provides more than 15% of their inventory.

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Lowering Input Costs

Dick’s Sporting Goods increase in productivity has allowed them to purchase large
masses of products from their suppliers. This can result in overcrowding merchandise in
their stores which can cause problems and would lead to discounts to customer to avoid
over crowdedness. Therefore, Dick’s Sporting Goods has two large distribution centers.
“We rely on two distribution centers along with a smaller return facility.” (Dick’s 2006
10K) They operate a 601,000 square foot and 725,000 square foot center in
Pennsylvania and in Indiana. Having these distribution centers allows Dick’s to reduce
individual store inventory investment, have a more timely replenishment of store
inventory needs, and reduce transportation costs. (Dick’s 2007 10-K) The sporting goods
retail industry is very seasonal and Dick’s Sporting Goods maintains inventory available
through their distribution centers. Along having distribution centers to minimize costs,
Dick’s has also incorporated a operating system that allows them to replenish their
inventory to maximize their productivity. By having this efficient operating system
enables Dick Sporting Goods to allocate their products more effectively resulting in an
increase their profit margins and reducing expenses on their inventory.

Customer Service

Dick’s Sporting Goods is a sporting goods store that invests money on hiring the
perfect candidates that know their sports to take care of their customers. “We were the
first full-line sporting goods retailer to have active members of the Professional Golfers’
Association working in our stores, and as of February 3, 2007 employed 279 PGA
professionals in our golf departments.” (Dicks 2006 10K) They have also hired bike
technicians to sale their bikes and service them, as well. They have professional fitness
trainers to sell their fitness equipment and inform the customers with the right
information. So customers that shop at Dick’s Sporting Goods are aware of the expertise
and that’s why they shop there.

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Investment in Brand Image

In order to maintain the loyal customers in their stores, Dick’s has invested on
recognized brands such as Nike, Adidas, Under Armour, and Callaway. They have also
invested on their on brands such as Walter Hagan and Ativa to maintain the loyal ones
and attract new ones. Sports fans usually know what brands they like they stick to them.
Dick’s Sporting Goods is also advertising fan Friday’s to attract the sport’s fan to wear
their favorite teams on jerseys. This simply works for advertisement and the people that
don’t have anything to wear feel the desire to go buy their favorite jerseys.
In order for Dick’s Sporting Goods to stay on the competitive advantage they must
keep innovation with their brand image and quality. Great customer service will
encourage customers to keep shopping and to bring new customers, as well. Dick’s
Sporting goods can not just be differentiated though, they must be aware of the cost
leadership strategies to stay competitive.

Into the Future

Dick’s Sporting Goods is always on the verge of expansion and growth. They
recently acquired Golf Galaxy, which operated 65 stores in 24 states. Dick’s Sporting
Goods went from 22 stores in 1994 to 322 stores in 2007. The sporting retail industry is
steadily growing, but Dick’s Sporting Goods growth has been really increasing fast over
the past years. They hope to keep growing over the years to come. Dick’s Sporting
Goods really invests money on studying where they want to open new stores. They are
very careful on choosing their sites and locations according to the market and availability.
“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.” (Dick’s 2007 10K)
Being cautious and aware of the competition has helped them be successful in opening
new store that will stay open.

35
 Accounting Analysis

The accounting analysis is a tool used to analyze the success of a certain firm
within the market. The analysis uses financial statements in order to have a better
understanding of how well a business is performing and what its future projection looks
like. There is room within accounting systems for managers to influence financial
statement data, making it important for the analysis to understand this and determine
what a manager “used to signal their proprietary information or what is merely disguised
reality” (Palepu and Healy).
Within the accounting analysis consists of 6 steps used to evaluate certain aspects
of the company’s financial statements. These 6 steps include: identify key accounting
polices, assess accounting flexibility, evaluate actual accounting strategy, evaluate the
quality of disclosure, identify potential red flags, and undo accounting distortions.
Identifying key accounting policies is a way to compare its key success factors and its
potential risk. Next a companies accounting flexibility must be measured. Since not all
companies have the same amount of flexibility due to constraints from accounting
standards, we have to keep this in mind when analyzing a company. If a certain
company has accounting flexibility it can use this to either provide information about its
economic situation or hide its true performance, so an evaluation of accounting strategy
must be performed. It is also important for an analyst to evaluate the quality of
disclosure, because even though managers are required to provide a minimum amount of
disclosure, they do have a considerable amount of say in what is released.
One of the most important steps the analyst will make is identifying possible red
flags that could point to questionable accounting. Finally the analyst will undo accounting
distortions if one feels that the company’s financial statements are misleading or
inaccurate. Using all of these steps will help create a successful accounting analysis.

36
Key Accounting Policies

In the accounting analysis it is important to “identify and evaluate the policies and
the estimates the firm uses to measure its critical factors and risks” (Palepu and Healy).
This step is directly influenced by key success factors and risks within the market. As
mentioned in the Five Forces Model Dick’s Sporting Goods key success factors are
economies of scale, tight cost control, and investment in brand image. Due to the
competitive nature of the sporting goods retail industry cost control becomes the most
significant factor. Brand image is a way for companies to invest in marketing the
company’s name; Dick’s utilizes an approach of big brand names for a competitive price.

Continuous Growth
The highly cost competitive market that is the sporting goods retail industry,
creates an atmosphere where companies must continue to grow and expand in order to
stay competitive in the industry. The chart below shows the comparable store net sale
increase percentage and the number of new stores Dick’s Sporting Goods has opened in
the last 5 years.

Sales Growth
2002 2003 2004 2005 2006
Comparable store net sales increase 5.10% 2.10% 2.60% 2.60% 6.00%
Number of Stores 141 163 234 255 294
*Calculated using Dick’s 2006 10-K

The chart show that not only is Dick’s Sporting Goods growing its sells, it has also
been expanding its store base over the last several years. As of August 4, 2007 Dick’s
Sporting Goods owns and operates 315 stores across 34 states. They also own Golf
Galaxy, a multi-channel golf specialty retailer, with 77 stores in 29 states (Dick’s 2006 10-
K). This merger took place in February 2007, and shows that Dick’s Sporting Goods is
wanting to expand its company into other parts of the industry. Gaylan’s Trading Inc.
was another merger that took place for the company in 2004. With these mergers and
the expansion of stores Dick’s Sporting Goods has significantly increased its sales growth

37
and net assets. However, because the opening of new stores is dependent on several
different factors there is a certain amount of risk associated with the opening of new
stores. This is something to watch for when dealing with Dick’s Sporting Goods, because
the industry is so seasonal.

Economies of Scale
Dick’s Sporting Goods use a system of store clustering to take advantage of
economies of scale in “advertising, promotion, distribution, and supervisory costs. We
seek to locate stores within separate trade areas within each metropolitan area, in order
to establish long-term market penetration”(Dick’s 2006 10-K). This clustering can be very
effective for their marketing and advertising program, in which they can “employ their
advertising strategy using a cost effective basis through the use of newspapers and local
and national television and radio advertising” (Dick’s 2006 10-K).
Their merchandise planning and allocation systems optimizes distribution of most
products to the stores by taking a combination of historical sales data and forecasted
data at an individual store and item level (Dick’s 2006 10-K). The company believes that
this helps with markdowns taken on merchandise and improves sales on these products.
Dick’s has a couple of distribution centers, which after a purchase is made it is sent
directly from the vendor to the distribution center, where it is processed and then
shipped to the store. All purchases made from vendors are done on a short-term
purchase order basis.

Operating and Capital Leases

Within the retail industry it is common for most companies to use operating leases
with their stores. This has a major benefit for a company since operating leases are not
recorded on the balance sheet, making shareholders believe that they are more cost
efficient. Dick’s Sporting Goods leases all of its stores for lease terms for 10-25 years
with multiple 5 year renewal options and which expire at various dates all the way to
2027 (Dick’s 2006 10-K). Dick’s Sporting Goods does give information in their 10-K about
amounts owed for both on and off balance sheet obligations including operating leases.

38
Operating leases total up to be 2.8 billion dollars due through 2011, this is a very
significant number. Operating leases are by far the largest owed contractual obligation,
with capital leases only amounting to 7.8 million in comparison. Two of Dick’s capital
lease agreements are from the estate of a former stockholder that mature in April 2021.
They also have a capital lease on a store with a fixed interest rate of 10.6% that matures
in 2024 (Dick’s 2006 10-K). It is apparent that Dick’s prefers to use operating leases
over capital leases, which is generally the case in the retail industry.

Goodwill
Dick’s Sporting Goods did record “$156.6 million of goodwill as the excess of the
purchase price of $369.6 million over the fair value of the net amounts assigned to assets
acquired and liabilities assumed” (Dick’s 2006 10-K). This means that sometimes
managers can over estimate the value of a company that is purchased, such as Gaylan’s
and Golf Galaxy, and goodwill is used to balance the balance sheet. Dick’s evaluation of
goodwill for “impairment requires judgments and financial estimates in determining the
fair value of the reporting unit”(Dick’s 2006 10-K). This means that they continually
reevaluate their goodwill to accurately report the difference between the purchase of
Gaylan’s and Golf Galaxy, and this is what these companies are really actually worth.

Conclusion
The key accounting policies a company uses are directly linked to the key success
factors and risks within a market. If an analyst sees that the company’s accounting
policies do not match its success factors then the analyst should be aware of potential
red flags within that companies financials. With Dick’s Sporting Goods we feel like there
is a good amount of information disclosure when dealing with their financials, and they
provided a decent amount of information regarding mergers and their leasing policy.

39
Areas of Accounting Flexibility
The Generally Accepted Accounting Principles (GAAP) is accounting guidelines for
presenting and reporting financial statements. Firms report financial information so that
investors can make informed decisions on future investments. GAAP allows flexible
methods for reporting data that could lead to distortion in the financial data and could
mislead investors, as well. Information reported should be consistent to improve the
quality and credibility of the financial statements. Balance sheets and income statements
have high amount of flexibility that can be manipulated by top management.

Operating vs. Capital Leases

Reporting operating vs. capital leases in one way flexible accounting helps
managers. In the operating lease, “the lessor transfers only the right to use the property
to the lessee (www.cr-ny.com).” The lessee is only renting the property and has no right
of ownership; therefore the lease can be booked as an expense in the income statement.
The booking of this expense would have no effect on the balance sheet and would be
considered an off balance sheet asset. Dick’s Sporting Goods and most of its competitors
have operating leases for most of their stores. Dicks Sporting Goods operating leases
range from 10-25 years. Dicks Sporting Goods only has two buildings that they have
capital leases on. One of these capital leases is the year 2021 and the other is till 2024.
These operating leases are expenses that do not show up on the balance sheets, which
cause the company’s assets and or liabilities to be understated. So with understated
expenses, the company is going to show overstated net income. The overstated of
owners equity and net income makes the company look more profitable and therefore
investors are more willing to invest.
On the other hand, capital leases are treated as paying interest on debt. When
you have capital leases you assume the risk of ownership. Capital leases do affect the
balance sheet, unlike operating leases. “If it is a capital lease, the lessor records the
present value of future cash flows as revenue and recognizes expenses. The lease
receivable is also shown as an asset on the balance sheet, and interest revenue is
recognized over the term of the lease, as paid (www.cr-ny.com).” Capital leases can be

40
listed as assets or liabilities on the financial statements. They show up as assets under
plant, property, and equipment. They can also show up liabilities under lease payments.
Companies use capital leases to benefit some of the tax shelters, depreciation, and
reduction in interest expenses.
Operating and Capital leases can be used by managers in several different ways.
The flexibility of GAAP to allow these reporting methods allows managers to cover up
some of the true numbers of the companies. The methods managers use does not mean
its wrong, but can compensate them by making their company seem more prosperous
and meet certain covenants.
GAAP also allows flexibility in the reporting of goodwill and intangible assets.
“Goodwill and other finite-lived intangible assets are tested for impairment on an annual
basis (Dick’s 2006 10K).” Valuation of goodwill and intangible assets requires estimation
from managers which could have some estimation error. These estimations could lead to
some degree of potential “red flags”. When the carrying value of the assets is greater
than the fair value of the assets, then their assets are going to be impaired. Dick’s
Sporting Goods Company reports in their 10K that they determine the fair value by using
independent appraisals in order to come out with the best estimate.

Actual Accounting Strategy

Financial reporting can have either high or low disclosure. High disclosure is when
a company gives a wide range of information for the public as well as the investor. The
company does not try to hide anything. The company discusses all items in great detail.
Low disclosure is the reporting of items in less detail only to satisfy the GAAP. Each
company has the ability to report their information in a conservative or aggressive basis.
Most companies in the sporting goods industry show a mixture of both conservative and
aggressive along with Dick’s Sporting Goods.
Most of the sporting goods industry report operating leases instead of capital
leases in order to hide the true performance of company. This is one strategy that Dick’s
Sporting Goods uses reporting their data. In 2006 they reported $7.8 million in capital
leases and $205.8 million of operating leases. As mentioned previously operating leases

41
are a significant amount of contractual obligations in comparison to capital leases. Dick’s
favors the use of operating leases over capital leases, which is easily seen through their
building construction method. Reporting of these financial data is considered to be an
aggressive accounting strategy. These accounting objectives are what managers choose
to do to best fit the company as well as to earn incentives.
Dick’s Sporting Goods also allow customers to return their merchandise if it is
defective. Dick’s also gives credit or markdowns on merchandise that is purchased and
later customers find same merchandise at lower prize within a time period. They offer
allowances for customer and suppliers to maintain a positive relationship. The recording
of these reimbursements and markdowns are considered to be a conservative strategy
along the industry’s disclosure in their 10K’s.
All companies in the sporting goods industry also offer define benefit plans. These
define benefit plans have several assumptions they have to make to get a well deserve
rate of return along with well estimated discount rate. Dick’s Sporting Goods offers
employee stock options as well as a retirement savings plan or 401(K). Employees must
have completed 1 year of employment and have reached age of 21 years or older to
receive this benefit. The companies make several changes to the rates they choose
constantly on their reporting. These changes have not seemed to have made an impact
on the numbers though. The numbers have stayed consistently through past years. The
reporting of these expenses is considered to be relatively conservative in the industry. All
of these different ways of reporting are acceptable by GAAP. The accounting strategies
Dick’s implements might cover their true performance, but they actually are doing what
everyone in the industry is doing.

Evaluation of the Quality of Disclosure

For an analyst or an outsider to view a firm’s financial statements, managers
usually have a significantly great impact on the amount of disclosure it will allow analysts
to view. Ultimately the amount of disclosure available reflects how well an outsider can
truly understand how the firm is operating. Firm’s report their status on a continuing
basis such as their quarterly statements referred to 10-Q or their annual statements

42
known as 10-K’s. The subsequent section will give an outlook on the quality and
quantitative analysis of Dick’s Sporting Goods annual report.

Qualitative Analysis
Companies generally use different type of ways to provide adequate disclosures to
the public. Types include: the Letter to the Shareholders which discusses the “firm’s
industry conditions, its competitive position, and management’s plans for the future”
(Palepu and Healy). Another type is footnotes which explain the main accounting policies
companies decide to use and the reasoning behind it. As well as the Management
discussion and Analysis section, this provides information on changes in a firm’s
performance. Analysts use this information in order to view the company’s performance
and future decision. With the added information analysts, shareholders, investors, and
the public can have assurance in the current and future outlook of the company.
In general, managers have an incentive to manipulate their accounting numbers in
order to make the financial reports more favorable. By taking a closer looking at Dick’s
footnotes and Management Discussion and Analysis, analyst are able to see if there are
any distortions in the numbers. Dick’s 10-k was able to mention many important
information concerning operating and capital leases, an area were managers can easily
manipulate numbers. But one of the main disclosures discussed inside the most recent
10-k’s, was the acquisition of other companies. Midway through the year of 2004, Dick’s
Sporting Goods was able to acquire Gaylan’s Trading Company inc., which was another
sporting goods store. Through this acquisition, Dick’s assume responsibility of 48 of
Gaylan’s stores causing a dramatic change in the financials reports for year 2004 and
2005. Dick’s 10-k was able to give an in depth analysis of the change due to this
acquisition, but this is an area were financial statements can be easily distorted. Some of
the main items disclosed regarding this was goodwill. “The transaction is being accounted
for using the purchase method as required by (SFAS)”(Dick’s 2004 10-k). The following
statement displays the amount of goodwill calculated based on purchase acquired taken
into account fair values of assets and liabilities.

43
 “In accordance with SFAS No. 141, “Business Combinations.” As of January 29,
2005, $157.2 million of goodwill was recorded as the excess of the purchase price
of $369.5 million over the fair value of the net amounts assigned to assets
acquired and liabilities assumed. In accordance with SFAS No. 142, “Accounting for
Goodwill and Other Intangible Assets,” the Company will continue to assess on an
annual basis whether goodwill and other intangible assets acquired in the
acquisition of Galyan’s are impaired. Additional impairment assessments may be
performed on an interim basis if the Company deems it necessary. Finite-lived
intangible assets are amortized over their estimated useful economic lives and are
periodically reviewed for impairment. No amounts assigned to any intangible
assets are deductible for tax purposes” (Dick’s 2004 10-k/ Management Discussion
Section).

As a result there could be a considerable amount of distortion on the manager’s

behalf. But it seems that Dick’s was able to give an accurate account of the purchase and
goodwill. According to the five year balance sheet, there is a dramatic increase in assets
but goodwill is consistent the following years. Also the income statements do show a
change in net sales but overall there is no erratic change in expense and in net income.
Dick’s Sporting Goods provides good information in their 10-K that is relevant to the key
success factors.

