2005 ANNUAL REPORT FINANCIAL HIGHLIGHTS Fiscal Year (Dollars in thousands, except per share data) Net sales Gross profit Gross profit margin Selling, general and administrative expenses Pre-opening expenses Merger integration and store closing costs Income from operations Net Income Adjusted Net Income 1 Diluted earnings per common share Adjusted Diluted earnings per common share 1 Diluted weighted average shares outstanding (in thousands) Total stockholders’ equity Return on invested capital EBITDA Adjusted EBITDA 1 Comparable store net sales increase Store count 2005 2004 2003 $ 2,624,987 $ 2,109,399 $ 1,470,845 737,640 586,526 408,025 28.1% 27.8% 556,320 10,781 37,790 132,749 72,980 94,548 1.35 1.75 53,979 414,793 11.3% 184,454 219,531 2.6% 255 $ $ $ $ $ 443,776 11,545 20,336 110,869 68,905 74,518 1.30 1.41 52,921 313,667 12.1% 160,471 165,799 2.6% 234 $ $ $ $ $ 27.7% 314,885 7,499 – 85,641 52,408 50,286 1.04 1.00 50,280 240,894 11.9% 106,731 103,195 2.1% 163 $ $ $ $ $ $ Diluted earnings applicable to common stockholders and diluted weighted average shares outstanding are adjusted for the two-for-one stock split, in the form of a stock dividend, which became effective April 5, 2004 1 Results exclude merger integration and store closing costs, and gain on sale of investment Our goal is to be the number one sports and fitness specialty retailer for all athletes and outdoor enthusiasts, through the relentless improvement of everything we do. dick’s sporting goods, inc. 2005 annual report seizing visible growth opportunities Great athletes seize every opportunity to become bigger, faster, stronger and better than their competitors. At Dick’s Sporting Goods, we think that great companies are built much the same way, so we work continuously to improve our operations, expand our store network and extend our reach. Our efforts have made us the most profitable publicly held sporting goods retailer in the nation for the past several years1, as well as one of the largest chains of our kind in the United States, with 255 stores in 34 states. We move forward with a focus on continuing to improve our performance and support our growth by drawing on the strengths that have made us a best-in-class retailer. 1 As measured by income from continuing operations and adjusted for non-recurring items 255 stores in 34 states Consistent Store Growth 2000 2001 2002 2003 2004 2005 105 125 141 163 234 255 1 1 6 We have the potential for at least 800 stores nationwide We can nearly double the size of the chain in the eastern half of the United States 3 5 1 2 12 12 14 30 6 5 6 2 3 4 2 Expansion initiatives at our distribution centers will result in a total network capacity of 460 stores Distribution Centers Corporate Headquarters Key markets and regions for growth include Chicago, Atlanta, Denver, Boston, Florida 2 3 11 8 9 2 25 28 8 4 13 17 5 1 2 2 1 dick’s sporting goods, inc. 2005 annual report DEAR FELLOW SHAREHOLDERS One of college football’s legendary coaches once noted that the mark of a true professional is the ability to consistently deliver a higher level of performance than others. While this may seem like a simple concept, executing it consistently is not an easy task. Instead, it demands unwavering discipline, focus and effort – all qualities that the team at Dick’s Sporting Goods has demonstrated year after year, as we have consistently performed at a higher level than our peers. In 2005, we continued this trend, delivering a strong performance on a number of fronts. During the year, we Executing Our Game Plan One of the greatest challenges that any healthy, growing completed the integration of the Galyan’s stores we acquired company faces is that of managing its growth effectively. This in 2004, while continuing to fuel our organic growth, create begins with formulating an expansion plan that can generate new efficiencies and pave the way for future expansion. meaningful, long-term value and executing that plan in a At the same time, we maintained our consistent focus on disciplined manner – all while keeping an eye on the ball financial results, posting improved gross, operating, EBITDA of ongoing operations. At Dick’s Sporting Goods, we have a and net income margins.2 Our net income rose 52 percent to tradition of growing our Company while meeting all of these $94.5 million, compared to proforma, combined company criteria, and, in 2005, we once again showcased these abilities. results in 2004.2 Sales increased 24 percent to $2.6 billion, while comparable store sales grew 2.6 percent. This marked A defining achievement for the year was our integration of the sixth consecutive year in which we have posted a compa- Galyan’s. When we made this acquisition in July of 2004, rable store sales gain; moreover, in every one of those years we said that it was a strategic move for Dick’s that would we delivered an increase of more than 2 percent in this position us with premium real estate in a number of key new metric. As a result of this performance, Dick’s ended the year markets that offered further growth opportunity, including as not only the largest full-line sporting goods retailer in the Chicago, Atlanta, Minneapolis and Denver. We also said that nation with $2.6 billion in sales, but also the most profitable it would enable us to expand our presence in several existing publicly held full-line sporting goods retailer in the nation – markets and create valuable efficiencies in the areas of a designation that we have held for the past several years.3 procurement and marketing. Our rapid integration of this acquisition enabled us to realize some of these efficiencies immediately and to make the acquisition nominally accretive to our 2004 earnings. In 2005, we continued this momentum, completing the conversion of the 44 Galyan’s stores into 2 Results exclude merger integration and store closing costs, and gain on sale of investment 3 As measured by income from continuing operations and adjusted for non-recurring items 2 MANAGEMENT TEAM (left to right) William R. Newlin Executive Vice President and Chief Administrative Officer Michael F. Hines Executive Vice President and Chief Financial Officer William J. Colombo President and Chief Operating Officer Jeffrey R. Hennion Senior Vice President – Marketing Jay Crosson Senior Vice President – Human Resources Edward W. Stack Chairman and Chief Executive Officer Doug Walrod Senior Vice President – Real Estate and Development Gwen Manto Executive Vice President and Chief Merchandising Officer Eileen Gabriel Senior Vice President and Chief Information Officer Lee Belitsky Senior Vice President – Distribution and Transportation Joseph H. Schmidt Senior Vice President – Store Operations Dick’s Sporting Goods stores within nine months of making Galyan’s distribution center to optimize our supply chain the acquisition – one quarter ahead of our plan. This was a network. Our diligent attention to these initiatives enabled us formidable undertaking that encompassed re-merchandising, to achieve $20 million in expected operating synergies in 2005. re-signing and re-setting all of the stores to mirror the mer- chandise assortment and layout of a Dick’s store; converting While the acquisition was a major growth driver for our the Galyan’s stores’ systems to our own; and launching a Company in 2005, it did not distract us from pursuing organic grand re-opening campaign in each market. We also closed growth. During the year, we opened 26 new Dick’s Sporting the Galyan’s corporate office, and adapted the former Goods stores that enabled us to enter nine new markets, STOCK PRICE PERFORMANCE OCTOBER 16, 2002 IPO THROUGH FISCAL 2005 $40 $30 $20 $10 $0 O P I 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 including our first store in Florida, which represents the 34th state that we now serve. Much of this organic growth took place during the second half of the year, and, in fact, we opened 16 stores and relocated three stores during the third quarter alone, representing the largest single quarter store opening campaign in our Company’s history. Expanding Our Playing Field In the midst of all this activity, we continued to plan for the future. One of the primary ways that Dick’s has become a best-in-class retailer is by driving the growth of our store concept. This concept centers around offering multiple “store-within-a-store” specialty areas inside each of our locations, each of which is designed to stand alone as a true 3 dick’s sporting goods, inc. 2005 annual report specialty store. We create compelling