Quantitative Analysis
Transparent Financial Reporting refers to the ability to allow outsiders to acquire a
“true and fair” picture of the firm’s financial statements (Ch 1. Class Notes). But
managers are able to make their judgments on displaying their financial statements
because they have personal comprehension of their company’s operations. In order
words, they have the discretion on to how much information they will present in the
reports. The amount of flexibility that managers have, usually results at a cost. If
managers have a fair amount of flexibility, this tends to make the financial reports less
informative and not reflect their genuine business. On the other hand if managers

44
flexibility is limited, this result in a aggressive financial reports which decreases the
relevance of the valuation. So if the accounting standards are too strict, managers may
be tempted to restructure their business transactions in order to have a higher earnings.
Quantitative analysis allows for a better evaluation of the financial reports numbering.
Quantitative analysis allows for a diagnostic measure to ensure a greater validity
of the financial reports. There are two types of diagnostics that measures the revenues
and expenses incurred year by year. One is the sales manipulation diagnostics which
computes ratios of net sales to cash from sales, net account receivable, unearned
revenues, warranty liabilities, and inventory. These ratios determine if the sales acquired
is accurate. The other type is expense manipulation diagnostic which includes ratios for
declining asset turnover, changes in CFFO/OI, changes in CFFO/NOA, total
accruals/change in sales, pension expense/ SG&A. These ratios determine how well the
firm is managing their expenses.

Core Sales Manipulation Diagnostics

As noted before, managers have a significant impact on the financial reports given
every year. Their incentives drive them to manipulate the numbers in order to show the
reports in their favor. By allowing outsiders the opportunity to view their annual reports,
a thorough analysis can be conducted to observe a company’s true performance. The
following will display a graphical analysis of Dick’s Sporting Goods sales performance
along with the main competitors such as Hibbits, Cabela’s, Big 5 Sporting Goods, and as
well as at an overall industry level. The graph includes ratios for sales manipulation
diagnostics of: Net Sales/ Cash from Sales, Net Sales/ Net Account Receivable, and Net
Sales/ Inventory. Having the following denominator compared to net sales allow analysts
to see if consistency of the reported net sales.

45
Net Sales/ Cash from Sales

Net Sales/ Cash from Sales

1.2
1
DKS
0.8 HIBB
0.6 CAB
0.4 BGFV
Industry AVG
0.2
0
2002 2003 2004 2005 2006
Year

The ratio of net sales to cash from sales is a measurement of whether or not a
company’s sales are high in comparison to its cash flow. The computation of this graph
came about by comparing total average net sales of a year to average cash collected
from sells in that year excluding account receivables.
In general a company would prefer a ratio of 1:1, which on average Dick’s is able
to collect cash from sales at a steady rate near 1. This appears to be consistent with the
rest of the industry. It should be noted that there was a net sale increase in year 2004
by 24% due to the acquisition of Gaylan’s stores, which was another sporting goods store
which brought a huge increase in revenue the following year (DKS 10- K). As a result the
ratio jumps from .99 to 1.04 from year 2004 to 2005, indicating that in year 2005 Dick’s
was receiving less cash than products sold. Cabela’s did not release information in a 10-K
for the year 2002, which means that the ratios could not be calculated for both 2002 and
2003, since previous year information is used.

46
Net Sales/ Account Receivables

Net Sales/ Net Account Receivable

250.00
DKS
200.00
HIBB
150.00
CAB
100.00
BGFV
50.00
Industry AVG
0.00
2002 2003 2004 2005 2006
Year

When comparing industry net sales to account receivable ratio each company
appears to maintain a relatively low ratio, with Dick’s Sporting Goods spiking in 2004, but
regaining stability in 2005. This ratio is computed by dividing net sales by account
receivables. The spike in Dick’s ratio in 2004 can be attributed to the merger that took
place between them and Gaylan’s, with Dick’s Sporting Goods taking on their account
receivables. But it started to recede once again after collecting most of the receivables
amount. The amount of account receivables collected primarily through credit cards is
fairly low for Dick’s compared to the total net sales.
Overall, the companies do not seem to keep a consistent ratio, which would raise
the question of whether or not net sales or net accounts receivables were reported
accurately. Cabela’s did not provide a company 10-K in the year 2002, giving the reason
to why that ratio is 0.

47
Net Sales/ Inventory

Net Sales/Inventory

14.00
12.00 DKS
10.00 HIBB
8.00
CAB
6.00
4.00 BGFV
2.00 Industry AVG
0.00
2002 2003 2004 2005 2006
Year

The net sales to inventory ratio explains how well companies maintain their
inventory levels to produce profits. This is where the flexibility of inventory methods
really can help companies. This graph shows that Dick’s has maintained a consistent
inventory ratio and therefore explains why they have been profitable. But on the other
hand Big 5 Sporting Goods really increased their ratio from 2005 to 2006. Unexpected
spikes like this could indicate that a company has overstated its Net Sales. As mentioned
previously Cabela’s did not release a 10-K for 2002.

Conclusion
After reviewing the results of the ratios calculated above, it would seem to us that
the reported sales are credible. Dick’s Sporting Goods appears to maintain ratio levels
even with the rest of the industry, and their does not appear to be any spikes on any
charts, which could be a suggestion that sales are not recorded credibly. Due to this we
feel that since their does not appear to be anything to be suspicious over, Dick’s Sporting
Goods did a good job in recording their financial data honestly.

48
 Net Sales/ Cash from Sales

2002 2003 2004 2005 2006

DKS 1.01 1.01 0.99 1.04 1.00

HIBB 0.99 1.03 1.01 1.02 1.00

CAB n/a 1.02 1.04 1.01 1.03

BGFV 0.83 1.01 0.97 1.03 1.03

Industry AVG 0.94 1.02 1.00 1.02 1.01

Net Sales/ Net Account Receivable

2002 2003 2004 2005 2006

DKS 88.28 89.73 207.11 85.75 106.05

HIBB 102.52 82.82 89.23 77.73 92.79

CAB n/a 47.15 235.04 133.90 31.64

BGFV 54.30 72.61 28.28 39.21 37.62

Industry AVG 81.70 73.08 139.91 84.15 67.02

Net Sales/Inventory

2002 2003 2004 2005 2006

DKS 6.31 6.23 8.29 5.74 5.81

HIBB 2.97 3.24 1.01 3.67 4.04

CAB n/a 2.91 3.26 3.74 3.01

BGFV 7.70 9.54 3.41 3.69 11.53

Industry AVG 5.66 5.48 3.99 4.21 6.10

49
Core Expense Manipulation Diagnostics
Besides examining the financial reports through a sales manipulation diagnostic,
an expense diagnostics can also be examined to see if there are any discrepancies. By
observing the expenses, one can determine the impact it has on the net income for a
company. Any potential change in expenses can dramatically influence the company’s
overall standing. The following graphs and summaries concentrate on expense
manipulation by Dick’s Sporting Goods, Big 5 Sporting Goods, Cabela’s, and Hibbet.

Asset Turnover

Asset Turnover
5.00
4.00
3.00 DKS
2.00 HIBB
1.00 CAB
0.00 BGFV
2002 2003 2004 2005 2006 Industry AVG
Year

By computing the asset turnover ratio, an analyst can see how efficient the firm is
using its assets to generate sales. Having a higher ratio means that a firm is more able to
use its assets to generate money. The graph indicates that Dick’s has consistent asset
turnover ratio until about year 2004. This sudden drop in asset turnover can be
attributed to the merger with Gaylan’s Inc., which would increase assets substantially.
As far as the industry, all competitors seem to be on the same stream, with Dick’s
being the highest. The industry average increased from 2002 to 2003, and decreased
from 2003 to 2004, but is steadily increasing from 2004 to 2006.

50
Change in CFFO/OI

Change in CFFO/ OI
3.00
2.50
2.00 DKS
1.50 HIBB
1.00 CAB
0.50
0.00 BGFV
2002 2003 2004 2005 2006 Industry AVG
Year

The ratio of cash flow from operations over operating income compares how much
cash is generating from cash operations. With this ratio companies want a lower
number. The lower the ratio the better. It seems like Dick’s was struggling in year 2005
or their profits must have came from investing and financing activities since their ratio
was higher than the industry average. Dick’s decreased their ratio very rapidly from 2005
to 2006, which would indicate an increase in profits from operating activities. The
industry average seems to have stayed steady though from 2002 to 2006.

51
CFFO/NOA

Change in CFFO/ NOA

4.00
3.00
DKS
2.00 HIBB
1.00 CAB
0.00 BGFV
2002 2003 2004 2005 2006 Industry AVG
Year

CFFO/NOA

0.80
DKS
0.60 HIBB
0.40 CAB

0.20 BGFV
Industry AVG
0.00
2002 2003 2004 2005 2006
Year

The ratio of cash flow from operations to net operating assets basically relates the
cash from operations to industry’s fixed assets (include property, plant, and equipment).
In general the ratio of CFFO/NOA shows how well a company utilizes property, plant, and

52
equipment to generate cash flows. The higher the ratio indicates more income was
produced during each year from these fixed assets.
Overall Dick’s Sporting Goods runs even with the industry average, but in recent
years all companies have had a decline. This decline is due to higher property, plant, and
equipment compared to a lower growth of cash flows from operations. Another thing we
can conclude is that since most companies in the sporting goods retail industry have
operating leases for most of their stores, then the expense of operating leases brings the
CFFO/ NOA ratio lower. This would explain the higher property, plant, and equipment
numbers.

53
 Declining Asset Turnover

2002 2003 2004 2005 2006

DKS 3.95 3.91 3.88 2.42 2.62

HIBB 2.09 3.24 1.90 1.87 2.25

CAB 2.35 2.39 2.14 2.59 2.16

BGFV 2.59 2.61 n/a 2.60 2.48

Industry AVG 2.75 3.04 2.64 2.37 2.38

Change in CFFO/ OI

2002 2003 2004 2005 2006

DKS 2.12 2.00 0.34 2.45 0.29

HIBB 1.83 2.15 1.01 0.66 0.16

CAB 0.97 0.85 1.35 1.46 0.61

BGFV 0.19 0.12 0.57 0.83 1.78

Industry AVG 1.28 1.28 0.82 1.35 0.71

Change in CFFO/ NOA

2002 2003 2004 2005 2006

DKS 1.01 0.63 0.06 0.41 0.20

HIBB 1.96 1.05 0.73 0.55 0.11

CAB n/a 0.10 0.12 0.13 0.11

BGFV n/a 0.14 0.82 3.58 3.26

Industry AVG 1.49 0.48 0.43 1.17 0.92

CFFO/NOA

2002 2003 2004 2005 2006

DKS 0.33 0.39 0.22 0.26 0.19

HIBB 0.38 0.54 0.58 0.41 0.34

CAB 0.18 0.17 0.11 0.12 0.07

BGFV 0.35 0.31 0.29 0.16 0.24

Industry AVG 0.31 0.35 0.30 0.24 0.21

54
Potential “Red Flags”

Potential “red flags” surface with respect to analyzing any company in any
industry. These “flags” yield notice to potential accounting discrepancies and questionable
manners in regards to reporting. Although Dick’s Sporting Goods continues to grow at a
vast pace within the market, minimal problems in their accounting strategy exist. With
respect to the two capital leases Dick’s already maintains, the remainder of their leases
are operating. With this in mind, Dick’s liabilities are understated, which leads to a
distorted view on net income. The more off-balance sheet accounting Dick’s involves
itself in the more net income is affected. Currently, the majority of its leases are reported
off the balance sheet as operating leases are the prominent way of running their
business.
On July 29th, 2004, Dick’s Sporting Goods upgraded its market value through the
acquisition of Galyan’s. With this purchase, Dick’s implemented their evaluation of
goodwill for impairment and stated it “requires accounting judgments and financial
estimates in determining the fair value of the reporting unit” (Dick’s 2006 10-k). Not only
did it have to account for $156.6 million of goodwill, it also accounted for Galyan’s
inventory and net sales for the fiscal year ending in 2005. Viewing the income statement
the net sales increased from $1,470,845,000 to $2,109,399,000, which is a significant
increase of roughly $638 million. This increase in net sales throws up the “red flag” and
forces the acquisition to be presented. In addition, inventory increased by about 200
million, also introducing the potential overstatement of net inventory. Therefore, without
prior knowledge of the acquisition, the financial statements are not accurately
represented.

55
The Undoing
To reduce distortions and errors related to the accounting analysis process,
analysts have to change the previous calculations (undo) and re-calculate what is said to
be a more accurate representation of the firm’s numbers. This might affect calculated
ratios, investor’s interests in the company, or overall potential growth of the firm. Thus,
potential profitability introduced to investors is misleading without analyzing the following
distortions.
Failing to expense their capital leases payments raises potential “red flags” and
understates the liabilities. In order to effectively realize the understated liabilities, we
have to offer a capitalized version of the current and future operating lease expenses.
This is possible by discounting the payments at a 10.6% discount rate, which is listed as
the average rate in relation to other similar capital leases on the books.

56
 Capitalized Lease at a 10.6 % Discount Rate (in thousands)
Fiscal Year FV Payment PV Factor PV Payment
2007 230,830 0.9042 208,707
2008 236,681 0.8175 193,488
2009 235,771 0.7392 174,271
2010 235,007 0.6683 157,058
2011 228,976 0.6043 138,361
2012 110,118 0.5463 60,163
2013 110,118 0.4940 54,397
2014 110,118 0.4466 49,183
2015 110,118 0.4038 44,469
2016 110,118 0.3651 40,208
2017 110,118 0.3301 36,354
2018 110,118 0.2985 32,870
2019 110,118 0.2699 29,720
2020 110,118 0.2440 26,871
2021 110,118 0.2206 24,296
2022 110,118 0.1995 21,967
2023 110,118 0.1804 19,862
2024 110,118 0.1631 17,958
2025 110,118 0.1475 16,237
2026 110,118 0.1333 14,681
2027 110,118 0.1205 13,274

Total 1,374,394
*Calculated using Dick’s Sporting Goods 10-K

After calculating the difference in payments of a capital lease versus the current
operating leases, we found a $1.4 billion understatement of liabilities. This is a significant
number, and is considered an aggressive accounting strategy. Therefore, by maintaining
operating leases on the books Dick’s Sporting Goods understates their liabilities by $1.4
billion, which must be adjusted on the balance sheet.
Goodwill must also be considered when undoing accounting distortions. Dick’s
Sporting Goods maintains that throughout the year they check for impairments to
goodwill, claiming that no impairments to goodwill occurred during the years of 2004,

57
2005, and 2006. The value provided on the balance sheet must be assumed to be
correct.
Consequently, interpreting distortions allows analysts to provide an accurate
representation of current numbers that contribute to the firms’ overall key success
factors. Re-estimating the difference in a capital lease versus an operating lease
introduced Dick’s Sporting Goods choice in aggressive accounting and assessed their
main distortion.

58
 Financial Analysis, Forecast Financials, and
Cost of Capital Estimations

Financial Analysis
To determine how well a company is doing within a certain industry, many analyst
use ratios to take a firm’s financial statements and break them down into easily analyzed
numbers. These ratios make it easier for the analyst to compare how well a certain
company is doing compared to its competitors. The ratios used in this section can be
broken down into three different groups: liquidity ratios, profitability ratios, and capital
structure ratios.

Liquidity Analysis
Liquidity ratios refer to the ability a company has to pay off its short-terms debts
obligations (Investopedia.com). These ratios become an important issue when a company
decides to borrow money. Creditors or lenders usually analyze these ratios to see if the
company has the ability to convert short-term assets into cash so it can cover its debt.
The major liquidity ratios that used are: current ratios, quick ratio, inventory turnover,
accounts receivables turnover, and working capita turnover. The following graphs and
analysis will further analyze how these ratios are applied.

59
Current Ratio

The current ratio is used as a measurement between current assets (cash, cash
equivalents, receivables, etc.) and current liabilities (short term debts and payables).
This ratio determines how well the company could pay back its short term liabilities, if the
need ever arises. It is important to use a 1:1 ratio to base an analysis of the ratio, which
means that a company has $1 of assets for every $1 of short-term debt.
Dick’s Sporting Goods has maintained a relatively stable current ratio around
1.5:1; this means that Dick’s has $1.50 in current assets for every $1 in short term debt.
Many of Dick’s main competitors are above the 2:1 ratio, which means that Dick’s has
generally been at the bottom of the spectrum when dealing with current ratio.

60
Quick Ratio

The quick ratio measures a companies current assets excluding inventory (cash,
cash equivalents, and receivables) and dividing by its current liabilities. This ratio is a
more accurate assessment of how a company is able to convert its current assets to pay
for short term debt, because inventory can sometimes be hard to convert to cash.
Dick’s Sporting Good’s maintains a quick ratio of around 0.3:1, which means that
Dick’s only has $0.30 of liquid assets for every $1 of short term debts. Compared to the
market Dick’s has increased its quick ratio in recent years, giving it a more desirable
outlook.

61
Receivables Turnover

The receivables turnover is the measurement of a company’s net sales compared

to its accounts receivables, by taking net sales and dividing by account receivables.
When this ratio is low it indicates that a company is not collecting on its receivables on
time, and must fill the gap from finances elsewhere. Dick’s Sporting Goods maintains a
receivables turnover of around 80-100, which is pretty steady with its competitors in the
market. From our analysis we noticed that the majority of the competitors of Dick’s tend
to keep around the same receivables turnover, with the exception of Cabela’s falling
under 50.

62
Days Sales Outstanding

Days sales outstanding, merely measures how quickly it takes a company to collect
on its accounts receivables. In order to find this analysis, we simply took 365 days in one
year and divide by the receivables turnover ratio calculated. A low number generally
means that a company is doing well, because they are collecting their accounts
receivables quickly. Within the sporting goods retail industry this ratio is typically low
compared to other industries which generally have a 30-90 days sales outstanding ratio.
Dick’s Sporting Goods maintains a days sales outstanding ratio of about 3.5, which means
they collect on their receivables in 3.5 days. As far as the industry, the average days to
collect the receivables are around 3.3 days. So basically Dick’s Sporting Goods are
taking just a bit longer to collect than the industry average which indicates a negative
indication for the company, but is very slim. The faster they collect the faster they can
turn their receivables into cash to reinvest again and able to make more sales. Making
more sales can then generate more profits for the company.

63
Inventory Turnover

The inventory turnover ratio is a measurement of a companies cost of goods sold

compared to its inventory. To find this you simply take the companies cost of goods sold
and divide by the inventory. This ratio tells an analysis how often a company sells and
replaces its inventory. A higher inventory generally indicates that a company has high
sales, but it could also mean that the company has insufficient inventory supply. Dick’s
Sporting Goods is leading the industry in inventory turnover, which indicates that they are
outselling their competitors.

64
Days Supply Inventory

The days supply inventory ratio tells how many days it takes before an item is
sold. To calculate this ratio we simply took 365 days and divided that by the inventory
turnover ratio. The lower the number the better, because this indicates that a company
is selling its inventory faster. Dick’s Sporting Goods has the lowest days supply inventory
ratio, meaning they are able to sell products faster than their competitors in the market.
It is also a good indication that they will have more space to overstock for the fast selling
seasons since Dick’s is cyclical. Dick’s is well below the average as well, which means
that they are by far the leaders in the industry. The cash to cash cycle for Dick’s Sporting
Goods average for the past years came out to 73 days. The industry average cash to
cash cycle is about 101 days. So Dick’s Sporting Goods is selling their inventory faster
than their competitors.

65
Working Capital Turnover

The working capital turnover ratio measures how a firm is able to turn its working
capital (current assets – current liabilities) in to sales. The higher this ratio the better,
since this indicates that a company is producing greater sales compared to what it uses
to fund those sells. Dick’s Sporting Goods outperforms its competitors in this area, with
an average working capital turnover of 21. As you can see from the illustration, Dick’s
Sporting Goods is fairly above the industry average. We take this ratio into a further
discussion with the working capital days on the graph below.

66
Working Capital Days

The working capital day’s ratio is calculated by taking 365 days in a year and
dividing it by the outcome of the working capital turnover. This gives us a measure of
how many days money is tied up in operating working capital. Since Dick’s had the
highest working capital ratio, then obviously they are going to have the lowest working
capital days. Dick’s Sporting Goods average for the past 5 years was 18 days and the
industry average is 50 days. With this ratio companies are better off with the lowest
days possible. As we can see from the graph, Dick’s is doing better than the industry
average.

Conclusion
The quickness to calculate the liquidity ratios give us great measures of how well a
company is performing along with its competitors. The liquidity ratios are good indicators
of the firm’s ability to convert its assets into cash to meet its obligations. It can be drawn
that Dick’s is generally in line with its competitors as far as liquidity goes. Dick’s is
leading the industry when it comes to inventory turnover and working capital turnover,
which means that they are managing their inventory well. Taking account all the liquidity

67
measures helps analyze the industry and helped us compare where Dick’s Sporting Goods
lies within its competitors.

Profitability Analysis
Another way to evaluate a company’s standing is by analyzing its profits.
Profitability ratios provide a better understanding of a company’s generated earning.
(Investopedia.com) The ratios used for this analysis are: gross profit margin, operating
expense ratio, net profit margin, asset turnover, return on assets, and return on equity.

Gross Profit Margin

Gross Profit Margin is the difference between sales and cost of sales compared to
its revenue. The Gross Profit Margin provides a source for paying additional expenses
and as well as any future savings. Company’s that have higher Gross Profit Margin
indicate that they are operating more efficiently thus being able to pay its additional
expenses and have future savings. Although Dick’s Sporting Goods is below the industry
average, Dick’s have been able to maintain a steady growth rate each year. They have
also been able to acquire Golf Galaxy Inc. which further indicates their growing
performance.

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Operating Profit Margin

The company’s income from operations is computed by taking the gross profits
and deducting all the expenses. To evaluate the operating profit margin, take income
form operations and divide by the total sales. This ratio measures how efficient a
company is in maintaining their operating expenses low. This ratio is important to
investors because it shows how well a company is able to have cost control and
minimizing day to day expenses. From analyzing this graph, Dick’s is clearly below the
industry average as well as the main competitors. This low operating profit margin is due
to the Dick’s increasing operating expenses. From the past five years, Dick’s has made
pretty heavy expenditures which is made now in order to increase the company. From
year 2005 to 2006, it’s clearly to see that Dick’s operating profit margin is increasing
indicating that profits are increasing as well.

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Net Profit Margin

Net Profit Margin indicates how well the company was able to control its cost. In
other words how well a company was able to convert revenue into profit after deducting
all of the cost or expenses incurred throughout the year. The higher the percentage the
better a company is able to keep its earnings. Net Profit Margin is calculated by dividing
Net Income by its sales. Dick’s Net Profit Margin begins to downward slope around 2003
after the acquisition of Gaylan’s Golf Galaxy. The downward sloping can be attributed to
the extra cost of the acquisition as well having expenses in expanding to other stores. At
year 2005, the Net Profit Margin starts to increase from about 2.8 to 3.5 which is due to
the dramatic increase in net income in that year indicating that Dick’s is becoming more
profitable.

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Asset Turnover

The Asset Turnover is “used to determine how much sales revenue a company
generates from its investment in assets”(Wikepedia.com). The Asset Turnover ratio or
sales divided by assets, is a good indicative of how well a company is able to convert
asset into revenue. As the graph indicates, Dicks is above the industry’s average as well
as all of the other main competitors. There is a dramatic drop from year 2004 to 2005
primarily due to the acquisition of Gaylans Golf Galaxy. In that year sales maintain a
steady growth but asset increase almost twice its size from $543360 to $1085048. But
then in year 2005 the asset turnover rate begins to increase passing all of our main
competitors.

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Return on Assets

Return on assets tells how profitable a company is relative to its total assets.
(Investopedia.com) The ROA shows how much earnings were earned from its assets.
ROA is computed by dividing the net income by the total assets of the year before. This
ratio is important because it shows how well the company is able to turn their investment
in every asset they put in into profit. The higher the return on assets, the better the
company is doing in making profits in its assets with fewer investments. The reason for
Dick’s start off point is in year 2003, is the data for year 2001 was not provided. Dick’s
return on asset is above all of the other competitors just under 2 percent. After year
2004 there is a decline in ROA due to the increase in total assets.

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Return on Equity

Return on Equity

5
Dicks Sporting Goods
4 Hibbett Sports
Big 5 Sporting Goods
3 Cabelas
Average
2

0
2002 2003 2004 2005 2006
Year

Return on Equity is one of the most important ratios because it explains the
company’s performance. ROE demonstrates how well a company was able to produce a
profit through its earnings. Divide the total net income by its total owner’s equity to get
the ROE ratio. Year 2001 information was not disclosed for these companies’ and
therefore we were not able to compute the year 2002 ratios. The graph indicates that
Dick’s is below industry average right below 1 percent. Dick’s is moving along the
industry’s average which is a good indicator that they are doing well in the industry. The
declining rate for Dick’s is mainly due to the decreasing amount in owner’s equity
attributed to the acquisition of other stores.

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Conclusion
The profitability ratios are great ways to measure if a firm is creating revenue.
Some of these ratios also compare their revenues to its operating expenses. The
profitability ratios are easy created from the financial statements and helped us compare
Dick’s Sporting Goods to its competitors. These profitability ratios helped us examine
benchmarks of the industry to make assumptions on Dick’s profitability.

Capital Structure Analysis

There are three capital structure ratios used to evaluate the strength of Dick’s
Sporting Goods compared to its competitors along the industry. The first one is the debt
to equity ratio calculated by the total liabilities divided by the total owners’ equity. The
second ratio is the times interest earned computed by the operating income divided by
the interest expense. The last ratio is the debt service margin ratio computed by the
currents year cash flow from operations divided by the previous year notes payable. All
of these ratios and illustrations help us in our valuations of Dick’s Sporting Goods and are
further discussed.

Debt to Equity

Debt to Equity refers to the amount of debt company uses produce revenue. Debt
to Equity is calculated by taking the total liabilities divided by the total owner’s equity.

74
The higher the percentage of the ratio, an indication would emphasize that a company
uses more debt than their equity to finance its assets. In the debt to equity ratio, Dick’s
Sporting Goods went from 4.1% in 2002 to 1.86% in 2006. The decreasing of the ratio
means that they are using more equity to finance its assets than they were in 2002. The
industry average of 1.69% shows us that Dick’s is moving right along the industry with
the debt to equity. Dick’s Sporting Goods has a fairly constant growth which
demonstrates that Dick’s is able to finance its assets through its equity.

Times Interest Earned

Time Interest Earned “indicates how many times a company can cover its interest
charges on a pretax basis.” (Investopedia.com) In other words, being able to pay off any
interest expenses from the available earnings that the company has retained. The
calculation to this ratio is simply the earning before income tax (EBIT) divided the interest
expense. A high ratio is indicative that a company is able to pay off the interest expense
from its equity. From year 2002 to year 2003, there is dramatic increase in retained
earnings allowing Dick’s to be able to pay off their interest expense. But then there is
sudden drop the following year due to the tremendous increase in interest expense.

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Debt to Service Margin
Debt Service Margin 2002 2003 2004 2005 2006
Dicks Sporting Goods n/a 0.69 0.79 0.91 0.80
Hibbett Sports n/a n/a n/a n/a n/a
Big 5 Sporting Goods n/a n/a n/a n/a n/a
Cabelas 1.79 1.51 1.77 2.16 8.47
Average 1.79 1.10 1.28 1.54 4.64

The Debt Service Margin refers to company’s ability to pay its notes payable from
their cash flow from operating activities. The ratio is simply the Cash Flow from
Operations current year divided by the previous year’s notes payable. To get an accurate
indication on how the company is using their operation cash flow to pay off their long
term debt.

Conclusion
The capital structure ratios are great indicators of analyzing the capital structure of
a firm and financing of its assets. The primary considerations of these ratios are
acquainting the amount liabilities to its equity and amount to cover the interest charges
by the operating income. Valuing the company’s capital position to the industry are great
measures to make good assumptions of the financial strength of a firm.

Internal and Sustainable Growth Analysis

Both the internal and sustainable growth rates are great indications to see if the
firms will continue to make profits and continue to grow in future years to come. The
IGR is calculated by taking ROA times one minus the dividends. For Dick’s we didn’t have
to worry about any dividends since they don’t pay any. The SGR is computed by taking
the IGR times one plus the debt to equity ratio.

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Internal Growth Rate

IGR is the “growth that a company can reach without having to use any financing
(www.investopedia.com).” Calculating these growths rate helped us determine how fast
Dick’s Sporting Goods is really growing. The IGR growth rate that we came up for Dick’s
was an average of 14.6 percent for IGR and so we can conclude that Dicks has this
percentage of growth potential. The industry average was around 10 percent and Dick’s
Sporting Goods have been above the industry average on growth potential which is a
good indication of how fast they are growing. The actual growth for Dick’s is around 3.2
percent along with the industry actual growths provided from the 10-K financials.

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Sustainable Growth Rate

The SGR is the “maximum growth that a company can sustain without having to
use financial leverage (www.investopedia.com).” Since Dick’s does not pay any dividends
our calculations were much easier. Dick’s Sporting Goods average SGR came out to
about 39.08 percent for past 5 years. The industry average was around 22.90 percent.
This tells us that Dick’s is growing at a very fast pace, but we didn’t think this was an
accurate number for our estimations for our forecasts. Since the industry actual growth
rate are between 3 to 4 percent we decided to forecast our net sales at a conservative 5
percent throughout the 10 years forecasted. We used a 5 percent because we believe
Dick’s is growing a little faster than the industry average. We can see a better picture
from the illustrations of our IGR and SGR graphs.

Conclusion
Both the IGR and SGR ratios play a major role to determine the profitability of a
firm. When both ratios are higher we can conclude that companies have less debt
obligations and there probably finance most of their debt from their equity. By doing this
companies will be more profitable in future years. As we saw the illustrations from the
graphs, we can see that Dick’s Sporting Good’s IGR and SGR are fairly higher than their

78
competitors. We can assume that Dick’s will be profitable in the future by observing
these ratios.

Financial Statement Forecasting Methodology

Forecasting future years for a firm’s financial statements provides bigger picture
and understanding in the valuing of a firm. In the forecasting process to forecast the
financials for 10 years of future data we had to look for trends in the financials and on
the ratios we discussed earlier. By looking for trends in the balance sheet, income
statement, and the cash flows was a good approach to begin making the future
forecasts. We looked for trends in the liquidity ratios, profitability ratios, and capital
structure ratios for Dicks Sporting Goods in order to determine what line items to forecast
in future years. We also calculated the ratios for the competitors that way we could
compare the data of Dick’s Sporting Goods with the industry to make sure our estimates
were fair and reasonable.
We first began with the income statement using the growth rates of the industry
and Dick’s to make assumptions of how fast Dick’s is growing. We also built a common
size income statements, common size balance, and common size cash flows and used
the past 5 year averages for the future forecast for some of the lines items. We mainly
used the ratios for the balance sheet forecasting that was relevant and made sense. For
the statement of cash flows we used the manipulation core expense ratios to make our
determinations at what percent to grow the most relevant items. We further discuss our
financial statements forecasting for the next 10 years.

Forecasting of Income Statement

Forecasting the Income Statement was the first financial statement that we started
to forecast 10 years into the future. We first created a common size income statement
and set our biggest number net sales equal to 100 percent to get all our line items as a
percentage of sales. To forecast our net sales we assumed the rate of 5 percent

79
throughout the next 10 years. Dick’s actual growth rate was 3.2 provided by the 10-K
and the industry growth rate was between 3 to 4 percent. So we assumed that Dick’s
was growing a little above the industry average and so we grew net sales by 5 percent.
We calculated our internal growth rate average for the past four years to be at 14.6
percent and the sustainable growth average at 39.08. We concluded though that this
growth rates were not very reasonable for the forecasting of net sales. The further we
move to the future years the more noise and error there is in the forecasts because we
can’t compare future years with current data that is relevant.
The next thing we forecasted was the cost of goods sold. To forecast cost of
goods sold we took the average of the percentage of the common size income statement
of cost of goods sold for the past 5 years. We came up with 72.21 percent and so we
assumed that was a fair estimate to come up with the future years. So we forecasted the
next 10 years using this estimate. After this we just subtracted cost of goods sold from
net sales to get gross profit so that our statements made sense.
We then forecasted the rest of the line items that were consistent in the last 5
years actual income statements. Some of the line items were not forecasted because
they did not show any trend and were just misleading to the other items. The two lines
items that were not forecasted were pre-opening expenses and store closing costs. Dick’s
pre-opening expense was so low that it did not make any sense in the forecasting. As for
the store closing costs, we only had data for two years out the past 5 years so this was
not very consistent. As far as the rest of the line items, we were able to forecast them all
using the past 5 year’s average. We used the same method using the average of the
common size percentages because we saw we were coming up with good future
estimates.

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Dick's Sporting Goods, Inc. 2006 10-k
Forcasted Income Statement
Actual Financials Forecast Financial Statements
Fiscal Year 2001 2002 2003 2004 2005 2006 Assume Average 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(Dollars in thousands, except per share)

Statement of Income Data: 0.05

Net sales 893,396 1,272,584 1,470,845 2,109,399 2,624,987 3,114,162 5.00% 100.00% 3,269,870 3,433,364 3,605,032 3,785,283 3,974,548 4,173,275 4,381,939 4,601,036 4,831,087 5,072,642
Cost of goods sold (1) 684,552 934,956 1,062,820 1,522,873 1,887,347 2,217,463 72.21% 2,361,173 2,479,232 2,603,193 2,733,353 2,870,021 3,013,522 3,164,198 3,322,408 3,488,528 3,662,955
Gross profit 208,844 337,628 408,025 586,526 737,640 896,699 27.79% 908,697 954,132 1,001,838 1,051,930 1,104,527 1,159,753 1,217,741 1,278,628 1,342,559 1,409,687
Selling, general and administrative expenses 169,392 262,755 314,885 443,776 556,320 682,625 21.24% 694,520 729,246 765,709 803,994 844,194 886,404 930,724 977,260 1,026,123 1,077,429
Merger integration and store closing costs 20,336 37,790
Pre-opening expenses 5,911 6,000 7,499 11,545 10,781 16,364

Income from operations 33,541 68,873 85,641 110,869 132,749 197,710 5.58% 182,459 191,582 201,161 211,219 221,780 232,869 244,512 256,738 269,575 283,053
(Gain) on sale / loss on write-down of non-cash 2,447 (3,536) (10,981) (1,844)
investment (2) (3)
Interest expense, net 6,963 2,864 1,831 8,009 12,959 10,025 0.31% 10,137 10,643 11,176 11,734 12,321 12,937 13,584 14,263 14,976 15,725
Other income (1,000)

Income before income taxes 26,578 63,562 87,346 114,841 121,634 187,685 5.41% 176,900 185,745 195,032 204,784 215,023 225,774 237,063 248,916 261,362 274,430
Provision for income taxes 10,631 25,425 34,938 45,936 48,654 75,074 2.16% 70,629 74,161 77,869 81,762 85,850 90,143 94,650 99,382 104,351 109,569

Net income 8,643 38,137 52,408 68,905 72,980 112,611 3.24% 105,944 111,241 116,803 122,643 128,775 135,214 141,975 149,074 156,527 164,354

Common Size Income Statement

Average Forecast Financial Statements
Fiscal Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(Dollars in thousands, except per share and sales per square foot data)
Statement of Income Data:
Sales Growth Percent
Net sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold (1) 73.47% 72.26% 72.19% 71.90% 71.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21%
Gross profit 26.53% 27.74% 27.81% 28.10% 28.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79%
Selling, general and administrative expenses 20.65% 21.41% 21.04% 21.19% 21.92% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24%
Merger integration and store closing costs 0.96% 1.44%
Pre-opening expenses 0.0047 0.0051 0.0055 0.0041 0.0053

Income from operations 5.41% 5.82% 5.26% 5.06% 6.35% 5.58% 5.58% 5.58% 5.58% 5.58% 5.58% 5.58% 5.58% 5.58% 5.58% 5.58%
(Gain) on sale / loss on write-down of non-cash 0.19% -0.24% -0.52% -0.07%
investment (2) (3)
Interest expense, net 0.23% 0.12% 0.38% 0.49% 0.32% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31%
Other income

Income before income taxes 4.99% 5.94% 5.44% 4.63% 6.03% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41%
Provision for income taxes 2.00% 2.38% 2.18% 1.85% 2.41% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16%

Net income 3.00% 3.56% 3.27% 2.78% 3.62% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24%
Revised Income Statement
To compute the actual and forecasted years with capital leases corrections we had
to first undo the corrections for our past 5 years data. After we corrected our financials
and came out with corrected numbers, then we were able to move on to the forecast.
We still followed the same format as we did the regular income statement. We did a
common size income statement and used the past 5 years average. We set our net sales
to 100% and every line item as a percentage of sales to get close estimates. We saw
that the difference in net income due to capitalization from years 2001 to 2012 were all
negative numbers due to the fact of capital leases. From 20012 to 2016, we came out
with some positive numbers as Dick’s pays more and more of their capital leases. We
posted this in our Appendix.