specialty store environ- In the past two years, we took a number of steps to set the ments by providing customers with authentic merchandise stage for this growth. In 2004, we expanded our distribution assortments, highly knowledgeable employee teams, a center in Smithton, Pennsylvania; we implemented new first-rate selection of national and private-label brands, and merchandise and allocation systems; and we moved into a a range of value-added services. These characteristics set new headquarters location that centralized our corporate Dick’s stores apart within our industry and position us to office functions under one roof. In 2005, we made enhance- deliver customer satisfaction in every new market we enter. ments to our merchandise systems to expedite the flow of merchandise from our vendors to our stores and to provide Over the years, we have demonstrated our commitment to our buyers and planners with more timely data to use in this store concept by regularly expanding our store network. the decision-making process. We also laid the groundwork As a result, Dick’s is one of the largest chains of its kind in to open another 40 stores in 2006 in a mix of new and the United States, with 255 stores in 34 states and more than established markets. And we formulated a plan to expand 14 million square feet of retail space. As we look ahead, our distribution center in Plainfield, Indiana, which, when we believe that there is ample opportunity for us to continue complete, will yield a total network capacity of 460 stores to grow, and we are sharply focused on capitalizing on between our two distribution centers. this potential by working to increase our store count by approximately 15 percent annually in the coming years. In To support the planned growth of our store network and the process, we plan to increase our penetration of existing maximize our supply chain capacity, we began implementing markets, as well as to extend our reach into new markets. a warehouse management system that will enable us to SALES NET INCOME1 OPERATING MARGINS2 (IN MILLIONS) (IN MILLIONS) (PERCENTAGE) 5 2 6 2 $ , 9 4 4 2 $ , 9 0 1 2 $ , . 5 4 9 $ . 5 4 7 $ . 1 2 6 $ % 2 6 . % 8 5 . % 4 5 . % 5 6 . % 8 4 . % 2 4 . . 3 0 5 $ . 6 9 3 $ . 2 3 2 $ 1 7 4 1 $ , 3 7 2 1 $ , 5 7 0 1 $ , 2001 2002 2003 2004 2004 P 2005 2001 2002 2003 2004 2004 P 2005 2001 2002 2003 2004 2004 P 2005 1 Results exclude merger integration and store closing costs, gain on sale of investment, and loss on write-down of non-cash investment 2 Results exclude merger integration and store closing costs 2004 P: Proforma results as if Galyan’s had been aquired at the beginning of the period 4 optimize our growing infrastructure and speed merchandise to our selling floors. We also continued to develop and provide Dick’s own training programs to store associates, and to extend Performance dick’s sporting goods, inc. 2005 annual report 2005 ACCOMPLISHMENTS our tradition of opening new Dick’s locations with an experi- enced Dick’s store manager. These initiatives help ensure that our team is well-versed in delivering excellent service and offering up-to-date product knowledge to our customers. Finally, we fortified our ability to pursue future growth opportunities by ending the year with no borrowings on our revolving credit facility, a reduction of $76 million compared with last year. Outpacing the Competition If I were to characterize the past year in a word, I would say “performance.” Indeed, 2005 was a period during which our Company delivered exceptional operating and financial results, while taking steps to ensure that we can continue to outpace our competitors in the coming years. Our ability to deliver these accomplishments is the direct result of the way we think and function at Dick’s, which I liken to a great athlete: continually developing our strengths and skills, and perpetually preparing for the challenges and opportunities that lie ahead. We believe that one of these opportunities is to drive our continued earnings growth. With this in mind, we are focused on increasing our operating margin by approximately 30 basis points annually, thereby fueling an estimated annual earnings growth rate of approximately 20 percent for our Company. As we move forward, I would like to thank our employees for their dedication and hard work over the past year. I would also like to thank our vendors for their partnership, our customers for their patronage, and our shareholders for their support. Rest assured that we will continue to focus on delivering a level of performance that enables Dick’s to excel within our industry. Edward W. Stack Chairman and Chief Executive Officer Completed integration of Galyan’s acquisition one quarter ahead of plan Delivered improved gross, operating, EBITDA and net income margins Increased comparable store sales by 2.6%, marking our sixth consecutive year of posting a gain of greater than 2% in this metric Improved our merchandise margin, leveraging our growing purchasing power and driving sales in our more than 10 private-label brands, which in 2005 accounted for a record 12% of total sales Achieved $20 million in synergies resulting from the Galyan’s acquisition Ended 2005 with no borrowings on our revolving credit facility, a reduction of $76 million compared with last year Ended the year as the largest full-line sporting goods retailer in the nation with $2.6 billion in sales, and once again as the most profitable publicly held full-line sporting goods retailer in the nation4 Growth Converted 44 Galyan’s stores into Dick’s Sporting Goods stores, positioning us in a number of key new markets, and increasing our presence in several existing markets Opened 26 new Dick’s Sporting Goods stores that enabled us to enter nine new markets, including our first store in Florida, our 34th state Marked the largest single quarter store opening campaign in our history in the third quarter, opening 16 new locations and relocating three additional locations Began servicing more stores from our recently expanded Smithton, Pennsylvania distribution center 4 As measured by income from continuing operations and adjusted for non-recurring items 5 dick’s sporting goods, inc. 2005 annual report unique shopping experience At Dick’s Sporting Goods, our top priority is to serve the needs of our customers, and we’ve tailored our business to accomplish this goal. One of the primary ways we’ve done this is by employing a unique “store-within-a-store” concept that sets us apart among sporting goods retailers. In essence, each of our 255 locations houses several sports specialty stores – the Golf Pro Shop, the Lodge, the Fitness Center, Footwear, Team Sports and Athletic Apparel – all under one roof. Each of our specialty stores offers the distinct benefits of a dedicated stand-alone location, including an authentic merchandise assortment, a premier brand selection, access to value-added services, and personalized assistance from highly knowledgeable sales associates – many of whom are enthusiasts and experts in their particular sports. We combine these advantages with “one-stop” convenience, as well as the access to new products and purchasing power we enjoy as a best-in-class retail chain. The success of this concept has helped Dick’s to develop a reputation for excellence that draws our customers back for their sporting goods needs in every season of the year. 6 Every Season Starts at Dick’s Sports enthusiasts know that every season truly does start at Dick’s – from golf season, to hunting, fishing and camping seasons, to those exhilarating times of year when every team sport first kicks off. No matter what the season, our mission at Dick’s is to carry the latest selection of authentic sports merchandise so our customers can excel in the sports and outdoor activities they love all throughout the year. dick’s sporting goods, inc. 2005 annual report THE GOLF PRO SHOP THE LODGE FITNESS CENTER FOOTWEAR TEAM SPORTS ATHLETIC APPAREL 7 dick’s sporting goods, inc. 2005 annual report Our suite of golf-related services encompasses everything from club repair and re-gripping to arranging private lessons with our pros. In-store driving ranges and putting greens enable customers to test-drive the latest merchandise releases. THE GOLF PRO SHOP The quality of a golf swing is the result of a combination of factors – strength, agility, discipline and concentration, to name just a few. In Dick’s Golf Pro Shop, we recognize that technology can also play a leading role, and we make it our business to be a leader in providing the most up-to-date golf equipment in the industry. Our selection includes state-of-the-art clubs, balls and shoes, as well as a wide array of high-quality golf apparel, outerwear and training devices for the beginner through the enthusiast golfer. We represent the premier golf brands that our customers trust, including TaylorMade, Callaway, Titleist, FootJoy and our own Walter Hagen and Acuity lines. 