Forecasting of Balance Sheet

The forecasting of the balance sheet shows more accuracy in confidence in terms
of confidence and error. The more recent forecasted years will also show better
accuracy. The latest years into the future will have more error in estimation. We made a
common size balance sheet for our balance sheet financials as well as looked at the ratios
discussed earlier. We set our total assets to 100 percent and our total liabilities and
equity to 100 percent so that we wouldn’t have trouble balancing our financials. We then
forecasted total assets by using the asset turnover ratio. We came up with an average of
3.36 percent for the past 5 years and so that is how we came up with the calculations.
We determined that was the best measure because the asset turnover is calculated using
the biggest number in the income statement, net sales divided by the biggest number in
the balance sheet, total assets. This ratio best links the income statement to the balance
sheet and helped us get a fairly accurate estimate. In 2006 we had 1.187 billion in
assets and came up with 1.227 billion in 2007.
To forecast our inventory we assumed that the best indicator would be our
inventory turnover ratio to calculate the best estimate for the next 10 years. We took the
average of past 5 years since they all had a trend and used the 5.1 percent to come up
with the forecasts for inventory. We did the same for the accounts receivables. We took
the average of the day’s supply of receivables to come up with best estimate in
calculating the accounts receivable for the next 10 years. We assumed the 3.2 percent
and grew the rest of the years using this ratio in mind.
For the forecast of the liabilities we kind of went the same route as the assets
section. We looked for trends in the financials and trends on the results from the ratios.
If we thought there was no trend then we decided not to forecast the line item. We
forecasted the most important line items starting with our total liabilities and equity.
Since our total assets have to equal our total liabilities and equity results we decided to
use the same growth percent used to calculate the total assets. The 3.36 percent was
used in this calculation and gave us the best estimate in forecasting 10 years out for
Dick’s Sporting Goods.
After this, we moved on to the current liabilities and felt that the current ratio gave
us the best indication to forecast our line item. The average current ratio for the past 5
years was 1.37 percent so we assumed a 1.4 percent would be an accurate number in
estimating 10 years out. For our total liabilities we used the common size average for the
past 5 years times our total liabilities and equity to get our estimates. After getting our
total liabilities, then we were able to get our long term liabilities by subtracting the
current liabilities from our total liabilities. We did the same with our stockholder’s equity.
Since we had already forecasted the total liabilities, then we just subtracted the total
liabilities from total liabilities and equity to get our stockholder’s equity. By doing this, we
were able to keep our balance sheet financials in balance at the end of the process.

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Dick's Sporting Goods Balance Sheet Actual Financial Statements Forecast Financial Statements
2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $8,976 $11,120 $93,674 $18,886 $365,464
Accounts receivable, net $14,416 $16,391 $10,185 $30,611 $29,365 3.2 3.2 30,305 31,274 32,275 33,308 34,374 35,474 36,609 37,780 38,989 40,237
Income tax receivable $232 $7,202
Inventories, net $201,585 $233,497 $254,360 $457,618 $355,698 5.1 5.1 373,839 392,904 412,942 434,003 456,137 479,400 503,849 529,545 556,552 584,936
Prepaid expenses and other current assets $5,219 $5,572 $5,222 $8,772 $11,961
Deferred income taxes $5,243 $8,697 $1,021 $7,966 $429
Total current assets $235,439 $275,277 $364,694 $531,055 $614,017 51.00% 626,126 647,164 668,909 691,384 714,615 738,626 763,444 789,095 815,609 843,013
PROPERTY AND EQUIPMENT, NET $71,795 $80,109 $144,402 $349,098 $370,277
CONSTRUCTION IN PROGRESS - LEASED FACILITIES $10,927 $15,233 $7,338
GOODWILL $157,245 $156,628
OTHER ASSETS:
Deferred income taxes $5,970 $7,512 $6,099 $871 $8,959
Investments $5,770 $1,950 $7,054 $3,388 $3,197
Other $3,008 $11,378 $10,184 $28,158 $27,373
Total other assets $14,748 $20,840 $23,337 $32,417 $39,529 601,572 621,785 642,677 664,271 686,591 709,660 733,505 758,150 783,624 809,954
TOTAL ASSETS $321,982 $376,226 $543,360 $1,085,048 $1,187,789 3.36% 1,227,699 1,268,949 1,311,586 1,355,655 1,401,205 1,448,286 1,496,948 1,547,246 1,599,233 1,652,967

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable 95,573 125,208 118,383 211,685 253,395
Accrued expenses 47,012 59,239 72,090 141,465 136,520
Deferred revenue and other liabilities 17,958 22,752 37,037 48,882 62,792
Income taxes payable 5,728 12,763 18,381
Current portion of other long-term debt 211 213 505 635 181
Total current liabilities 166,482 220,175 228,015 402,667 471,269 1.40% 471,269 477,867 484,557 491,341 498,219 505,195 512,267 519,439 526,711 534,085
LONG-TERM LIABILITIES:
Senior convertible notes 172,500 172,500
Revolving credit borrowings 77,073 76,094
Other long-term debt 3,577 3,364 3,411 8,775 8,520
Non-cash obligations for construction in progress - leased facilities 10,927 15,233 7,338
Deferred revenue and other liabilities 11,745 12,188 60,113 96,112 113,369
Total long-term liabilities 92,395 15,552 74,451 368,714 301,727
Total Liabilities 258,877 235,727 302,466 771,381 772,996 66.98% 822,313 849,942 878,500 908,018 938,527 970,062 1,002,656 1,036,345 1,071,166 1,107,158
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $.01 per share, authorized shares 5,000,000;
none issued and outstanding
Common stock, par value, $.01 per share, authorized shares 200,000,000;
issued and outstanding
shares 36,545,332 and 34,790,358, at January 28, 2006
and January 29, 2005, respectively 169 126 331 348 365
Class B common stock, par value, $.01 per share,
authorized shares 40,000,000; issued and

outstanding shares 13,730,945 and 14,039,529, at January 28, 2006 and January
29, 2005, respectively 77 141 140 137
Additional paid-in capital 96,279 130,071 175,748 181,321 209,526
Retained earnings 28,029 10,225 60,957 129,862 202,842 202,544 216,463 216,623 231,015 231,663 246,561 247,732 263,169 264,898 280,912
Notes receivables for common stock 6,196
Accumulated other comprehensive income 892 3,717 1,996 1,923
Total stockholders' equity 63,105 140,499 240,894 313,667 414,793 405,386 419,007 433,086 447,637 462,678 478,224 494,292 510,901 528,067 545,810
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 321,982 376,226 543,360 1,085,048 1,187,789 3.36% 1,227,699 1,268,949 1,311,586 1,355,655 1,401,205 1,448,286 1,496,948 1,547,246 1,599,233 1,652,967
Balance Sheet Common Size Actual
2002 2003 2004 2005 2006 Average Assume
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 2.79% 2.96% 17.24% 1.74% 30.77% 11.10% 11.50%
Accounts receivable, net 4.48% 4.36% 1.87% 2.82% 2.47% 3.20% 3.20%
Income tax receivable 0 0 0.04% 0.66% 0
Inventories, net 62.61% 62.06% 46.81% 42.17% 29.95% 48.72% 49.00%
Prepaid expenses and other current assets 1.62% 1.48% 0.96% 0.81% 1.01%
Deferred income taxes 1.63% 2.31% 0.19% 0.73% 0.04%
Total current assets 73.12% 73.17% 67.12% 48.94% 51.69% 62.81% 51.00%
PROPERTY AND EQUIPMENT, NET 22.30% 21.29% 26.58% 32.17% 31.17% 26.70%
CONSTRUCTION IN PROGRESS - LEASED FACILITIES 0.00% 0.00% 2.01% 1.40% 0.62% 0.81%
GOODWILL 0.00% 0.00% 0.00% 14.49% 13.19% 5.54%
OTHER ASSETS:
Deferred income taxes 1.85% 2.00% 1.12% 0.08% 0.75% 1.16%
Investments 1.79% 0.52% 1.30% 0.31% 0.27% 0.84%

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Balance Sheet (Revised)
In order to account for the capitalization Dick’s operating lease on our revised
balance sheet, the capital leases was added to both the assets and liabilities. For the
following 10 years these capital leases will be at a lesser value due to the continual
obligations to make payments on these leases. As a result, the values in asset and
liabilities began to diminish. As the capital leases that were debited to the asset column
began to depreciate, the current and long term lease obligations began to be credited on
the liability side. So as time went by and the leases were being paid off, the asset and
liabilities we equal each other.

Forecasting of Cash Flow Statement

The forecast of the cash flow statement contains much more error in the estimates
that can be misleading. By doing the forecasts of the balance sheet and income
statement first, we decided to stay with the same routine. We got the common size cash
flow and set the cash flow from operating activities to 100 percent. By doing this we
were able to start forecasting 10 years out. We also used three other ratios to compare
any trends that we could use. We computed the CFFO/Sales, CFFO/Net Income, and
CFFO/Operating Income ratios. In doing this, we felt that the average for the past 4
years of CFFO/Sales of 5 percent gave us the best measure to estimate cash flow from
operating activities. We decided not to include the year 2002 in the average of the ratio
because we thought it was an outlier to the rest of the numbers. It could have still had
some impact from the 9-11 disaster that happened in 2001.
We then starting forecasting the rest of the lines items that we saw had trends in
respect to the data that we gathered. The other items that we forecasted included; net
income, depreciation and amortization, and deferred revenue. We used the same
methodology by using the last four years average percentage to our 100 percent item of
net cash provided by operating activities. We were able to forecast 10 years out, but like
we said before the cash flow statement has the most error in estimation and is one of the
weaknesses in the forecasting stage.
Statements of Cash Flows For Dick's Sporting Goods
Dollar in Thousands (fiscal year)
2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net Income 23,471 38,137 52,408 68,905 72,980 54.00% 54.00% 96,124 100,930 105,976 111,275 116,839 122,681 128,815 135,255 142,018 149,119
Adjustments to reconcile net income to net cash by Operating Activities
Loss on write down of non-cash investment
Depreciation and amortization 12,082 14,420 17,554 37,621 49,861 26.00% 26.00% 46,282 48,596 51,026 53,577 56,256 59,068 62,022 65,123 68,379 71,798
Deferred Income Taxes 1,187 5,103 8,201 1,559
Stock Based Compensation
Excess tax benefit from stock--based compensation
Tax benefit from exercise of Stock options 662 29,861 15,868 14,678
Gain on sale of Investment 3,536 10,981 1,844
Other non-cash items 2,447 2,067 2,171 2,452
Changes in Assets and Liabilities:
Accounts Receivables 6,096 1,984 3,904 3,470 16,002
Inventories 39,044 31,912 20,863 44,813 77,872
Prepaid expenses and other assets 1,909 8,218 1,549 2,177 2,589
Accounts Payable 9,424 28,122 19,850 4,260 35,119
Accrued expenses 3,773 12,122 12,842 4,707 193
Income Taxes Payable 7,033 12,763 19,144
Deferred Construction Allowances 29,072 11,032
Deffered Revenue and other Liabilities 5,606 9,845 27,840 6,488 29,201 16.57% 16.57% 29,496 30,970 32,519 34,145 35,852 37,645 39,527 41,503 43,579 45,757
Net Cash provided by Operating Activities 12,007 65,685 99,214 107,841 169,530 5.00% 5.00% 178,007 186,907 196,252 206,065 216,368 227,186 238,546 250,473 262,997 276,147
Net Cash used in Investing Activities 21,965 27,131 46,109 414,772 93,718 120,739 5.00% -98,404 -103,324 -108,490 -113,915 -119,611 -125,591 -131,871 -138,464 -145,387 -152,657
Net Cash provided by Financing Activities 10,655 36,410 29,449 232,143 58,134
Average
CFFO/Sales 0.94% 4.47% 4.70% 4.11% 5.44% 0.05 5.44% 5.44% 5.44% 5.44% 5.44% 5.44% 5.44% 5.44% 5.44% 5.44%
CFFO/Net Income 51.16% 172.23% 189.31% 156.51% 232.30% 1.88 185.19% 185.19% 185.19% 185.19% 185.19% 185.19% 185.19% 185.19% 185.19% 185.19%
CFFO/Operating Income 0.17 0.77 0.89 0.81 0.86 0.83 97.56% 97.56% 97.56% 97.56% 97.56% 97.56% 97.56% 97.56% 97.56% 97.56%
Common Size Cash Flows 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net Income 195.48% 58.06% 52.82% 63.89% 43.05% 54.46% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00%
Adjustments to reconcile net income to net cash by Operating Activities
Loss on write down of non-cash investment
Depreciation and amortization 100.62% 21.95% 17.69% 34.89% 29.41% 25.99% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00%
Deferred Income Taxes 9.89% -7.77% 8.27% 0.00% 0.92% 0.35%
Stock Based Compensation
Excess tax benefit from stock--based compensation
Tax benefit from exercise of Stock options 0.00% 1.01% 30.10% 14.71% 8.66% 13.62%
Gain on sale of Investment 0.00% 0.00% -3.56% -10.18% -1.09%
Other non-cash items 0.00% 3.73% 2.08% 2.01% 1.45% 2.32%
Changes in Assets and Liabilities:
Accounts Receivables -50.77% -3.02% 3.93% -3.22% 9.44%
Inventories -325.18% -48.58% -21.03% -41.55% -45.93%
Prepaid expenses and other assets -15.90% -12.51% 1.56% -2.02% -1.53%
Accounts Payable 78.49% 42.81% -20.01% -3.95% 20.72%
Accrued expenses 31.42% 18.45% 12.94% -4.36% -0.11%
Income Taxes Payable 0.00% 10.71% -12.86% 0.00% 11.29%
Deferred Construction Allowances 0.00% 0.00% 0.00% 26.96% 6.51%
Deffered Revenue and other Liabilities 46.69% 14.99% 28.06% 6.02% 17.22% 16.57% 16.57% 16.57% 16.57% 16.57% 16.57% 16.57% 16.57% 16.57% 16.57% 16.57%
Net Cash provided by Operating Activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Conclusion
Well, by forecasting the income statement, balance sheet, and the cash flow
statements we now have discussed some of the limitations, strengths, and weaknesses of
the forecasts. Most of the strengths are in the balance sheet because they have to
balance out. In both the income statement and balance sheet we were able to use some
of the ratios discussed earlier in our analysis that helps improve the accuracy. We made
assumptions from those ratios and from where the industry stands. We believe Dick’s
Sporting Goods will keep growing a little higher than the rest of the industry because of
all the stores they are opening and acquiring different stores, as well.

Analysis of Valuation
Cost of Equity
The cost of equity is calculated using the CAPM model, which states that “the cost
of equity is the sum of a required rate of return on riskless assets plus a premium for
beta or systematic risk” (Palepu & Healy). The tricky part in this model is estimating the
number for beta. The stated beta on yahoo finance is 1.77, which we used as a
measuring block to make sure our calculations are within that range. In order to find a
measure for beta we had to gather the historical pricing for Dick’s Sporting Goods stock
(finance.yahoo.com), and finding the companies CAP Gain. It is important to note that
Dick’s Sporting Goods did have a stock split in April of 2004 which is a positive signal that
the company is doing well, but it is also important to note that the company does not
give out dividends. We then used the St. Louis Federal Reserve to find a fair number for
the risk free rate at each time period. We gathered the constant maturity rates for 3-
month, 1-year, 2-year, 5-year, and 10-year, which in turn we were able to calculate the
market risk premium (MRP) by subtracting our risk free rate for each maturity rate from
our market rate (S&P 500 historical prices). Gathering the maturities for the 3-month, 1-
year, 2-year, 5-year, and 10-year, helped us observe which rate was the best estimate in
our calculation of beta.
We then ran a regression in Excel using different time periods of 60, 48, 36, and
24 months. Again these periods were used to help us determine which period was the
best for our beta estimate. It is usually best to use at least 72 months worth of data in
order to have a broader scope, but Dick’s Sporting Goods has only been traded for 60
months. After running our regressions for all of the risk free rates over these time
periods we came up with varying results, but found that the 60 month 5-year constant
maturity T-bill was the best. We came to this conclusion because this time period had
the highest R-squared of 19.55%, which is used as a measurement of the explanatory
factor of beta. This in turn gave us a beta of 1.68.
The next step was to find an appropriate risk-free rate and to calculate the market
risk premium. The risk free rate we used was the most recent 5-year constant maturity
rate provided by the St. Louis Federal Reserve, which was 4.20%. In order to calculate
the Market Risk Premium we used the average MRP from 2000-2005, and found the size
correction of 4.7% (Palepu & Healy) using Dick’s Market Cap. Then taking the numbers
we calculated for the beta, risk free rate, and the market risk premium we came up with
a cost of equity of 12.096%

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 Regression Analysis
3-Month Constant Maturity
60-Month 48-Month 36-Month 24-Month
Rf 4.20% 4.20% 4.20% 4.20%
R² 0.1731 0.1328 0.0924 0.1413
Beta (β) 1.4098 1.3469 1.2290 1.4511
MRP 11.50% 11.50% 11.50% 11.50%
Ke 0.2041 0.1969 0.1833 0.2089

1-Year Constant Maturity

60-Month 48-Month 36-Month 24-Month
Rf 4.20% 4.20% 4.20% 4.20%
Adjusted R² 0.1845 0.0882 0.1094 0.1421
Beta (β) 1.4677 1.1010 1.3314 1.4562
MRP 11.50% 11.50% 11.50% 11.50%
Ke 0.2108 0.1686 0.1951 0.2095

2-Year Constant Maturity

60-Month 48-Month 36-Month 24-Month
Rf 4.20% 4.20% 4.20% 4.20%
R² 0.1954 0.1003 0.1269 0.1394
Beta (β) 1.5588 1.2117 1.4288 1.4314
MRP 11.50% 11.50% 11.50% 11.50%
Ke 0.2213 0.1813 0.2063 0.2066

5-Year Constant Maturity

60-Month 48-Month 36-Month 24-Month
Rf 4.20% 4.20% 4.20% 4.20%
R² 0.1955 0.1096 0.1446 0.1366
Beta (β) 1.6784 1.3435 1.5321 1.4196
MRP 11.50% 11.50% 11.50% 11.50%
Ke 0.2350 0.1965 0.2182 0.2053

7-Year Constant Maturity

60-Month 48-Month 36-Month 24-Month
Rf 4.20% 4.20% 4.20% 4.20%
R² 0.1916 0.1312 0.1534 0.1368
Beta (β) 1.6954 1.3795 1.5839 1.4247
MRP 11.50% 11.50% 11.50% 11.50%
Ke 0.2370 0.2006 0.2241 0.2058

10-Year Constant Maturity

60-Month 48-Month 36-Month 24-Month
Rf 4.20% 4.20% 4.20% 4.20%
R² 0.1857 0.1121 0.1594 0.1373
Beta (β) 1.6962 1.3920 1.6235 1.4335
MRP 11.50% 11.50% 11.50% 11.50%
Ke 0.2371 0.2021 0.2287 0.2068

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Cost of Debt
We were able to calculate the cost of debt using both the short term and long
term debts, since both are important when calculating debt. Value of debt can be
“estimated by discounting the future payouts at current market rates of interest
applicable to the firm” (Palepu & Healy). In other words we can take long-term and
short-term debts and discount them to the current market rate that applies to each bond.
First we found the weight of each portion of liabilities compared to total liabilities.
We then applied a 3-month non-financial commercial paper rate of 4.63% (St. Louis Fed
Fred) to accounts payable, accrued expenses and other current liabilities. We then
applied a rate of 10.6% to all capital leases, this rate was provided in Dick’s 10-K. The
St. Louis Fed Fred also provided us with a 2-month risk free governmental rate of 3.97%
to our deferred revenue and other liabilities. Then we found a rate of 2.375 in Dick’s 10-
k to apply to senior convertible notes, and also used a tax-rate of 40% provided in Dick’s
10-K for income taxes payable.
Each debt on the balance sheet must be weighted and given an interest rate
according to the 10-K or using the percentages we found above. Then taking these
weights you can calculate an appropriate cost of debt by finding the sum of the weighted
value. When calculating the cost of debt it is also important to know that there is both a
before-tax and after-tax cost of debt. When all of this was applied we came up with a
before-tax cost of debt of 4.99%, and by applying an effective tax rate of 40% provided
in Dick’s 10-K we came up with an after-tax cost of debt of 2.994% or 3%.

Weighted Average Cost of Capital

By taking the numbers we calculated for the cost of equity and the cost of debt,
we can apply them to the Weighted Average Cost of Capital formula for before-tax:
WACC_bt = ((773.0/1,187.8)*0.0499) + ((414.7/1,187.8)*0.12096)
This gives us a WAAC before-tax of 7.47%. We can then apply the after-tax cost
of debt to the equation to find the after-tax WAAC:
WACC_at = ((773.0/1,187.8)*0.02994) + ((414.7/1,187.8)*0.12096)
After plugging in the numbers we came up with an after-tax WAAC of 6.17%.

92
 Intrinsic Valuations

“Valuation is the process of converting a forecast into an estimate of the value of

the firm or some component of the firm.” (Business Analysis and Valuation) There are
many types of methods that analysts can use to determine the firms value. Overall,
these different types of methods are developed from theory and concepts therefore
making some more accurate than others. Among the available methods, valuations
using price multiples is widely used in order to estimate the share price of a company.
Price multiple valuations or method comparables is a basic screening tool and is primarily
used because of their simplicity. With this method one can easily observe the share price
of the company and evaluate it against other companies in the industry. The
computation of the share price can also be compared to the industry average. By doing
so, it can determine whether or not the company is over valued, or undervalued, or is at
fair value.
Under this approach, it takes the ratios derive using price multiples and compares
it to the industry average. The different types of methods used were: P/E (forward), P/E
(trailing), P/B, P.E.G, P/ EBITDA, P/ FCF per share, and EV/ EBITDA. All of these ratios
help in deriving a share price for the company. In order to use these ratios, we began by
computing the share price of each company. The price per share for each company was
then used respectively in the following ratios. After computing the ratio for each
company, we then used that to find the average at the industry level. Finally, we use the
industry average to derive Dick’s Sporting Goods price per share. Each ratio will be
further explained in the following.

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Forward Price to Earnings

Industry DKS Share

PPS EPS P/E Average Price
DKS 31.18 1.58 19.73 13.11 20.71
CAB 19 1.49 12.75
BGFV 16.49 1.56 10.57
HIBB 22.24 1.39 16

The first method uses the price per share reported on November 1, 2007 and the
forecasted earning per share to compute the forward P/E ratio. Then we did the same
for the other competitors, by obtaining their prices per share (PPS) found in yahoo
finance, and their projected earnings per share (EPS). Once all of the PPS and EPS were
found, it was then used accordingly to compute the price to earnings ratios for each
company. Next, the industry average was computed simply by taking all of the
competitors P/E ratios which were: Cabela’s at 12.75, Big Five at 10.57, Hibbett’s at 16
and adding this value which resulted at 39.2. Then just divide the total P/E ratios by 3 to
result in 13.11 for the industry average. Now with computing the industry average, we
just took that amount and multiplied it by Dick’s earning per share of 1.58 to determine
Dick’s share price at $20.71. By observing the computed share price, it indicates that
Dick’s is overvalued in comparison to the actual price of $31.18. Dicks P/E ratio is above
all of the competitors and industry average. Having a high P/E ratio is not necessarily
bad since Dick’s is growing rapidly, which could indicate that investors will pay higher P/E
stocks. But the same time, it is not too good because it could show that Dick’s has a
limited amount for potential future earnings growth.

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Trailing Price to Earnings

Industry DKS Share

PPS EPS P/E Average Price
DKS 31.18 1.28 24.36 15.37 19.68
CAB 19 1.26 15.08
BGFV 16.49 1.39 11.86
HIBB 22.24 1.16 19.17

This next approach takes is similar of that of the forward price to earnings ratio.
Rather than dividing the price per share by the projected earnings per share, the current
earnings per share was used instead. As before, the PPS for each company was found by
similarly by the listed current price reported on November 1, 2007. The EPS was acquired
by using the current price rather than the project price. The same steps were used to
compute the industry which totaled 15.37. Then we multiplied Dick’s EPS of 1.28 to 15.37
to result in Dick’s share price of $19.68. Again, this showed that Dick’s was overvalued
using the trailing price to earnings model. Dick’s P/E ratio is the highest, which stated
before not indicative of a bad result. But it does show that Dick’s potential to have
earnings growth might be limited.

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Price to Book
Industry DKS Share
PPS BPS P/E Average Price
DKS 31.18 8.33 3.74 3.4 28.32
CAB 19 11.7 1.62
BGFV 16.49 4.809 3.43
HIBB 22.24 4.32 5.15

The following displays, the price to book method of comparables. For this
method, the same current price per share and the book value of equity per share
reported on our most recent annual report were used accordingly. The price per share
and book value of equity per share for the other competitors were obtained from the
November 1, 2007 listed values. The same process was used to find the industry
average. The total value of the P/B ratios resulted in 10.2; this was then divided to find
the industry of 3.4. We took the industry average and multiplied to Dick’s BPS which
computed the share price to be $28.32. Dick’s current share price of $31.18 compared to
that of $28.32, Dick’s Sporting Goods is overvalued using this method. Having a lower
P/B ratio shows that the company has a better value; Dick’s P/B ratio not being that low
could show that it is overvalued. But it is near to the industry average which could
indicate that at the industry level the company value is may be at fair valued.

96
Price Earnings Growth
Growth Industry DKS Share
PPS EPS Rate(t+1) P.E.G. Average Price
DKS 31.18 1.28 14.8 1.65 1.35 25.57
CAB 19 1.26 20.8 0.72
BGFV 16.49 1.39 14.8 0.8
HIBB 22.24 1.16 7.6 2.52

The Price Earning Growth (P.E.G) Model uses the P/E ratio and then divides it by
the next year’s growth rate. This was done to our company as well as all of our
competitors. To compute the industry average, we totaled up all of our competitors
P.E.G ratios which resulted in 4.04 and divided that by three. This gave us our industry
average of 1.35. To calculate the share price for Dick’s, we multiplied the industry
average to Dick’s growth rate of 14.8, then to then the EPS of 1.28 and PPS of 31.18 to
obtain the share price of $25.57. Using this method, once again shows the company is
overvalued.

97
Price to EBITDA
EBITDA
Industry DKS Share
PPS (in millions) P/EBITDA Average Price
DKS 31.18 197.71 0.1557 0.2108 41.68
CAB 19 200.08 0.0947
BGFV 16.49 74.86 0.2203
HIBB 22.24 70.09 0.3173

This next method uses the current price per share and EBITDA which is computed
by obtaining the earnings before interest, taxes, depreciation, and amortization. The
same price per share from the previous models is used again, and EBITDA is obtained
from Dick’s annual report. The competitor’s EBITDA was acquired from the yahoo
finance. In order to compute this number, we had to adjust EBITDA because it was
stated in billions. The next step is to find the industry average which is calculated by
adding all of the other competitors P/EBITDA ratios and dividing by 3. This will give a
industry average of .2108 which was then multiplied to Dick’s EBITDA of 197.71(in
millions) to result in a share price of $41.48.

98
Price to FCF per share
Industry DKS Share
PPS FCF (PS) P/FCF (PS) Average Price
DKS 31.18 1.523 20.47 24.226 36.89
CAB 19 -1.363 -13.94
BGFV 16.49 1.186 13.9
HIBB 22.24 0.3058 72.72

The Price to Free Cash Flow is another ratio used to calculate the estimated price
per share for the company. This ratio is computed by dividing the current price per share
by the free cash flows of the company. The same price per share for each company as
before was used again. To find the free cash flow of the company, we used the formula
of FCF = CFFO + (-) CFFI. In other words its cash flows from operating activities plus or
minus the cash flows investing activities. Then to put the free cash flows simply divide it
by the shares outstanding for that year. We calculated the FCF per share for the
competitors off of yahoo finance. The same methodology was computed to find the
industry average which totaled 24.226. To find the price per share for the company,
simply multiply the average by Dick’s PPS of $31.18 and this averaged out to be $36.89.
Up to now this method, has been the only one to undervalue the company. But with this
method the FCF have problems because it tends to fluctuate year by year. This method is
not one of the best ones to use when evaluating a company’s share price.

99
Enterprise Value to EBITDA
Industry DKS Share
EV EBITDA EV/EBITDA Average Price
DKS 2.75 197.71 0.0139 0.0374 14.51
CAB 3.24 200.08 0.0163
BGFV 1.12 74.86 0.0149
HIBB 5.65 70.09 0.0806

This method consists of finding the enterprise value of the company and divide by
the EBITDA. The enterprise value (EV) of company is determined by taking the market
value of equity or (PPS) plus its book value of liabilities minus its cash and cash
equivalents. The EV reported on their annual reports gave us 2.75. The EBITDA as
before is just the earnings before interests, taxes, depreciation, and amortization which
was also included in the annual reports. As for the competitors, we used yahoo finance
to compute the EV and EBITDA. After finding the ratios, we followed the same steps in
calculating the industry average. Again, the EV and the EBITDA were numbers were
adjusted to compute the price per share because the numbers were too high. Then we
took the industry average and multiplied it by the EBITDA, then subtracted the book
value of liabilities and added back the cash and cash equivalents. Finally, we took that
total and divided by the shares outstanding which resulted in a share price of 14.51.
Comparing to the current price of Dick’s to be at 31.18, the company is overvalued.

Conclusion

The method of comparables is another tool that analysts use to determine the value of
the firm. In determining the price per share for Dick’s Sporting Goods, we noticed that
these methods overvalued our most of the time. The only one that we found to

100
undervalue the company was the price to FCF (PS) approach. The closet results that
came near our current share price were the price to book model. Although these
methods do develop a estimate share price, we feel that it might not be the best
approach in valuing the company. It does give of a good benchmark of what to expect
and what variables to use, but the results as a whole were not completely reliable since it
did not produce a share price similar to our current one. Although the results were not
the best, there are other models that do a better estimation in valuating a company.

Intrinsic Models
The intrinsic valuation methods are generally used as a more realistic estimation of
a firm than the comparables method. By using theoretical principles these models are
used to estimate the value of the firm. The methods we used were the Discounted Free
Cash Flow model (FCF), Residual Income model (RI), Long-run Residual Income (LRRI)
model, and the Abnormal Earnings Growth (AEG) model. Below we will discuss each of
these models and how they were used to value Dick’s Sporting Goods. Because Dick’s
Sporting Goods uses operating leases instead of capital leases for their stores, we did not
adjust any of the models using our adjusted balance sheet.

Discount Dividend Model

The discount dividend model values a firm based on the dividends of the firm and
future payouts of dividends. In order to compute the discount dividend model simply use
the forecasted financial value of dividends and the cost of equity. This is a very
unreliable way of calculating the value of the firm, since dividends do not increase
consistently. Dick’s Sporting Goods does not payout dividends, so the discount dividend
model does not apply to them.

Free Cash Flows Model

The Free Cash Flow model estimates the company’s value by using future cash
flow estimations of the company. This model is a comparison between the costs of
capital to growth rate on the perpetuity. Calculating the Free Cash Flow model requires
forecasted cash flows from operations and investments, the calculated before tax WAAC,

101
forecasted liabilities, and the observed share price. It is important to note that this is a
fairly inaccurate calculation, due to the use of forecasted values.
The first step is taking the difference between the cash flows from operations and
the cash flows from investments to give you an annual free cash flow. Then you must
take this value and multiply it by a present value factor in order to get the present value.
Then by adding the total present value of annual cash flows ($608,517) to the present
value of perpetuity, $928,993, we come up with the value of the firm, $1,537,510. Then
we take the value of the firm and subtract the book value of debt and preferred stock,
$722,996, to get the market value of equity, $764,514; which is then divided by the
number of shares outstanding to calculate the estimated price per share, $14.92.
It is important to remember that this value must be brought to the date the
valuation is being made. We must bring this value to November 1, the day of our
valuation, so in order to do this simply take the estimated price per share, multiply it by
the weighted average cost of capital raised to ten months divided by twelve months.
$14.29*.0747^(10/12)
From this point we can then do our sensitivity analysis in order to draw a
conclusion on whether Dick’s Sporting Goods’ stock is overvalued, undervalued, or fairly
valued.
Sensitivity Analysis
growth rate
0 0.01 0.03 0.05
WACC 0.06 $23.95 $29.24 $50.39 $156.18
0.07 $18.07 $21.60 $33.96 $71.05
0.0747 $15.84 $18.81 $28.76 $54.80
0.08 $13.63 $16.11 $24.04 $42.54
0.09 $10.15 $11.96 $17.37 $28.19
0.10 $7.34 $8.70 $12.56 $19.51

Overvalued $36.79
Fairly Valued +/- 18%
Undervalued $25.57

After analyzing our sensitivity analysis for our free cash flow model, we discovered
that the firm is slightly overvalued on November 1, 2007. The majority of our analysis
shows that the firm is overvalued, with a few fairly valued growth rate of 5% with our

102
calculated Ke. However we still feel that because the Free Cash Flow model is so
sensitive to changes in Ke, Dick’s Sporting Goods is overvalued.

Residual Income Model

The residual income model is one of the most reliable models from all the
valuation models. This model is based on accounting data and measurements. This
model is not as sensitive as the free cash flow model. This model uses the cost of equity
to discount back to present values. For this model, we had to first come up with the
book value of equity from our previous year and add it to the net income to get the
ending value of equity for each year we were calculating. Dick’s did not have any
dividends so we did not have to subtract any dividends. Normal income was the next
calculation. We calculated it by multiplying beginning book value of equity by the cost of
capital. We then calculated the residual income and subtracted the normal income and
then were able to get the perpetuity from the tenth year of the residual income. After
this, we had to account for the present value and discount it back. These present values
are good indicators to see if a company is adding or destroying value.