8 dick’s sporting goods, inc. 2005 annual report Our Golf Pro Shop experience includes broadcasts of golf tournaments and educational golf programming. PGA golf professionals provide our customers with informed assistance in selecting the right products for their needs. 9 dick’s sporting goods, inc. 2005 annual report We draw on our roots as a local bait and tackle shop to deliver authentic merchandise for every season. Tried-and-true brands, such as Coleman, Shakespeare, The North Face, and Old Town Canoe and Kayak, deliver the dependable quality our customers demand. 10 dick’s sporting goods, inc. 2005 annual report Value-added services, like refilling CO2 tanks, mounting rifle scopes, cutting arrows, and selling hunting and fishing licenses, make Dick’s the outdoor enthusiast’s one-stop shop. Customers can even test products in our in-store archery ranges. We feature exclusive, private-label equipment, outerwear, apparel and footwear products under our own Field & Stream and Northeast Outfitters brands. THE LODGE Outdoor pursuits like hunting, fishing and camping are more than just a hobby – they’re a way of life that beckons throughout the year. The Lodge has the authentic equipment necessary for sportsmen of all skill levels to enjoy a changing spectrum of activities, terrain and weather conditions from winter through fall. Dick’s Sportsman’s Lodge is staffed by seasoned outdoor enthusiasts whose firsthand experience ranges from camping and fishing to kayaking and archery. These knowledgeable associates know precisely which equipment is best suited for every need, and they offer a combination of proven advice and personal wisdom that our customers have come to trust and expect. 11 dick’s sporting goods, inc. 2005 annual report Certified bike technicians make repairs and showcase our brand selection, which includes Diamondback, Iron Horse, Mongoose and Dick’s own Quest line. Certified fitness trainers in our stores provide qualified advice on the best equipment for individual needs. 12 dick’s sporting goods, inc. 2005 annual report Our assortment incorporates “good, better and best” choices within each category, and is complemented by services like home delivery and set-up of fitness equipment. FITNESS CENTER The Fitness Center at Dick’s is a comprehensive fitness environment where both fitness beginners and experts can get the equipment, apparel and services they need to fulfill their personal objectives. We employ fitness trainers in our stores, who are certified by the International Fitness Professionals Association. These individuals understand every step of the fitness chain, so they can offer informed guidance on the most effective training techniques and equipment for customers at every level. Our exceptional merchandise selection encom- passes the nation’s preeminent brands, such as Horizon, Bowflex and Everlast. We complement this assortment with our own offering of high-performance fitness equipment under the Fitness Gear name. 13 dick’s sporting goods, inc. 2005 annual report Dedicated sales associates complete a combina- tion of proprietary and vendor-sponsored training programs, ensuring they are always familiar with the latest technical attributes. We deliver a winning combination of premier brands, technology-driven products and an extensive merchandise assortment that includes specialty footwear for every season. 14 dick’s sporting goods, inc. 2005 annual report We strive to be among the first-to-market with new releases, making us a leader in the delivery of the latest athletic footwear. We feature a vast selection of technical performance running shoes that are carefully engineered to provide athletes with the best fit and ride for their specific foot types. FOOTWEAR Leading manufacturers of athletic footwear, including Nike, Asics, New Balance and adidas, work to meet the needs of today’s athletes by continually developing sophisticated new products that unite next- generation materials with cutting-edge technologies. A prime example is the revolutionary new Nike Air Max 360 running shoe, which utilizes a unique foamless midsole that dramatically reduces the shoe's weight, increases its durability and enables wearers to run in unsurpassed comfort on a cushion of 100 percent air. The Footwear store at Dick’s is a full- service specialty location where customers can select from among the newest and most technologically advanced athletic shoes available. In addition to our broad merchandise assortment, our customers have the advantages of special vendor promotions and an authentic in-store track where they can put their potential purchases through their paces. 15 dick’s sporting goods, inc. 2005 annual report Technology advances daily, and so does our assortment of the latest backboards, baseball bats, football and other equipment for every major team sport. Many of our sales associates are sports enthusiasts who have hands-on experience with the merchandise we sell. 16 dick’s sporting goods, inc. 2005 annual report Our ScoreCard loyalty program rewards repeat shoppers with special discounts and promotional offers. We’re a year ’round resource where athletes can always get the merchandise they require to train and compete in their sports. TEAM SPORTS The Team Sports store at Dick’s is a one-stop destination where athletes can get the gear they need to hit the playing field. Our merchandise assortment includes products from industry leading manufacturers, such as Nike, adidas, Under Armour, Mizuno and Wilson. We round these out with our own private-label brands, including our PowerBolt line, which provides our customers with a combination of high quality and great value. And since we believe that shopping for sporting goods should be convenient and fun, we employ careful store layouts to differentiate among the “good, better and best” items within each category, and we employ clear signage to help players, coaches and parents make quick and accurate product comparisons. 17 dick’s sporting goods, inc. 2005 annual report Our broad assortment of women’s athletic apparel features garments for children and adults to use for competition, team sports and fitness. 18 dick’s sporting goods, inc. 2005 annual report Under Armour products, including Metal, Tech, ColdGear, AllSeasonGear and TurfGear, protect athletes in a changing range of extreme weather conditions. ATHLETIC APPAREL There are a host of factors that can influence the caliber of an athlete’s performance, and personal comfort is one of them. That’s why top manufacturers of athletic apparel offer a growing selection of products that integrate space-age fabrics and emerging sports technology to provide the ultimate in comfort and performance across a spectrum of sports. For example, Nike Sphere products are designed to help athletes regulate their body temperatures even in demanding climates. Innovations like these enable today's athletes to achieve enhanced performance, as well as to engage in their favorite sports on a year ’round basis. The Athletic Apparel store at Dick’s offers a broad assortment of cutting-edge athletic clothing for men, women and children that help athletes to look and feel their best. This assortment includes products from Under Armour, Nike, and adidas, as well as Dick’s exclusive private-label brands, Ativa and Fitness Gear, which incorporate advanced technology, while offering our customers exceptional quality and value. 