0 1 2 3 4 5 6 7 8 9 10
201 201
2006 2007 2008 2009 2010 2011 2 3 2014 2015 2016
PV of 4975 3840 2865 2031 1320 717 208 (2182 (5732 (8659
RI 2 1 3 2 3 2 4 ) ) )

For our sensitivity analysis we used negative growth rates to bring the price back
to zero. The higher the negative growth rate the change in price rises. Our cost of
equity is 12.096% so we used a couple percents lower and higher of the cost of equity
for the sensitivity analysis. The higher the cost of equity we used, the price would
decrease. The lower the cost of equity, the higher the price we came up with. Even with
these changes, though, our prices stayed fairly consistent. Since our observed price was
$31.18, we assumed 18% was an accurate estimate for our overvalued and undervalued.
So anything under $25.57 is undervalued and anything over $36.79 is overvalued.
Anything that fall in between would be fairly valued.

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 Sensitivity Analysis
Growth rate
-0.1 -0.2 -0.3 -0.4
Ke 0.1 $10.69 $11.11 $11.33 $11.45
0.12 $10.77 $11.20 $11.41 $11.54
0.12096 $10.98 $11.34 $11.54 $11.66
0.13 $10.22 $10.56 $10.74 $10.85
0.16 $8.10 $8.36 $8.49 $8.58

Over-valued $36.79
Fairly Valued +/- 18%
Under-Valued $25.57

In our sensitivity analysis, all of our values were undervalued of the observed price
with that 18% cushion. This analysis demonstrates that Dick’s Sporting Goods is way
overvalued. To even get close to the observed share price of November 1, 2007, Dick’s
would have to have a very low cost of equity. With this in mind, we determined Dick’s is
an overvalued firm.

Long-run Residual Income Model

The long run residual income model uses the original residual income model, and
applies the perpetuity equation that is calculated within the original RI model. This
model uses the calculated Ke, Return on Equity, and the growth rate.
Using our forecasted earnings and book value we can then find our long run return
on equity. We do this by taking our total net income and dividing by the total book value
of equity. Below we present our calculated ROE for each year:

ROE 25.54% 21.36% 18.48% 16.38% 14.78% 13.52% 12.50% 11.67% 10.97% 10.38%

After this step we found the long-run growth of the return on equity. This is a
relatively simply calculation which takes the percent change in book value of equity from
year to year.
Growth % of
BVE -16.4% -13.5% -11.4% -9.8% -8.5% -7.5% -6.7% -6.0% -5.4%

After this we simply used this equation:

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 Value of Firm= BVE(1+((ROE – Ke/ (Ke-g)
Then we simply took this number and divided by shares outstanding to find the
value of our price per share, $11.85. After this we ran our sensitivity analysis to come up
with an idea of whether Dick’s Sporting Goods was overvalued, undervalued, or fairly
valued according to the long-run residual model.

ROE=.18
Growth
Ke 0.05 0.06 0.07 0.08 0.09
0.1 $21.04 $24.28 $29.67 $40.46 $72.83
0.11 $17.53 $19.42 $22.25 $26.98 $36.42
0.12096 $14.83 $15.93 $17.47 $19.76 $23.52
0.14 $11.69 $12.14 $12.72 $13.49 $14.57
0.16 $9.56 $9.71 $9.89 $10.12 $10.40

Growth=.08
ROE
Ke 0.14 0.16 0.18 0.2 0.22
0.1 $24.28 $32.37 $40.46 $48.56 $56.65
0.11 $16.19 $21.58 $26.98 $32.37 $37.77
0.12096 $11.85 $15.81 $19.76 $23.71 $27.66
0.14 $8.09 $10.79 $13.49 $16.19 $18.88
0.16 $6.07 $8.09 $10.12 $12.14 $14.16

Ke=.12096
ROE
Growth 0.14 0.16 0.18 0.2 0.22
0.05 $10.26 $12.54 $14.83 $17.11 $19.39
0.06 $10.62 $13.28 $15.93 $18.59 $21.24
0.07 $11.12 $14.29 $17.47 $20.64 $23.82
0.08 $11.85 $15.81 $19.76 $23.71 $27.66
0.09 $13.07 $18.30 $23.52 $28.75 $33.98

After running the sensitivity analysis and with the calculated price per share of
$11.85, we felt that the firm was overvalued. Even when we manipulated the numbers in
the analysis the only way we could come up with a fair value was with a growth rate of
8% and an ROE of 0.22. While this is not extraordinary we did not feel that it was
realistic, so we believed that the stock was overvalued, if only slightly.

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Abnormal Earnings Growth Model
The abnormal earnings growth model is another model that is very accurate giving
us a fair value of the firm. This model is linked up to the residual income model and
performs as a check figure to see if the calculations make sense comparing them to the
residual income model. This model is not as sensitive to price as the free cash flows
model, either. This model takes into account the price earnings or PEG ratio.
For the abnormal Earnings model we first calculated our cumulative dividends
earnings (CDI). Since Dick’s did not have any dividends, we just used the net earnings
starting in year two. We then calculated our normal earning by the previous year’s net
earnings times (1+.12096)^t one plus cost of equity to the power of time t. After this,
we could then subtract our normal earnings from CDI to get the AEG. Taking the sum of
the present value AEG, gave us the total annual AEG for 2007. We had to get the
perpetuity of year 2017 to finish up our AEG model. For the perpetuity, we just took the
average of our AEG calculations.
Sensitivity Analysis
Growth rate
-0.1 -0.2 -0.3 -0.4
Ke 0.1 $12.23 $13.29 $13.83 $14.14
0.12 $8.32 $9.25 $9.74 $10.04
0.12096 $8.17 $9.10 $9.58 $9.88
0.13 $6.96 $7.82 $8.27 $8.56
0.16 $4.28 $4.92 $5.28 $5.52

Over-valued $36.79
Fairly Valued +/- 18%
Under-Valued $25.57

After all these calculations, we were able to do the sensitivity analysis for the AEG
model using the excel spreadsheet. We used negative growth rates assuming that the
negative growth rates would get us back to the equilibrium. Using positive growth would
do the opposite and take us farter away from the equilibrium. For both the AEG and
residual income models, the faster they get to the equilibrium point the more they relate.
We used the same 18% percent cushion from our $31.18 observed share price. Anything
under $25.57 is undervalued and anything over $36.79 is overvalued. Anything that falls
in between would be fairly valued.

106
Conclusion
With the abnormal earnings model we get very closely related outcomes because
the residual and AEG models are so closely related. This model also tells us that Dick’s
Sporting Goods is overvalued. As we compared all of our models, we concluded they all
agreed with Dick’s being overvalued. All of these models constructed the same idea of
valuing a firm in their own unique way.

Revised Discounted Free Cash Flows

After accounting for capital leases, we were able to run our Free Cash Flow
analysis to get a different aspect now that we accounted for capital leases. With this
model we saw that Dick’s was undervalued to the actual price of $31.18 at November 1,
2007. The lower we made our WACC the higher, the price we would get. Increasing our
growth rate also increased Dick’s implied share price.

Sensitivity Analysis with Capital Leases

0 0.01 0.03 0.05
WACC 0.06 $54.54 $61.29 $88.28 $223.27
0.07 $46.58 $51.09 $66.86 $124.71
0.0747 $43.53 $47.33 $60.01 $93.24
0.08 $40.48 $43.65 $53.77 $81.60
0.09 $35.63 $37.94 $44.84 $58.66
0.10 $31.66 $33.39 $38.32 $47.19

Over-valued $36.79
+/-
Fairly Valued 18%
Under-Valued $25.57
Revised Residual Income Model
After correcting the Residual Income Model, we then got a better measure of
accuracy in valuing Dick’s. Sense this model is one of the best models in terms of
accuracy. We were then able to get a better picture in measuring the value of Dick’s.
The sensitivity we ran gave us all implied price under the observed share price of 31.18.
Just like all of the models that gave us all numbers under this price, simply means that
Dick’s is overvalued. As you can see from our table, the prices don’t even come near the

107
observed price. Accounting for capital leases, did not change the outcome from the
Residual Model.

Sensitivity Analysis with Capital Leases

Sensitivity Analysis
Growth rate
-0.1 -0.2 -0.3 -0.4
Ke 0.1 $10.87 $11.30 $11.51 $11.64
0.12 $11.15 $11.52 $11.72 $11.83
0.12096 $11.17 $11.53 $11.73 $11.84
0.13 $11.29 $11.63 $11.82 $11.93
0.16 $11.67 $11.96 $12.12 $12.22

Over-valued $36.79
+/-
Fairly Valued 18%
Under-Valued $25.57

108
Revised AEG Model
After accounting for capital leases and running the correct data into the AEG
model we then saw a little change in our estimated prices. The revised and regular AEG
model’s stayed fairly consistent in the implied prices. This model again proved that Dick’s
is fairly overvalued. We did observe a slim decrease in the implied price from the regular
AEG model. This decrease is because of the corrections made to the financials from the
capital leases.

Sensitivity AEG with capital leases

Sensitivity Analysis
Growth rate
-0.1 -0.2 -0.3 -0.4
Ke 0.1 $10.70 $11.84 $12.58 $13.02
0.12 $7.02 $8.21 $8.83 $9.22
0.12096 $6.90 $8.07 $8.67 $9.07
0.13 $5.86 $6.93 $7.50 $7.85
0.16 $3.58 $4.34 $4.77 $5.04

Over-valued $36.79
Fairly Valued +/- 18%
Under-Valued $25.57

Credit Analysis

In order to value the credit worthiness of Dick’s Sporting Goods, we used the
Altman Z-score. This is a measure of the probability that a company will go bankrupt.
The Altman Z-score uses 5 different ratios from balance and income statements to
calculate this measure. When the calculations turn out to be 1.81 or less, simply mean
that the company is a high risk and more than likely will go bankrupt. When the
outcomes are “between” 1.81 to 2.67, the company is in a gray area. Finally when the
company is greater than 3.28 then the company is a grade A investment and is less risk
to go bankrupt. Basically the higher the number the less risk there is to fail.

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 Altman Z-Score

Z-Score = 1.2(Working Capital/Total Assets) + 1.4(Retained Earnings/Total

Assets) + 3.3(Earnings before Interest and Taxes/Total Assets) + .6(Market
Value of Equity/Book Value of Debt) + 1.0(Sales/Total Assets)

Year (dks) 2002 2003 2004 2005 2006

Z-Score 4.742 5.135 4.996 3.148 3.718

In calculating Dick’s Sporting Goods z-score we can conclude that Dick’s is a grade
A investment due to the fact that their scores in 2006 are 3.718. They did seem to go
down in 2005 to 3.148 just a little under 3.28. We concluded this downturn was from the
acquisition of Galyan’s in June 2004. Even with this decrease though, Dick’s never gets
in the gray area and can be easy determined that they are a high credit company. We
can also determine in the past years they have not been at risk of bankruptcy from the
calculations of the Altman Z-score.

Conclusion
The Altman Z-score calculations gave us great insight in the credit analysis for
Dick’s Sporting Goods. The Altman Z-score helped us determined that Dick’s was a grade
A investment and at no risk of bankruptcy in the near future. This credit analysis uses
the 5 different ratios from the balance sheet and income statement to account for this
credit evaluation.

110
 Analyst Recommendation
After dedicating so much time and effort with this project we can now give analyst
recommendations of how to value a firm. We now have a much better understanding of
the industry analysis, accounting analysis, financial analysis, forecasting financial
statements, and intrinsic valuation models which give us the knowledge and expertise to
make precise observations in the valuation process.
In the sporting goods industry, the major competitors of Dick’s Sporting Goods are
Big 5 Sporting Goods, Cabela’s Incorporated, and Hibbett Sporting Goods. Due to the
fragmentation companies must rely on merchandising and marketing skills. This industry
is highly competitive and therefore Dick’s key success factors are required to stay on top
of the industry. The bargaining power of supplier and customers play major roles in the
industry. The relationship that already exists between the firms and their costumers
make it extra difficult for new companies to enter into the market.
In the accounting analysis, the financial statements are used to better understand
how well a firm is operating and if the firm is profitable. Accounting distortions can be
manipulated in the way managers disclose information. We evaluated Dick’s Sporting
Goods and all its competitors to get a big picture of how well they present their
information. The flexibility of GAAP to allow different reporting methods allows managers
to cover some of the true values of a company. With Dick’s Sporting Goods we felt that
there was a good amount of information disclosure when dealing with their financials,
and they provided a decent amount of information regarding mergers and their leasing
policy.
Financial Analysis gave us insight in determining how well a company is doing
within a certain industry. We used liquidity, profitability, and capital structure ratios and
compared Dick’s ratios within the industry to see how they compared with each other.
Most of the ratios proved Dick’s to be ahead of the industry average. We also used some
of the ratios that had trends to the financials to forecast the financial statements. The
balance sheet showed the most accuracy in terms of confidence and error. The most
recent year’s forecasts will show a better accurate number. The farther away we move
into the future, the more noise and error there is in the estimations.

111
 The intrinsic valuations models consisted of the free cash flows, residual income,
long run residual income, and the abnormal earnings model. All of these models gave us
the same outcomes in our valuation of Dick’s Sporting Goods. The PEG ratio indicated
Dick’s estimated share price at $25.57, and therefore indicates that Dick’s is overvalued.
From all of our sensitivity analysis, especially the residual income and AEG models we
conclude that Dick’s is around $15 to 25$ overvalued. Dick’s current market price is
$31.18 and the calculations were under by the 15 to 25. That’s how we determined that
Dick’s is overvalued. As a result of the intrinsic valuations, now that we concluded Dick’s
to be overvalued, we must also conclude Dick’s Sporting Goods (DKS), a sell
recommendation.

112
 Appendix

Liquidity Ratios
Current Ratio A/R Turnover
2002 2003 2004 2005 2006 2002 2003 2004 2005 2006
DKS 1.41 1.25 1.60 1.32 1.30 DKS 88.28 89.73 207.11 85.75 106.05
HIBB 2.80 3.20 3.08 2.73 2.73 HIBB 102.52 82.82 89.23 77.73 92.79
BGFV 1.94 1.58 1.61 1.62 1.58 BGFV 73.68 73.62 83.90 110.02 103.04
CAB 1.57 1.65 1.61 1.27 1.54 CAB 41.68 42.24 46.05 50.09 46.85
Average 1.93 1.92 1.97 1.73 1.79 Average 76.54 72.10 106.57 80.90 87.18

Quick Ratio A/R Days

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006
DKS 0.14 0.12 0.46 0.12 0.84 DKS 4.13 4.07 1.76 4.26 3.44
HIBB 0.21 0.53 1.03 1.05 0.82 HIBB 3.56 4.41 4.09 4.70 3.93
BGFV 1.70 1.70 1.87 1.98 1.62 BGFV 4.95 4.96 4.18 3.32 3.54
CAB 0.62 0.64 0.62 0.22 0.35 CAB 3.38 3.15 2.96 2.68 2.49
Average 0.92 0.91 0.70 1.05 1.23 Average 4.01 4.15 3.25 3.74 3.35

Inventory Turnover Working Capital Turnover

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006
DKS 4.64 4.55 5.99 4.12 6.23 DKS 18.45 26.69 15.43 20.45 21.82
HIBB 2.06 2.23 2.29 2.48 2.69 HIBB 4.28 3.93 3.30 3.56 4.46
BGFV 2.53 2.46 2.43 2.41 2.41 BGFV 9.18 8.66 9.84 10.78 8.74
CAB 3.38 3.15 2.96 2.68 2.49 CAB 6.48 6.07 5.62 12.16 6.10
Average 3.15 3.10 3.42 2.92 3.46 Average 9.60 11.34 8.55 11.74 10.28

Inventory Days
2002 2003 2004 2005 2006
DKS 79 80 61 89 59
HIBB 177 164 159 147 135
BGFV 144 148 150 152 155
CAB 108 116 123 136 147
Average 102 102 99 105 99

113
Profitability Ratios

Gross Profit Margin Return on Assets

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006
DKS 0.27 0.28 0.28 0.28 0.29 DKS n/a 0.16 0.18 0.13 0.10
HIBB 0.31 0.31 0.32 0.32 0.33 HIBB 0.11 0.12 0.15 0.15 0.17
BGFV 0.36 0.36 0.36 0.37 0.35 BGFV 0.68 0.09 0.12 0.13 0.09
CAB 0.40 0.40 0.40 0.40 0.41 CAB n/a n/a n/a n/a n/a
Average 0.33 0.34 0.34 0.34 0.35 Average 0.40 0.13 0.15 0.14 0.12

Operating Profit Margin Debt to Equity

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006
DKS 0.05 0.06 0.05 0.05 0.06 DKS 4.10 1.68 1.26 2.46 1.86
HIBB 0.08 0.08 0.10 0.10 0.12 HIBB 0.36 0.33 0.36 0.55 0.57
BGFV 0.07 0.08 0.08 0.08 0.06 BGFV n/a 4.24 3.34 2.35 1.78
CAB 0.06 0.06 0.06 0.06 0.07 CAB 1.33 1.54 1.32 1.14 1.38
Average 0.07 0.07 0.07 0.08 0.08 Average 1.93 1.95 1.57 1.62 1.40