19 dick’s sporting goods, inc. 2005 annual report CREATING THE CAPACITY TO GROW 2004 2005 2006, Planned Moved into a new headquarters location, centralizing all corporate office functions under one roof Implemented new merchandise and allocation systems Expanded Smithton, Pennsylvania distribution center, giving us the ability to support 230 stores Introduced the Manhattan transportation and warehouse management system: Implemented the transportation management segment centrally Implemented the warehouse man- agement segment in our Plainfield, Indiana distribution center Manhattan is a highly scalable supply chain platform geared to drive productivity and improve supply chain response times Expand Plainfield, Indiana distribution center, extending our total supply chain capacity to 460 stores Implement Manhattan in our Smithton, Pennsylvania distribution center Ongoing Take measures to ensure that each new store is opened with an experienced Dick’s manager Applied new reporting processes to provide our merchandising organization with more detailed and timely data Provide a mix of proprietary and vendor-sponsored product training to store associates Continue to build Senior Management team, placing people with relevant experience in key roles planning ahead Dick’s enters 2006 with a brand that resonates with consumers and is backed by strong relationships with the industry’s top manufacturers of authentic sporting goods merchandise. We have a solid balance sheet, proven store operation and growth strategies, and an experienced management team. What’s more, we operate in an industry that affords us significant opportunity to increase our presence in established geographic markets and to penetrate new markets. In 2006, we plan to open 40 new stores. To support this growth, we will finish implementing a new warehouse management system in our distribution centers, which will optimize our infrastructure and speed merchandise to our selling floors. In addition, in 2006, we will expand our Plainfield, Indiana distribution center. When these initiatives are complete, we will have the supply chain capacity to serve approximately 460 stores. 20 dick’s sporting goods, inc. 2005 annual report Operating Income per Square Foot1 Gross Profit Margins 2001 2002 2003 2004 2004 P 2005 $7.8 $10.3 $11.5 $12.7 $9.1 $12.1 (PERCENTAGE) 2001 2002 2003 2004 2004 P 2005 Private-Label Sales (PERCENTAGE) 24.6% 26.5% 27.7% 27.8% 27.2% 28.1% 2001 2002 2003 2004 2004 P 2005 2.6% 5.8% 10.5% 9.8% 8.6% 11.9% 1 Results exclude merger integration and store closing costs 2004 P: Proforma results as if Galyan’s had been aquired at the beginning of the period 2005 FINANCIAL REPORT Five-Year Financial Summary 22 Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 Quantitative and Qualitative Disclosures About Market Risk Management’s Responsibilities Report Independent Auditors’ Report Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Consolidated Statements of Changes in Stockholders’ Equity Notes to Consolidated Financial Statements Reconciliation of Non-GAAP Financial Information Corporate and Stockholder Information 34 35 36 38 39 40 41 42 44 59 62 2121 dick’s sporting goods, inc. 2005 annual report FIVE–YEAR FINANCIAL SUMMARY Fiscal Year 2005 2004 2003 2002 2001 (Dollars in thousands, except per share and sales per square foot data) Statement of Income Data: Net sales Cost of goods sold 1 Gross profit Selling, general and administrative expenses Merger integration and store closing costs Pre-opening expenses Income from operations (Gain) on sale / loss on write-down of non-cash investment 2, 3 Interest expense, net Other income Income before income taxes Provision for income taxes Net income Earnings per Common Share 4: Net income per common share – Basic Net income per common share – Diluted Weighted average number of common shares outstanding (in thousands): Basic Diluted Store Data: Comparable store net sales increase 5 Number of stores at end of period Total square feet at end of period Net sales per square foot 6 Other Data: Gross profit margin Selling, general and administrative percentage of net sales Operating margin Inventory turnover 7 Depreciation and amortization Balance Sheet Data: Inventories Working capital 8 Total assets Total debt including capital lease obligations Retained earnings (accumulated deficit) – $ 2,624,987 1,887,347 737,640 556,320 37,790 10,781 132,749 $ 2,109,399 1,522,873 586,526 443,776 20,336 11,545 110,869 $ 1,470,845 1,062,820 408,025 314,885 – 7,499 85,641 $ 1,272,584 934,956 337,628 262,755 – 6,000 68,873 $ 1,074,568 810,801 263,767 213,065 – 5,726 44,976 (1,844) 12,959 – 121,634 48,654 72,980 1.47 1.35 $ $ $ (10,981) 8,009 (1,000) 114,841 45,936 68,905 1.44 1.30 $ $ $ 49,792 53,979 47,978 52,921 2.6% 255 14,650,459 188 $ 2.6% 234 13,514,869 195 $ 28.1% 27.8% 21.2% 5.1% 3.42x 49,861 $ 21.0% 5.3% 3.56x 37,621 $ (3,536) 1,831 – 87,346 34,938 52,408 1.17 1.04 44,774 50,280 2.1% 163 7,919,138 193 27.7% 21.4% 5.8% 3.69x 17,554 $ $ $ $ $ $ 535,698 $ 142,748 $ 1,187,789 181,201 $ 457,618 $ $ 128,388 $ 1,085,048 $ 258,004 $ 254,360 $ 136,679 $ 543,360 3,916 $ 2,447 2,864 – 63,562 25,425 38,137 1.08 0.93 $ $ $ – 6,241 – 38,735 15,494 23,241 0.73 0.65 35,458 40,958 32,018 35,736 5.1% 141 6,807,021 192 3.6% 125 6,149,044 186 $ 26.5% 24.6% 20.7% 5.4% 3.83x 14,420 233,497 55,102 413,529 3,577 8,549 138,823 19.8% 4.2% 3.74x 12,082 201,585 68,957 365,517 80,861 (29,588) 61,556 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ including accretion of redeemable preferred stock Total stockholders’ equity $ 202,842 414,793 $ $ 129,862 313,667 $ $ 60,957 $ 240,894 1 Cost of goods sold includes the cost of merchandise, occupancy, freight and distribution costs, and shrink expense. 2 Gain on sale of investment resulted from the sale of a portion of the Company’s non-cash investment in its third-party Internet commerce service provider. We converted a royalty arrangement with that provider into an equity investment that resulted in this non-cash investment. 3 The loss on write-down of non-cash investment resulted from a write-down of the investment in our third-party Internet commerce service provider due to a decline in the value of that company’s publicly traded stock. 4 Earnings per share data gives effect to the two-for-one stock split, in the form of a stock dividend which became effective on April 5, 2004. 5 Comparable store sales begin in a store’s 14th full month of operations after its grand opening. Comparable store sales are for stores that opened at least 13 months prior to the beginning of the period noted. Stores that were closed or relocated during the applicable period have been excluded from comparable store sales. Each relocated store is returned to the comparable store base after its 14th full month of operations. The former Galyan’s stores will be included in the comparable store base beginning in the second quarter of 2006. 6 Calculated using net sales and gross square footage of all stores open at both the beginning and the end of the period. Gross square footage includes the storage, receiving and office space that generally occupies approximately 18% of total store space. 7 Calculated as cost of goods sold divided by the average of the last five quarters’ ending inventories. 8 Defined as current assets less current liabilities. 22 dick’s sporting goods, inc. 2005 annual report MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the “Five–Year Financial Summary” and our consolidated financial statements and related notes appearing elsewhere in this report. This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See page 33, “Forward–Looking Statements.” Overview The Company is an authentic full-line sporting goods retailer offering a broad assortment of brand-name sporting goods equipment, apparel and footwear in a specialty store environment. On July 29, 2004, a wholly owned subsidiary of Dick’s Sporting Goods, Inc. completed the acquisition of Galyan’s. The Consolidated Statements of Income include the operation of Galyan’s from the date of acquisition forward for the year ended January 29, 2005. As of January 28, 2006 we operated 255 stores, with approximately 14.7 million square feet, in 34 states, the majority of which are located primarily throughout the Eastern half of the United States. Executive Summary The Company reported net income for the year ended January 28, 2006 of $73.0 million or $1.35 per diluted share as compared to net income of $68.9 million and earnings per diluted share of $1.30 in 2004. The increase in earnings was attributable to an increase in sales as a result of a 2.6% increase in comparable store sales, new store sales and sales from the former Galyan’s stores that were acquired on July 29, 2004 and an increase in gross profit margins partially offset by an increase in selling, general and administrative expenses as a percentage of sales, a $5.5 million after tax decrease in the gain on sale of investment and a $10.5 million after tax increase in merger integration and store closing costs associated with the acquisition of Galyan’s. Net sales increased 24% to $2,625 million in 2005 from $2,109 million in 2004. This increase resulted primarily from a comparable