Net Profit Margin

2002 2003 2004 2005 2006 Return On Equity
DKS 0.03 0.04 0.03 0.03 0.04 2002 2003 2004 2005 2006
HIBB 0.05 0.05 0.06 0.07 0.08 DKS n/a 0.83 0.49 0.30 0.36
BGFV 0.03 0.03 0.04 0.04 0.03 HIBB n/a 0.18 0.20 0.20 0.26
CAB 0.06 0.06 0.06 0.06 0.07 BGFV n/a 6.38 1.68 0.62 0.51
Average 0.04 0.05 0.05 0.05 0.05 CAB n/a 0.20 0.17 0.13 0.13
Average n/a 1.90 0.64 0.31 0.31

Asset Turnover
2002 2003 2004 2005 2006
DKS 3.95 3.91 3.88 2.42 2.62
HIBB 2.09 2.15 1.85 1.67 2.48
BGFV 2.59 2.52 2.54 2.50 2.31
CAB 1.46 1.44 1.26 1.30 1.17
Average 2.52 2.51 2.38 1.97 2.14

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Capital Structure

Times Earned Interest

2002 2003 2004 2005 2006
DKS 22.19 47.70 14.34 9.39 18.72
HIBB 29.58 26.99 21.34 39.90 45.97
BGFV -0.24 -0.36 -0.49 -0.62 -0.76
CAB n/a n/a n/a n/a n/a
Average 17.18 24.78 11.73 16.22 21.31

Debt Service Margin

2002 2003 2004 2005 2006
DKS n/a 0.69 0.79 0.91 0.80
HIBB n/a n/a n/a n/a n/a
BGFV n/a n/a n/a n/a n/a
CAB 1.79 1.51 1.77 2.16 8.47
Average 1.79 1.10 1.28 1.54 4.64

Debt to Equity
2002 2003 2004 2005 2006
DKS 4.10 1.68 1.26 2.46 1.86
HIBB 0.44 0.33 0.43 0.55 0.57
BGFV 11.73 7.69 4.76 3.66
CAB 0.02 0.03 0.05 0.18 0.13
Average 1.52 3.44 2.36 1.99 1.56

115
 3-Month Regression

60 Months
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.432883133
R Square 0.187387807
Adjusted R Square 0.173131453
Standard Error 0.090893004
Observations 59

ANOVA
df SS MS F Significance F
Regression 1 0.108590982 0.108590982 13.14416039 0.000616304
Residual 57 0.470907674 0.008261538
Total 58 0.579498657

Standard
Coefficients Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.066096358 0.01430589 4.620220053 2.23596E-05 0.037449309 0.094743408 0.037449309 0.094743408
X Variable 1 1.40983788 0.388868487 3.625487608 0.000616304 0.631142173 2.188533587 0.631142173 2.188533587

42 Months
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.392413227
R Square 0.153988141
Adjusted R Square 0.132837844
Standard Error 0.077679577
Observations 42

ANOVA
df SS MS F Significance F
Regression 1 0.043932358 0.043932358 7.28066109 0.010158102
Residual 40 0.241364667 0.006034117
Total 41 0.285297025

Standard
Coefficients Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.065139325 0.018856144 3.454541071 0.001318265 0.027029636 0.103249015 0.027029636 0.103249015
X Variable 1 1.34687727 0.499163264 2.698270018 0.010158102 0.338030691 2.35572385 0.338030691 2.35572385

36 Month

116
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.343986267
R Square 0.118326552
Adjusted R Square 0.09239498
Standard Error 0.08142001
Observations 36

ANOVA
df SS MS F Significance F
Regression 1 0.030249323 0.030249323 4.563030423 0.039952435
Residual 34 0.225393412 0.006629218
Total 35 0.255642735

Standard
Coefficients Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.061217407 0.022970083 2.665093021 0.011687837 0.014536583 0.107898231 0.014536583 0.107898231
X Variable 1 1.229031221 0.575355453 2.136125095 0.039952435 0.059768268 2.398294174 0.059768268 2.398294174

24 Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.422640525
R Square 0.178625013
Adjusted R Square 0.141289787
Standard Error 0.068800568
Observations 24

ANOVA
df SS MS F Significance F
Regression 1 0.022646835 0.022646835 4.78435594 0.039635334
Residual 22 0.104137398 0.004733518
Total 23 0.126784234

Standard
Coefficients Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.090843035 0.028072558 3.236008414 0.003795585 0.032624113 0.149061958 0.032624113 0.149061958
X Variable 1 1.451133061 0.663430595 2.187317064 0.039635334 0.075262224 2.827003897 0.075262224 2.827003897

117
 1-Year
60-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.445609283
R Square 0.198567633
Adjusted R
Square 0.184507416
Standard Error 0.090265591
Observations 59

ANOVA
Significance
df SS MS F F
Regression 1 0.115069677 0.115069677 14.12265785 0.000404981
Residual 57 0.46442898 0.008147877
Total 58 0.579498657

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.070983157 0.014836306 4.784422558 1.25329E-05 0.041273967 0.100692348 0.041273967 0.100692348
X Variable 1 1.467653635 0.39053985 3.758012486 0.000404981 0.685611079 2.24969619 0.685611079 2.24969619

48-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.32795975
R Square 0.107557598
Adjusted R
Square 0.088156676
Standard Error 0.081073153
Observations 48

ANOVA
Significance
df SS MS F F
Regression 1 0.036439538 0.036439538 5.543942645 0.022868753
Residual 46 0.302351386 0.006572856
Total 47 0.338790924

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.057607866 0.01763877 3.265979775 0.00206467 0.022102864 0.093112867 0.022102864 0.093112867
X Variable 1 1.100967307 0.467589832 2.354557845 0.022868753 0.159757807 2.042176807 0.159757807 2.042176807

36-Month

118
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.3672172
R Square 0.134848472
Adjusted R
Square 0.109402839
Standard Error 0.080653526
Observations 36

ANOVA
Significance
df SS MS F F
Regression 1 0.034473032 0.034473032 5.299474023 0.02758355
Residual 34 0.221169703 0.006504991
Total 35 0.255642735

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.067091018 0.02388951 2.808388239 0.008191018 0.018541693 0.115640343 0.018541693 0.115640343
X Variable 1 1.331353003 0.578331488 2.302058649 0.02758355 0.156042019 2.506663987 0.156042019 2.506663987

24-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.423576345
R Square 0.17941692
Adjusted R
Square 0.14211769
Standard Error 0.068767393
Observations 24

ANOVA
Significance
df SS MS F F
Regression 1 0.022747237 0.022747237 4.81020429 0.039153682
Residual 22 0.104036997 0.004728954
Total 23 0.126784234

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.092246933 0.028568302 3.228995957 0.003858959 0.0329999 0.151493966 0.0329999 0.151493966
X Variable 1 1.4561649 0.663939945 2.193217794 0.039153682 0.079237737 2.833092064 0.079237737 2.833092064

119
 2-Year
60-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.457505792
R Square 0.20931155
Adjusted R
Square 0.195439823
Standard Error 0.089658504
Observations 59

ANOVA
Significance
df SS MS F F
Regression 1 0.121295762 0.121295762 15.08907628 0.000269412
Residual 57 0.458202895 0.008038647
Total 58 0.579498657

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.075983522 0.015402128 4.933313194 7.36887E-06 0.045141293 0.106825751 0.045141293 0.106825751
X Variable 1 1.558760636 0.401280543 3.884466022 0.000269412 0.755210215 2.362311058 0.755210215 2.362311058

48-Months
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.345586695
R Square 0.119430164
Adjusted R
Square 0.100287341
Standard Error 0.080532071
Observations 48

ANOVA
Significance
df SS MS F F
Regression 1 0.040461856 0.040461856 6.23890044 0.016136048
Residual 46 0.298329068 0.006485415
Total 47 0.338790924

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.062455186 0.018492054 3.3774066 0.001497302 0.025232612 0.09967776 0.025232612 0.09967776
X Variable 1 1.211705404 0.485113116 2.497779102 0.016136048 0.235223362 2.188187445 0.235223362 2.188187445

36-Months
SUMMARY
OUTPUT

120
 Regression Statistics
Multiple R 0.389665919
R Square 0.151839529
Adjusted R
Square 0.126893632
Standard Error 0.079857605
Observations 36

ANOVA
Significance
df SS MS F F
Regression 1 0.038816672 0.038816672 6.086753797 0.018814181
Residual 34 0.216826063 0.006377237
Total 35 0.255642735

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.070578401 0.023891586 2.954111142 0.005656474 0.022024856 0.119131945 0.022024856 0.119131945
X Variable 1 1.428829779 0.579145419 2.467134734 0.018814181 0.251864688 2.605794869 0.251864688 2.605794869

24-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.42050963
R Square 0.176828349
Adjusted R
Square 0.139411456
Standard Error 0.068875773
Observations 24

ANOVA
Significance
df SS MS F F
Regression 1 0.022419047 0.022419047 4.725896088 0.04074951
Residual 22 0.104365187 0.004743872
Total 23 0.126784234

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.089564469 0.027701737 3.233171586 0.0038211 0.032114583 0.147014355 0.032114583 0.147014355
X Variable 1 1.431374987 0.658432622 2.173912622 0.04074951 0.065869312 2.796880662 0.065869312 2.796880662

121
 5-Year
60-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.457605463
R Square 0.20940276
Adjusted R
Square 0.195532633
Standard Error 0.089653332
Observations 59

ANOVA
Significance
df SS MS F F
Regression 1 0.121348618 0.121348618 15.09739309 0.000268477
Residual 57 0.458150039 0.00803772
Total 58 0.579498657

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.087847496 0.017544954 5.006994971 5.65434E-06 0.052714332 0.12298066 0.052714332 0.12298066
X Variable 1 1.678430628 0.431968834 3.885536397 0.000268477 0.813427965 2.543433292 0.813427965 2.543433292

48-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.358562283
R Square 0.128566911
Adjusted R
Square 0.109622713
Standard Error 0.080113184
Observations 48

ANOVA
Significance
df SS MS F F
Regression 1 0.043557302 0.043557302 6.786611574 0.01233059
Residual 46 0.295233621 0.006418122
Total 47 0.338790924

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.071098039 0.020648612 3.443235829 0.001235434 0.02953454 0.112661538 0.02953454 0.112661538
X Variable 1 1.343491838 0.515713542 2.605112584 0.01233059 0.305414335 2.38156934 0.305414335 2.38156934

36-Month
SUMMARY
OUTPUT

122
 Regression Statistics
Multiple R 0.411132591
R Square 0.169030007
Adjusted R
Square 0.144589713
Standard Error 0.079044188
Observations 36

ANOVA
Significance
df SS MS F F
Regression 1 0.043211293 0.043211293 6.916038228 0.012738771
Residual 34 0.212431442 0.006247984
Total 35 0.255642735

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.075342584 0.024305063 3.099872065 0.003874071 0.025948755 0.124736414 0.025948755 0.124736414
X Variable 1 1.532116311 0.582590024 2.62983616 0.012738771 0.348150941 2.716081681 0.348150941 2.716081681

24-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.417328063
R Square 0.174162712
Adjusted R
Square 0.136624653
Standard Error 0.068987202
Observations 24

ANOVA
Significance
df SS MS F F
Regression 1 0.022081086 0.022081086 4.639630252 0.042458798
Residual 22 0.104703148 0.004759234
Total 23 0.126784234

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.088719041 0.027565615 3.218467696 0.00395604 0.031551455 0.145886626 0.031551455 0.145886626
X Variable 1 1.419638735 0.659076998 2.153980096 0.042458798 0.052796706 2.786480764 0.052796706 2.786480764

123
 7-Year
60-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.453351341
R Square 0.205527438
Adjusted R
Square 0.191589323
Standard Error 0.089872793
Observations 59

ANOVA
Significance
df SS MS F F
Regression 1 0.119102874 0.119102874 14.74571249 0.00031115
Residual 57 0.460395782 0.008077119
Total 58 0.579498657

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.092501388 0.018605973 4.971596259 6.42259E-06 0.055243569 0.129759206 0.055243569 0.129759206
X Variable 1 1.695354248 0.441496818 3.840014647 0.00031115 0.811272126 2.57943637 0.811272126 2.57943637

48-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.362199323
R Square 0.131188349
Adjusted R
Square 0.11230114
Standard Error 0.079992595
Observations 48

ANOVA
Significance
df SS MS F F
Regression 1 0.044445422 0.044445422 6.945882994 0.011413157
Residual 46 0.294345502 0.006398815
Total 47 0.338790924

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.07464891 0.021601703 3.455695531 0.001191055 0.031166937 0.118130883 0.031166937 0.118130883
X Variable 1 1.379493396 0.523426726 2.635504315 0.011413157 0.325890059 2.433096733 0.325890059 2.433096733

36-Month
SUMMARY
OUTPUT

124
 Regression Statistics
Multiple R 0.421372807
R Square 0.177555043
Adjusted R
Square 0.153365485
Standard Error 0.07863768
Observations 36

ANOVA
Significance
df SS MS F F
Regression 1 0.045390657 0.045390657 7.340152551 0.010484355
Residual 34 0.210252079 0.006183885
Total 35 0.255642735

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.078288207 0.02468085 3.172022274 0.003203118 0.028130685 0.128445729 0.028130685 0.128445729
X Variable 1 1.58388353 0.584616004 2.70927159 0.010484355 0.395800873 2.771966187 0.395800873 2.771966187

24-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.417511238
R Square 0.174315634
Adjusted R
Square 0.136784526
Standard Error 0.068980814
Observations 24

ANOVA
Significance
df SS MS F F
Regression 1 0.022100474 0.022100474 4.644564075 0.042358883
Residual 22 0.10468376 0.004758353
Total 23 0.126784234

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.089297128 0.027785034 3.213857081 0.003999296 0.031674495 0.146919761 0.031674495 0.146919761
X Variable 1 1.42465528 0.661054571 2.155125072 0.042358883 0.053712015 2.795598544 0.053712015 2.795598544

125
 10-Year
60-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.446928832
R Square 0.199745381
Adjusted R
Square 0.185705826
Standard Error 0.090199241
Observations 59

ANOVA
Significance
df SS MS F F
Regression 1 0.11575218 0.11575218 14.22733021 0.000387362
Residual 57 0.463746477 0.008135903
Total 58 0.579498657

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.096593866 0.019696193 4.904189759 8.17913E-06 0.057152921 0.136034811 0.057152921 0.136034811
X Variable 1 1.696189634 0.44968945 3.771913336 0.000387362 0.795702049 2.596677218 0.795702049 2.596677218

48-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.36189014
R Square 0.130964473
Adjusted R
Square 0.112072397
Standard Error 0.080002901
Observations 48

ANOVA
Significance
df SS MS F F
Regression 1 0.044369575 0.044369575 6.932243367 0.0114888
Residual 46 0.294421349 0.006400464
Total 47 0.338790924

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.077636373 0.022585025 3.437515442 0.001256333 0.032175076 0.12309767 0.032175076 0.12309767
X Variable 1 1.391979054 0.528683553 2.632915374 0.0114888 0.327794274 2.456163833 0.327794274 2.456163833

36-Month
SUMMARY
OUTPUT

126
 Regression Statistics
Multiple R 0.428296096
R Square 0.183437546
Adjusted R
Square 0.159421003
Standard Error 0.078355949
Observations 36

ANOVA
Significance
df SS MS F F
Regression 1 0.046894476 0.046894476 7.637966373 0.009160302
Residual 34 0.208748259 0.006139655
Total 35 0.255642735

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.081316054 0.02523856 3.221897583 0.002805597 0.03002513 0.132606978 0.03002513 0.132606978
X Variable 1 1.62351856 0.58744659 2.763687097 0.009160302 0.429683461 2.81735366 0.429683461 2.81735366

24-Month
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.418122793
R Square 0.17482667
Adjusted R
Square 0.137318791
Standard Error 0.068959464
Observations 24

ANOVA
Significance
df SS MS F F
Regression 1 0.022165265 0.022165265 4.661065259 0.042026644
Residual 22 0.104618968 0.004755408
Total 23 0.126784234

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.090464385 0.028213497 3.206422248 0.004070016 0.031953173 0.148975597 0.031953173 0.148975597
X Variable 1 1.433462511 0.6639628 2.158950036 0.042026644 0.056487948 2.810437073 0.056487948 2.810437073

127
Weighted Average Cost of Debt and WACC

Liabilities 2006 % of TL Interest Rate Value Added Weight

Current Liabilities
Accounts payable 253,395 0.3278 4.63 1.517755396
Accrued expenses and other current liabilities 199,312 0.2578 4.63 1.19381544
Income taxes payable 18,381 0.0238 40 0.95115628
Current portion of other long-term debt and capital leases 181 0.0002 10.6 0.002482031
Total Current Liabilities 471,269 0.6097 0
Long-term debt 0
Senior convertible notes 172,500 0.2232 2.375 0.529999508
Other long-term debt and capital leases 15,858 0.0205 10.6 0.217458823
Deferred revenue and other liabilities 113,369 0.1467 3.97 0.582247424
Total long-term liabilities 301,727 0.3903
Total Liabilities 772,996 1

Weighted Average Cost of Debt BeforeTaxes:

4.994914903

Weighted Average Cost of Debt After Taxes:

2.996948942
Dick's Sporting Goods, Inc. 2006 10-k
Forcasted Income Statement (Revised)
Actual Financials Forecast Financial Statements
Fiscal Year 2001 2002 2003 2004 2005 2006 Assume Average 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(Dollars in thousands, except per share)