store sales increase of 2.6%, or $36.7 million, and $478.9 million from the net addition of new stores in the last five quarters which are not included in the comparable store base, and the former Galyan’s stores which will be included in the comparable store base beginning in the second quarter of 2006. Income from operations increased 20% to $132.7 million in 2005 from $110.9 million in 2004 due primarily to the increase in gross profit, partially offset by an increase in merger integration and store closing costs and an increase in selling, general and administrative costs. As a percentage of net sales, gross profit increased to 28.10% in 2005 from 27.81% in 2004. The gross profit percentage increased primarily due to an increase in the merchandise margin percentage partially offset by higher occupancy costs in the former Galyan’s stores and an increase in freight expense. Selling, general and administrative expenses increased by 15 basis points. The increase as a percentage of sales was due primarily to an increase in store payroll expense as the former Galyan’s stores have higher payroll expense as a percentage of sales than the Dick’s stores, partially offset by the leverage obtained on corporate administration expenses due to the synergies obtained from the acquisition of Galyan’s and lower bonus expense this year. We ended the year with no borrowings on our line of credit as compared to $76.1 million of outstanding borrowings at January 29, 2005. The balance last year was due primarily to using the line to fund a portion of the Galyan’s acquisition. Excess borrowing availability totaled $275.6 million as of January 28, 2006. 23 dick’s sporting goods, inc. 2005 annual report Results of Operations The following table presents for the periods indicated selected items in the consolidated statements of income as a percentage of the Company’s net sales, as well as the basis point change in percentage of net sales from the prior year’s period: Basis Point Increase/ (Decrease) in Percentage of Net Sales from Prior Year 2004–2005A N/A Basis Point Increase/ (Decrease) in Percentage of Net Sales from Prior Year 2003–2004A N/A (29) 29 15 48 (14) (20) (45) 11 (5) (81) (33) (49) (7) 7 (37) 96 4 (56) 28 26 5 (50) (20) (29) 20051 100.00% 20041 100.00% 20031 100.00% 71.90 28.10 21.19 1.44 0.41 5.06 (0.07) 0.49 – 4.63 1.85 2.78% 72.19 27.81 21.04 0.96 0.55 5.26 (0.52) 0.38 (0.05) 5.44 2.18 3.27% 72.26 27.74 21.41 – 0.51 5.82 (0.24) 0.12 – 5.94 2.38 3.56% Fiscal Year Net sales 1 Cost of goods sold, including occupancy and distribution costs 2 Gross profit Selling, general and administrative expenses 3 Merger integration and store closing costs 4 Pre-opening expenses 5 Income from operations Gain on sale of investment 6 Interest expense, net 7 Other income Income before income taxes Provision for income taxes Net income A Column does not add due to rounding. 1 Revenue from retail sales is recognized at the point of sale. Revenue from cash received for gift cards is deferred, and the revenue is recognized upon the redemption of the gift card. Sales are recorded net of estimated returns. Revenue from layaway sales is recognized upon receipt of final payment from the customer. 2 Cost of goods sold includes the cost of merchandise, inventory shrinkage, freight, distribution and store occupancy costs. Store occupancy costs include rent, common area maintenance charges, real estate and other asset based taxes, store maintenance, utilities, depreciation, fixture lease expenses and certain insurance expenses. 3 Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company’s corporate headquarters. 4 Merger integration and store closing costs all pertain to the Galyan’s acquisition and include the expense of closing Dick’s stores in overlapping markets, advertising the re-branding of Galyan’s stores, duplicative administrative costs, recruiting and system conversion costs. Beginning in the third quarter of 2005, the balance of the merger integration and store closing costs, which relate primarily to accretion of discounted cash flows on future lease payments on closed stores, was included in rent expense. 5 Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs incurred prior to a new store opening. 6 Gain on sale of investment resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider. 7 Interest expense, net, results primarily from interest on our senior convertible notes and Credit Agreement borrowings partially offset by interest income. Fiscal 2005 Compared to Fiscal 2004 Net Income Net income increased to $73.0 million in 2005 from $68.9 million in 2004. This represented an increase in diluted earnings per share of $0.05, or 4% to $1.35 from $1.30. The increase in earnings was attributable to an increase in net sales and gross profit margin percentage, partially offset by an increase in selling, general and administrative expenses as a percentage of sales, a $5.5 million after tax decrease in the gain on sale of investment and a $10.5 million after tax increase in merger integration and store closing costs associated with the acquisition of Galyan’s. 24 dick’s sporting goods, inc. 2005 annual report Net Sales Net sales increased 24% to $2,625 million in 2005 from $2,109 million in 2004. This increase resulted primarily from a comparable store sales increase of 2.6%, or $36.7 million, and $478.9 million from the net addition of new stores in the last five quarters which are not included in the comparable store base and the former Galyan’s stores which will be included in the comparable store base beginning in the second quarter of 2006. The increase in comparable store sales is mostly attributable to sales increases in men’s and women’s apparel, exercise, athletic and casual footwear, socks, licensed merchandise, baseball and accessories and guns, partially offset by lower sales of paintball, in-line skates, bikes, hockey and hunting. Private Label Sales For the year ended January 28, 2006, private label product sales in total for all stores represented 11.9% of sales, an increase from last year’s 8.6% of proforma sales. These private label sales are for the merchandise developed by Dick’s, and do not include any remaining private label products developed by Galyan’s. Store Count During 2005, we opened 26 stores, relocated four stores and closed five stores. The store closures were a result of the Galyan’s acquisition. As of January 28, 2006 we operated 255 stores, with approximately 14.7 million square feet, in 34 states. Income from Operations Income from operations increased 20% to $132.7 million in 2005 from $110.9 million in 2004 due primarily to the increase in gross profit, partially offset by an increase in merger integration and store closing costs and an increase in selling, general and administrative costs. Gross profit increased 26% to $737.6 million in 2005 from $586.5 million in 2004. As a percentage of net sales, gross profit increased to 28.10% in 2005 from 27.81% in 2004. The gross profit percentage increased primarily due to improved merchandise margins in the majority of the Company’s product categories, partially offset by higher occupancy costs as a percentage of sales (50 basis points) due primarily to higher occupancy costs in the former Galyan’s stores, and higher freight expense as a percentage of sales (39 basis points). The increase in freight expense was primarily due to an increase in the fuel surcharge charged by our carriers. Selling, general and administrative expenses increased to $556.3 million in 2005 from $443.8 million in 2004 due primarily to an increase in store count and continued investment in corporate and store infrastructure. The 15 basis point increase over last year was due primarily to an increase in store payroll costs (64 basis points), a portion of which is due to the negative leverage from lower sales in the former Galyan’s stores, partially offset by lower bonus expense (28 basis points) and a decrease in corporate payroll expense (12 basis points), a portion of which is due to the synergies obtained from the acquisition of Galyan’s. Merger integration and store closing costs associated with the purchase of Galyan’s increased to $37.8 million in 2005 from $20.3 million in 2004. The increase is primarily due to closing Dick’s stores in overlapping markets and advertising the re-branding and re–grand opening of the former Galyan’s stores. Pre-opening expenses decreased by $0.7 million to $10.8 million in 2005 from $11.5 million in 2004. Pre-opening expenses were for the opening of 26 new stores and relocation of four stores in 2005 compared to the opening of 29 new stores and relocation of three stores in 2004. Pre-opening expenses in any year fluctuate depending on the timing and number of store openings and relocations. Gain on Sale of Investment Gain on sale of investment was $1.8 million in 2005 as compared to $11.0 million in 2004. The gain resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider. 25 dick’s sporting goods, inc. 2005 annual report Interest Expense, Net Interest expense, net, increased by $5.0 million to $13.0 million in 2005 from $8.0 million in 2004 due primarily to higher interest rates and higher average borrowings on the Company’s senior secured revolving credit facility. Other Income Other income in 2004 included a $1.0 million break-up fee related to our unsuccessful effort to acquire the assets of a bankrupt retailer. Fiscal 2004 Compared to Fiscal 2003 Net Income Our net income increased by $16.5 million to $68.9 million from $52.4 million in 2003. This represented an increase in diluted earnings per share of $0.26 to $1.30 from $1.04. The increase was due primarily to higher sales, a decrease in selling, general and administrative expenses as a percentage of sales and gain on sale of investment partially offset by merger integration and store closing costs associated with the acquisition of Galyan’s. Net Sales Net sales increased by $638.6 million, or 43%, to $2,109.4 million from $1,470.8 million in 2003. This increase resulted primarily from a comparable store sales increase of 2.6%, or $31.9 million and $606.7 million from the net addition of new Dick’s stores in the last five quarters which are not included in the comparable store base, and the acquired Galyan’s stores which will not be included in the comparable store base until 13 months after the completion of the re-branding and re-merchandising effort expected to occur by the end of the first half of 2005. The increase in comparable store sales is mostly attributable to sales increases in men’s, women’s and kid’s apparel, men’s, women’s and kid’s footwear, golf, licensed product and bikes, partly offset by lower sales of boots, in-line skates and hunting. Private Label Sales For the year ended January 29, 2005, private label product sales (excluding Galyan’s private label brands), represented 8.6% of proforma sales, an increase from last year’s 7.1% of proforma sales. These private label sales are for the merchandise developed by Dick’s, and do not include any remaining private label products developed by Galyan’s. Store Count During 2004, we opened 29 stores, relocated three stores, acquired 48 Galyan’s stores, closed three Dick’s stores and closed three Galyan’s stores, resulting in an ending store count of 234 stores in 33 states. Two of the Dick’s store closures were not related to the Galyan’s acquisition. One was closed as its replacement was opened in 2003, and the second was closed due to poor performance. Income from Operations Income from operations increased 30%, or $25.3 million to $110.9 million from $85.6 million in 2003 due primarily to increased sales partially offset by $20.3 million of merger integration and store closing costs, an increase in selling, general and administrative costs and an increase in pre-opening expenses. Gross profit increased by $178.5 million, or 44%, to $586.5 million from $408.0 million in 2003. As a percentage of net sales, gross profit increased to 27.81% in 2004 from 27.74% in 2003. The gross profit percentage increased primarily due to improved selling margins in the majority of the Company’s product categories, a larger portion of cooperative advertising funds classified as a reduction of cost of goods sold as opposed to a reduction of advertising expense (20 basis points) as fewer funds were tied directly to advertising expense, partially offset by lower selling margins in the Galyan’s stores due to the liquidation of non-go-forward product, and higher occupancy costs as a percentage of sales (52 basis points). Selling, general and administrative expenses increased by $128.9 million to $443.8 million from $314.9 million in 2003 due primarily to an increase in store count and continued investment in corporate and store infrastructure. 26 dick’s sporting goods, inc. 2005 annual report As a percentage of net sales, selling, general and administrative expenses decreased from 21.41% in 2003 to 21.04% in 2004. The decrease as a percentage of sales was due primarily to decreased advertising expense (27 basis points), decreased corporate payroll expense due to the synergies obtained from the acquisition of Galyan’s (13 basis points) and last year containing higher information systems costs (14 basis points). These decreases were partially offset by the classification of a larger portion of cooperative advertising funds as a reduction of cost of goods sold as discussed above (20 basis points). Merger integration and store closing costs associated with the purchase of Galyan’s were $20.3 million in 2004. These costs consisted primarily of $7.9 million of expenses related to the Dick’s stores that are closing; $5.2 million of duplicative administrative costs; $1.9 million of costs incurred during the four-day closing of all Galyan’s stores; and $5.3 million of other costs comprised primarily of system conversion costs, advertising and relocation costs. Pre-opening expenses increased by $4.0 million to $11.5 million from $7.5 million in 2003. Pre-opening expenses were for the opening of 29 new stores and relocation of three stores in 2004 compared to the opening of 22 new stores and relocation of one store in 2003. Gain on Sale of Investment Gain on sale of investment was $11.0 million in 2004 as compared to $3.5 million in 2003. The gain resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider. Interest Expense, Net Interest expense, net, increased by $6.2 million to $8.0 million from $1.8 million in 2003 due primarily to interest expense on our amended credit facility associated with the Galyan’s acquisition and senior convertible notes offset by interest income of $1.2 million from our investments in marketable securities and held-to-maturity investments which were sold in 2004. Other Income Other income in 2004 included a $1.0 million break-up fee related to our unsuccessful effort to acquire the assets of a bankrupt retailer. Liquidity and Capital Resources Our primary capital requirements are for working capital, capital improvements and to support expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing infrastructure improvements. The Company’s main source of liquidity in 2005 was our net cash provided from operations. The main sources of liquidity in 2004 were our cash provided from operations; borrowings under the credit facility; and net proceeds from the issuance of the convertible notes. The change in cash and cash equivalents is as follows: Fiscal Year Ended Net cash provided by operating activities Net cash used in investing activities Net cash (used in) provided by financing activities Net increase (decrease) in cash and cash equivalents January 28, 2006 $ 169,530 (93,718) (58,134) 17,678 $ January 29, 2005 107,841 (414,772) 232,143 (74,788) $ $ January 31, 2004 99,214 (46,109) 29,449 82,554 $ $ Operating Activities Cash flow from operations is seasonal in our business. Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, with the pre-Christmas inventory increase being the largest. In the fourth quarter, inventory levels are reduced in connection with Christmas sales and this inventory reduction, combined with proportionately higher net income, typically produces significantly positive cash flow. 27 dick’s sporting goods, inc. 2005 annual report Cash provided by operating activities increased by $61.7 million in 2005 to $169.5 million, which consists primarily of higher net income of $4.1 million and an increase in the change in assets and liabilities of $53.7 million. Changes in Assets and Liabilities The primary factors contributing to the increase in the change in assets and liabilities were the change in accounts receivable, accounts payable and income taxes payable, partially offset by an increase in the change in inventory. The change in accounts receivable was primarily as result of the decrease in the income tax receivable due to the net operating losses acquired as a result of the Galyan’s transaction. The increase in the change in accounts payable is primarily due to the increase in holiday receipts remaining in accounts payable as compared to the prior year along with an increase in inventory in-transit at year-end 2006 compared to 2005. The increase in the change in income taxes payable was primarily related to the usage of the net operating losses in the current year as noted above. Partially offsetting these cash inflows is the increase in inventory which is primarily due to the increase in inventory in-transit. The cash flows from operating the Company’s stores is a significant source of liquidity, and will continue to be used in 2006 primarily to purchase inventory, make capital improvements and open new stores. All of the Company’s revenues are realized at the point-of-sale in the stores. Investing Activities Cash used in investing activities decreased by $321.1 million in 2005 to $93.7 million due primarily to the acquisition of Galyan’s in 2004, which cost $369.6 million. Net capital expenditures increased $23.9 million due to an increase in capital expenditures of $7.1 million and a decrease in sale-leaseback proceeds of $16.8 million. We use cash in investing activities to build new stores and remodel or relocate existing stores. Furthermore, net cash used in investing activities includes purchases of information technology assets and expenditures for distribution facilities and corporate headquarters. The following table presents the major categories of capital expenditure activities: Fiscal Year Ended New, relocated and remodeled stores Future stores Existing stores Information systems Administration and distribution $ January 28, 2006 43,911 10,580 25,502 19,288 12,721 $ 112,002 $ January 29, 2005 72,542 1,402 5,719 12,400 12,881 $ 104,944 January 31, 2004 43,753 6,922 6,642 8,860 887 67,064 $ $ During 2005, we opened 26 stores and relocated four stores compared to opening 29 stores and relocation of three stores during 2004. Sale-leaseback transactions covering store fixtures, buildings and information technology assets also have the effect of returning to the Company cash previously invested in these assets. There were no building sale-leasebacks during 2005. During 2004, we completed four building sale-leaseback transactions that generated proceeds of $21.7 million, of which $15.2 million of the capital expenditures were incurred in 2003. The decrease in new, relocated and remodeled stores capital expenditures is primarily due to a decrease in the number of stores with construction allowances in 2005 and last year’s conversion of the Galyan’s stores to Dick’s stores. The increase in future store capital spend is due primarily to the greater number of stores expected to open in 2006. Existing store capital spend increased as a result of exterior sign conversions for the former Galyan’s stores along with updated information technology assets in the existing stores as we continue to upgrade our infrastructure and technology. The Company also generated $1.9 million in proceeds from the sale of a portion of the Company’s non-cash investment in its third-party Internet commerce service provider during 2005 as compared to $12.0 million in proceeds during 2004. 28 dick’s sporting goods, inc. 2005 annual report Financing Activities Cash used in financing activities increased by $290.3 million to $58.1 million primarily reflecting higher payments under the Credit Agreement in 2005, and the impact of the net proceeds from the senior convertible notes in 2004. Financing activities consisted primarily of the net payments under the Credit Agreement and proceeds from transactions in the Company’s common stock. The Company received proceeds of $11.1 million and $8.3 million from transactions in the Company’s stock option and employee stock purchase plan in 2005 and 2004, respectively. The Company’s liquidity and capital needs have generally been met by cash from operating activities, the proceeds from the convertible notes and borrowings under the $350 million Credit Agreement. Borrowing availability under the Credit Agreement is generally limited to the lesser of 70% of the Company’s eligible inventory or 85% of the Company’s inventory’s liquidation value, in each case net of specified reserves and less any letters of credit outstanding. Interest on outstanding indebtedness under the Credit Agreement currently accrues, at the Company’s option, at a rate based on either (i) the prime corporate lending rate or (ii) at the LIBOR rate plus 1.25% to 1.75% based on the level of total borrowings during the prior three months. The Credit Agreement’s term expires May 30, 2008. There were no outstanding borrowings under the Credit Agreement as of January 28, 2006. Borrowings under the Credit Agreement were $76.1 million as of January 29, 2005. Total remaining borrowing capacity, after subtracting letters of credit as of January 28, 2006 and January 29, 2005 was $275.6 million and $184.1 million, respectively. The Credit Agreement contains restrictions regarding the Company’s and related subsidiary’s ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur certain specified types of indebtedness or liens in excess of certain specified amounts, to pay dividends or make distributions on the Company’s stock, to make certain investments or loans to other parties, or to engage in lending, borrowing or other commercial transactions with subsidiaries, affiliates or employees. Under the Credit Agreement, the Company is obligated to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances. The obligations of the Company under the Credit Agreement are secured by interests in substantially all of the Company’s personal property excluding store and distribution center equipment and fixtures. As of January 28, 2006, the Company was in compliance with the terms of the Credit Agreement. Cash requirements in 2006, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new stores, enhanced information technology and improved distribution infrastructure. The Company plans to open 40 new stores and relocate two stores during 2006. The Company also anticipates incurring additional expenditures for remodeling or relocating certain existing stores. While there can be no assurance that current expectations will be realized, the Company expects capital expenditures, net of deferred construction allowances and proceeds from sale leaseback transactions, to be approximately $90 million in 2006. The Company believes that cash flows generated from operations and funds available under our credit facility will be sufficient to satisfy our capital requirements through fiscal 2006. Other new business opportunities or store expansion rates substantially in excess of those presently planned may require additional funding. Off-Balance Sheet Arrangements The Company’s only off-balance sheet contractual obligations and commercial commitments as of January 28, 2006 relate to operating lease obligations, future minimum guaranteed contractual payments and letters of credit. The Company has excluded these items from the balance sheet in accordance with generally accepted accounting principles. 29 dick’s sporting goods, inc. 2005 annual report Contractual Obligations and Other Commercial Commitments The following table summarizes the Company’s material contractual obligations, including both on- and off-balance sheet arrangements in effect at January 28, 2006, and the timing and effect that such commitments are expected to have on the Company’s liquidity and capital requirements in future periods: Payments Due by Period (Dollars in thousands) Contractual obligations: Senior convertible notes, net of discount (see Note 7) Capital lease obligations (see Note 7) Other long-term debt (see Note 7) Interest payments Operating lease obligations (see Note 8) Future minimum guaranteed contractual payments (see Note 14) Total contractual obligations Total Less than 1 year 1–3 years 3–5 years More than 5 years $ $ 172,500 7,909 792 22,083 2,881,538 $ – 97 84 4,888 218,824 $ – 240 94 9,748 464,294 – 413 101 1,494 453,289 $ 172,500 7,159 513 5,953 1,745,131 31,850 $ 3,116,672 500 $ 224,393 2,250 $ 476,626 3,200 $ 458,497 25,900 $ 1,957,156 The note references above are to the Notes to Consolidated Financial Statements. The following table summarizes the Company’s other commercial commitments, including both on- and off-balance sheet arrangements, in effect at January 28, 2006: (Dollars in thousands) Other commercial commitments: Documentary letters of credit Standby letters of credit Total other commercial commitments Total Less than 1 year $ $ 4,356 13,430 17,786 $ $ 4,356 13,430 17,786 The Company expects to fund these commitments primarily with operating cash flows generated in the normal course of business. Outlook Full Year 2006 – (53-Week Year) Comparisons to Fiscal 2005 – (52-Week Year) • Based on an estimated 55 million shares outstanding, the Company anticipates reporting earnings per share of approximately $1.77 – 1.81 (which includes $0.27 of stock option expense per share). • The earnings per share outlook includes the effect of the Company’s adoption of SFAS 123R as of January 29, 2006. During 2006, the Company expects to incur approximately $25 million of stock option expense on a pre-tax basis, or $0.27 per share after tax. • Comparable store sales are expected to increase approximately 3% on a 52-week to 52-week comparative basis. The converted Galyan’s stores will be included in the comparable store base beginning in the second quarter of fiscal 2006. • The Company expects to open 40 new stores and relocate two stores in 2006. 