Statement of Income Data: 0.05

Net sales $893,396 $1,272,584 $1,470,845 $2,109,399 $2,624,987 $3,114,162 5.00% 100.00% $3,269,870 $3,433,364 $3,605,032 $3,785,283 $3,974,548 $4,173,275 $4,381,939 $4,601,036 $4,831,087 $5,072,642
Cost of goods sold (1) $684,552 $934,956 $1,062,820 $1,522,873 $1,887,347 $2,217,463 72.21% $2,361,173 $2,479,232 $2,603,193 $2,733,353 $2,870,021 $3,013,522 $3,164,198 $3,322,408 $3,488,528 $3,662,955
Gross profit $208,844 $337,628 $408,025 $586,526 $737,640 $896,699 27.79% $908,697 $954,132 $1,001,838 $1,051,930 $1,104,527 $1,159,753 $1,217,741 $1,278,628 $1,342,559 $1,409,687
Selling, general and administrative expenses $169,392 $262,755 $314,885 $443,776 $556,320 $682,625 21.24% $694,520 $729,246 $765,709 $803,994 $844,194 $886,404 $930,724 $977,260 $1,026,123 $1,077,429
Adding Back Operating Lease expenses $74,918 $88,183 $97,100 $144,000 $196,300 $205,800 $230,830 $236,681 $235,771 $235,007 $228,976 $160,283 $112,198 $78,539 $54,977 $38,484
Less capital lease depreciation $12,082 $14,420 $17,554 $37,621 $49,861 $54,929 $60,512 $60,512 $60,512 $60,512 $60,512 $60,512 $60,512 $60,512 $60,512 $60,512

Income from operations $102,288 $148,636 $172,686 $249,129 $327,759 $364,945 5.58% $384,494 $401,054 $411,388 $422,431 $428,797 $373,121 $338,703 $319,394 $310,901 $310,230
Capital Lease Interest Expense $94,241 $144,196 $169,025 $238,479 $311,326 $351,052 $207,594 $215,309 $216,356 $217,647 $213,774 $147,346 $101,640 $70,478 $49,539 $35,800
Interest expense, net $6,963 $2,864 $1,831 $8,009 $12,959 $10,025 0.31% $10,137 $10,643 $11,176 $11,734 $12,321 $12,937 $13,584 $14,263 $14,976 $15,725
Other income (1,000)

Income before income taxes $1,084 $1,576 $1,830 $2,641 $3,474 $3,868 5.41% $176,900 $185,745 $195,032 $204,784 $215,023 $225,774 $237,063 $248,916 $261,362 $274,430
Provision for income taxes $434 $630 $732 $1,056 $1,390 $1,547 2.16% $70,760 $74,298 $78,013 $81,914 $86,009 $90,310 $94,825 $99,566 $104,545 $109,772

Net income with Leases Capitilized $651 $945 $1,098 $1,584 $2,085 $2,321 3.24% $105,944 $111,241 $116,803 $122,643 $128,775 $135,214 $141,975 $149,074 $156,527 $164,354
Net income with Operating Leases 8,643 38,137 52,408 68,905 72,980 112,611 3.24 $116,260 $120,026 $123,915 $127,930 $132,075 $136,354 $140,772 $145,333 $150,042 $154,903

Difference in Net Income due to Capitalization ($7,992) ($37,192) ($51,310) ($67,321) ($70,895) ($110,290) ($10,316) ($8,785) ($7,112) ($5,287) ($3,300) ($1,140) $1,203 $3,740 $6,485 $9,450

Common Size Income Statement (Revised)

Assume Average Forecast Financial Statements
Fiscal Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(Dollars in thousands, except per share and sales per square foot data)
Statement of Income Data:
Sales Growth Percent
Net sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold (1) 73.47% 72.26% 72.19% 71.90% 71.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21% 72.21%
Gross profit 26.53% 27.74% 27.81% 28.10% 28.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79% 27.79%
Selling, general and administrative expenses 20.65% 21.41% 21.04% 21.19% 21.92% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24% 21.24%
Merger integration and store closing costs 6.83% 7.48%

Income from operations 11.68% 11.74% 11.81% 12.49% 11.72% 11.89% 11.76% 11.68% 11.41% 11.16% 10.79% 8.94% 7.73% 6.94% 6.44% 6.12%

investment (2) (3)

Interest expense, net 0.23% 0.12% 0.38% 0.49% 0.32% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31%
Other income

Income before income taxes 0.12% 0.12% 0.13% 0.13% 0.12% 0.13% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41% 5.41%
Provision for income taxes 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16% 2.16%

Net income 0.07% 0.07% 0.08% 0.08% 0.07% 0.08% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24% 3.24%

129
Forcasted Balance Sheet (Revised) Actual Financial Statements Forecast Financial Statements
2002 2003 2004 2005 2006 Average Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 8,976 11,120 93,674 18,886 365,464
Accounts receivable, net 14,416 16,391 10,185 30,611 29,365 3.2 3.2 30,305 31,274 32,275 33,308 34,374 35,474 36,609 37,780 38,989 40,237
Income tax receivable 232 7,202
Inventories, net 201,585 233,497 254,360 457,618 355,698 5.1 5.1 373,839 392,904 412,942 434,003 456,137 479,400 503,849 529,545 556,552 584,936
Prepaid expenses and other current assets 5,219 5,572 5,222 8,772 11,961
Deferred income taxes 5,243 8,697 1,021 7,966 429
Total current assets 235,439 275,277 364,694 531,055 762,917 51.00% 919,542 1,049,117 1,173,246 1,292,767 1,406,768 1,484,718 1,562,347 1,639,925 1,717,706 1,795,927
Capital-lease rights $88,183 $97,100 $144,000 $196,300 $205,800 208,707 193,488 174,271 157,058 138,361 60,163 54,397 49,183 44,469 40,208
PROPERTY AND EQUIPMENT, NET 71,795 80,109 144,402 349,098 370,277
CONSTRUCTION IN PROGRESS - LEASED FACILITIES 10,927 15,233 7,338
GOODWILL 157,245 156,628
OTHER ASSETS:
Deferred income taxes 5,970 7,512 6,099 871 8,959
Investments 5,770 1,950 7,054 3,388 3,197
Other 3,008 11,378 10,184 28,158 27,373
Total other assets 174,726 198,049 322,666 750,293 779,572 883,482 1,007,976 1,127,236 1,242,070 1,351,600 1,426,494 1,501,078 1,575,614 1,650,345 1,725,498
TOTAL ASSETS 410,165 473,326 687,360 1,281,348 1,542,489 3.36% 1,803,024 2,057,093 2,300,482 2,534,836 2,758,368 2,911,212 3,063,425 3,215,540 3,368,051 3,521,425

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable 95,573 125,208 118,383 211,685 253,395
Accrued expenses 47,012 59,239 72,090 141,465 136,520
Deferred revenue and other liabilities 17,958 22,752 37,037 48,882 62,792
Income taxes payable 5,728 12,763 18,381
Current portion of other long-term debt 211 213 505 635 181
Total current liabilities 166,482 220,175 228,015 402,667 471,269 1.40% 477,867 484,557 491,341 498,219 505,195 512,267 519,439 526,711 534,085 541,562
LONG-TERM LIABILITIES:
Senior convertible notes 172,500 172,500
Revolving credit borrowings 77,073 76,094 148,900
Capital Lease Obligation $88,183 $97,100 $144,000 $196,300 $205,800 208,707 193,488 174,271 157,058 138,361 60,163 54,397 49,183 44,469 40,208
Other long-term debt 3,577 3,364 3,411 8,775 8,520
Non-cash obligations for construction in progress - leased facilities 10,927 15,233 7,338
Deferred revenue and other liabilities 11,745 12,188 60,113 96,112 113,369
Total long-term liabilities 180,578 112,652 218,451 565,014 656,427
Total Liabilities 347,060 332,827 446,466 967,681 1,127,696 66.98% 1,276,580 1,297,241 1,315,111 1,336,230 1,357,154 1,319,907 1,356,468 1,395,004 1,435,510 1,477,987
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $.01 per share, authorized shares 5,000,000;
none issued and outstanding
Common stock, par value, $.01 per share, authorized shares 200,000,000;
issued and outstanding
shares 36,545,332 and 34,790,358, at January 28, 2006
and January 29, 2005, respectively 169 126 331 348 365
Class B common stock, par value, $.01 per share,
authorized shares 40,000,000; issued and
outstanding shares 13,730,945 and 14,039,529, at January 28, 2006
and January 29, 2005, respectively 77 141 140 137
Additional paid-in capital 96,279 130,071 175,748 181,321 209,526
Retained earnings 28,029 10,225 60,957 129,862 202,842 114,894 235,750 152,394 271,860 190,623 370,247 217,255 397,028 244,262 424,331
Notes receivables for common stock 6,196
Accumulated other comprehensive income 882 3,717 1,996 1,923
Total stockholders' equity 63,105 140,499 240,894 313,667 414,793 317,736 350,644 388,144 424,254 462,483 560,870 587,502 614,283 641,290 668,593
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 410,165 473,326 687,360 1,281,348 1,542,489 3.36% 1,594,317 1,647,886 1,703,255 1,760,484 1,819,636 1,880,776 1,943,970 2,009,287 2,076,800 2,146,580

130
Discounted Free Cash Flows

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Cash Flow from Operations 178,007 186,907 196,252 206,065 216,368 227,186 238,546 250,473 262,997 276,147
Cash Provided (Used) by Investing Activities ($98,404) ($103,324) ($108,490) ($113,915) ($119,611) ($125,591) ($131,871) ($138,464) ($145,387) ($152,657)
Free Cash Flow (to firm) 79,603 83,583 87,762 92,150 96,757 101,595 106,675 112,009 117,609 123,490
discount rate (9% WACC) 0.93 0.87 0.81 0.75 0.70 0.65 0.60 0.56 0.52 0.49
Present Value of Free Cash Flows $74,070 $72,367 $70,704 $69,079 $67,491 $65,940 $64,425 $62,944 $61,497 $60,084
Total Present Value of Annual Cash Flows $608,517
Continuing (Terminal) Value (assume no growth) Sensitivity Analysis 1653142.697
Present Value of Continuing (Terminal) Value $928,993 g
Value of the Firm $1,537,510 0 0.01 0.03 0.05
Book Value of Debt and Preferred Stock $772,996 WACC 0.06 $23.95 $29.24 $50.39 $156.18
Value of Equity $764,514 0.07 $18.07 $21.60 $33.96 $71.05
0.0747 $15.84 $18.81 $28.76 $54.80
Estimated Value $14.92 0.08 $13.63 $16.11 $24.04 $42.54
Implied Share Price Nov. 1, 2007 $15.84 0.09 $10.15 $11.96 $17.37 $28.19
growth 0 0.10 $7.34 $8.70 $12.56 $19.51
Actual Price per share $31.18
Over-valued $36.79
Fairly Valued +/- 18%
Under-Valued $25.57

Additional Exercises

d a b c c/d
debt % equity % wacc k_d wacc-dwac
Ke based on WACC 50.28% 49.72% 0.0747 0.04990 0.02480 0.049875137

131
Risidual Income Valuation
Difference in RI ($7,518) ($7,894) ($8,288) ($8,703) ($9,138) ($9,595) ($10,075) ($10,578) ($11,107)
1 2 3 4 5 6 7 8 9 10 11
Forecast Years Perp
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Total Book Value Beg 414,793 520,737 631,978 748,781 871,424 1,000,199 1,135,413 1,277,388 1,426,462 1,582,989
Total Net Income 105,944 111,241 116,803 122,643 128,775 135,214 141,975 149,074 156,527 164,354
Dividends per share 0 0 0 0 0 0 0 0 0 0
Ending BE 414,793 520,737 631,978 748,781 871,424 1,000,199 1,135,413 1,277,388 1,426,462 1,582,989 1,747,343
Ke 0.12096
"Normal" Income 50,173 62,988 76,444 90,573 105,407 120,984 137,340 154,513 172,545 191,478
Residual Income (RI) 55,770 48,253 40,359 32,071 23,368 14,230 4,635 -5,439 -16,018 -27,125 -37,967
Discount Factor 0.89 0.80 0.71 0.63 0.57 0.50 0.45 0.40 0.36 0.32
Present Value of RI 49752 38401 28653 20312 13203 7172 2084 (2182) (5732) (8659)
ROE 0.255 0.214 0.185 0.164 0.148 0.135 0.125 0.117 0.110 0.104
BV Equity 2006 414,793 gr -16.4% -13.5% -11.4% -9.8% -8.5% -7.5% -6.7% -6.0% -5.4% 0.156
Total PV of RI (end 2006) 151663.89 -171830
Continuation (Terminal) Value -54853 Sensitivity Analysis
PV of Terminal Value (end 2006) (54853) g avg gr -9.4%
Market Value of equity 2006 $511,604.32 -0.1 -0.2 -0.3 -0.4
Shares outstanding 51,256 Ke 0.1 $10.69 $11.11 $11.33 $11.45
Price end of 2006 $9.98 0.12 $10.77 $11.20 $11.41 $11.54
Time Consistent Implied Price $10.98 0.12096 $10.98 $11.34 $11.54 $11.66
Actual Price per share $31.18 0.13 $10.22 $10.56 $10.74 $10.85
Growth -0.1 0.16 $8.10 $8.36 $8.49 $8.58
Ke 0.12096
Over-valued $36.79
Fairly Valued +/- 18%
Under-Valued $25.57

132
Long-run Risidual Income
Over-valued $36.79
BookEquity 414,793 Fairly Valued +/- 18%
Ke 0.12096 Under-Valued $25.57
ROE 0.22
g 0.09
ROE=.18
Growth
PPS $33.98 Ke 0.05 0.06 0.07 0.08 0.09
0.1 $21.04 $24.28 $29.67 $40.46 $72.83
0.11 $17.53 $19.42 $22.25 $26.98 $36.42
0.12096 $14.83 $15.93 $17.47 $19.76 $23.52
0.14 $11.69 $12.14 $12.72 $13.49 $14.57
0.16 $9.56 $9.71 $9.89 $10.12 $10.40

Growth=.08
ROE
Ke 0.14 0.16 0.18 0.2 0.22
0.1 $24.28 $32.37 $40.46 $48.56 $56.65
0.11 $16.19 $21.58 $26.98 $32.37 $37.77
0.12096 $11.85 $15.81 $19.76 $23.71 $27.66
0.14 $8.09 $10.79 $13.49 $16.19 $18.88
0.16 $6.07 $8.09 $10.12 $12.14 $14.16

Ke=.12096
ROE
Growth 0.14 0.16 0.18 0.2 0.22
0.05 $10.26 $12.54 $14.83 $17.11 $19.39
0.06 $10.62 $13.28 $15.93 $18.59 $21.24
0.07 $11.12 $14.29 $17.47 $20.64 $23.82
0.08 $11.85 $15.81 $19.76 $23.71 $27.66
0.09 $13.07 $18.30 $23.52 $28.75 $33.98

133
Abnormal Earnings Growth Value

1 2 3 4 5 6 7 8 9 10 11
Forecast Years Perp
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
EPS $105,944 $111,241 $116,803 $122,643 $128,775 $135,214 $141,975 $149,074 $156,527 $164,354
DPS $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
DPS invested at 17% (Drip) $0 $0 $0 $0 $0 $0 $0 $0 $0
Cum-Dividend Earnings $111,241 $116,803 $122,643 $128,775 $135,214 $141,975 $149,074 $156,527 $164,354
Normal Earnings $118,759 $124,697 $130,932 $137,478 $144,352 $151,570 $159,148 $167,105 $175,461
Abnormal Earning Growth (AEG) ($7,518) ($7,894) ($8,288) ($8,703) ($9,138) ($9,595) ($10,075) ($10,578) ($11,107) ($9,211)
PV Factor $1 $1 $1 $1 $1 $1 $0 $0 $0
PV of AEG ($6,707) ($6,282) ($5,884) ($5,512) ($5,163) ($4,836) ($4,530) ($4,243) ($3,975)
Residual Income Check Figure ($7,518) ($7,894) ($8,288) ($8,703) ($9,138) ($9,595) ($10,075) ($10,578) ($11,107)

Core EPS $105,944

Total PV of AEG ($43,157)
Continuing (Terminal) Value ($41,684)
PV of Terminal Value ($16,721)
Total PV of AEG ($59,878)
Total Average EPS Perp (t+1) $46,066
Capitalization Rate (perpetuity) 0.12096
Sensitivity Analysis
Intrinsic Value Per Share (end 1987) $7.43 g
time consistent implied price $8.17 -0.1 -0.2 -0.3 -0.4
Nov 1, 2007 observed price $31.18 Ke 0.1 $12.23 $13.29 $13.83 $14.14
Ke 0.1210 0.12 $8.32 $9.25 $9.74 $10.04
g -0.1 0.12096 $8.17 $9.10 $9.58 $9.88
0.13 $6.96 $7.82 $8.27 $8.56
Actual Price per share $31.18 0.16 $4.28 $4.92 $5.28 $5.52

Over-valued $36.79
Fairly Valued +/- 18%
Under-Valued $25.57

134
 References

1. Dick’s Sporting Goods website: www.dickssportinggoods.com

2006 Annual Report
2002-2006 10Ks
2. Cabela’s Inc. website: www.cabelas.com
2006 Annual Report
2002-2006 10ks
3. Big Five Sporting Goods website: www.big5sportinggoods.com
2006 Annual Report
2002-2006 10Ks
4. Hibbett Sports website: www.hibbett.com
2006 Annual Report
2002-2006 10Ks
5. U.S. Department of Commerce: www.commerce.gov
6. Occupational Safety and Health Administration: www.osha.gov
7. First Research: www.firstresearch.com
8. IBISWorld: www.ibisworld.com
9. Money Central: www.moneycentral.msn.com
10. Business analysis and Valuation: Using Financial Statements, Palepu and Healy
11. Yahoo Finance: www.finance.yahoo.com
12. Google Finance: www.google.com/finance
13. Hoovers: www.hoovers.com
14. All Business: www.allbusiness.com
15. International Trade Administration: www.ita.doc.gov
16. Investopedia: www.investopedia.com
17. Wikepedia: www.wikipedia.com