30 dick’s sporting goods, inc. 2005 annual report First Quarter 2006 • Based on an estimated 55 million shares outstanding, the Company anticipates reporting earnings per share of $0.15 – 0.17 (which includes $0.07 of stock option expense per share and $0.04 of store relocation expense per share). • Comparable store sales are expected to increase approximately 3–5%. • The Company expects to open seven new stores and relocate two stores in the first quarter. Newly Issued Accounting Standards In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” As permitted by FASB No. 123, the Company currently accounts for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, recognizes no compensation cost for employee stock options or our employee stock purchase plan. Accordingly, the adoption of SFAS 123R’s fair value method will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position or cash flows. Had the Company adopted SFAS 123R in prior periods, the impact of that standard for years ended January 28, 2006 and January 29, 2005 would have approximated the impact of FASB No. 123 as described in the disclosure of proforma net income and earnings per share in Note 1 of the Consolidated Financial Statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for such excess tax deductions were $14.7 million, $15.9 million and $29.9 million during fiscal 2005, 2004 and 2003, respectively. The Company will adopt the new requirements using the modified prospective transition method beginning in fiscal 2006. In October 2005, the FASB issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” This FSP requires rental costs associated with operating leases that are incurred during a construction period to be recognized as rental expense. The Company historically capitalized rental costs incurred during a construction period. The guidance permits either retroactive or prospective treatment for periods beginning after December 15, 2005. We will prospectively change our policy from capitalization to expensing beginning in fiscal 2006. The adoption of this FSP will not have a material effect on the Company’s consolidated financial statements. In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials are required to be recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 in fiscal 2006 is not expected to have a material effect on the Company’s consolidated financial statements. Critical Accounting Policies and Use of Estimates The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. Critical accounting policies are those that the Company believes are both most important to the portrayal of the Company’s financial condition and results of operations, and require the Company’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements. 31 dick’s sporting goods, inc. 2005 annual report Inventory Valuation The Company values inventory using the lower of weighted average cost or market method. Market price is generally based on the current selling price of the merchandise. The Company regularly reviews inventories to determine if the carrying value of the inventory exceeds market value and the Company records a reserve to reduce the carrying value to its market price, as necessary. Historically, the Company has rarely experienced significant occurrences of obsolescence or slow moving inventory. However, future changes such as customer merchandise preference, unseasonable weather patterns, or business trends could cause the Company’s inventory to be exposed to obsolescence or slow moving merchandise. Shrink expense is accrued as a percentage of merchandise sales based on historical shrink trends. The Company performs physical inventories at the stores and distribution centers throughout the year. The reserve for shrink represents an estimate for shrink for each of the Company’s locations since the last physical inventory date through the reporting date. Estimates by location and in the aggregate are impacted by internal and external factors and may vary significantly from actual results. Vendor Allowances Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are determined for each fiscal year and the majority are based on various quantitative contract terms. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction of cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction to the related expense in the period that the related expense is incurred. The Company records an estimate of earned allowances based on the latest projected purchase volumes and advertising forecasts. On an annual basis at the end of the year, the Company confirms earned allowances with vendors to ensure the amounts are recorded in accordance with the terms of the contract. Goodwill, Intangible Assets and Impairment of Long-Lived Assets Goodwill and other intangible assets are tested for impairment on an annual basis. Our evaluation of goodwill for impairment requires accounting judgments and financial estimates in determining the fair value of such assets. If these judgments or estimates change in the future, we may be required to record impairment charges for these assets. The Company reviews long-lived assets whenever events and circumstances indicate that the carrying value of these assets may not be recoverable based on estimated undiscounted future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is the store level. In determining future cash flows, significant estimates are made by the Company with respect to future operating results of each store over its remaining lease term. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Business Combinations Our acquisition of Galyan’s was accounted for under the purchase method of accounting. The assets and liabilities of Galyan’s were adjusted to their fair values and the excess of the purchase price over the net assets acquired was recorded as goodwill. The determination of fair value involved the use of an independent appraisal, estimates and assumptions which we believe provided a reasonable basis for determining fair value. Self-Insurance The Company is self-insured for certain losses related to health, workers’ compensation and general liability insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities associated with these losses are estimated in part by considering historical claims experience, industry factors, severity factors and other actuarial assumptions. 32 dick’s sporting goods, inc. 2005 annual report Forward-Looking Statements We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. You can identify these statements as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward- looking words such as “believe,” “anticipate,” “expect,” “estimate,” “predict,” “intend,” “plan,” “project,” “will,” “will be,” “will continue,” “will result,” “could,” “may,” “might” or any variations of such words or other words with similar meanings. Forward- looking statements address, among other things, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase profit margins and return on invested capital, plans to grow our private label business, projections of our future profitability, results of operations, capital expenditures or our financial condition or other “forward-looking” information and includes statements about revenues, earnings, spending, margins, liquidity, store openings and operations, inventory, private label products, our actions, plans or strategies. The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results for 2006 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our management: the intense competition in the sporting goods industry and actions by our competitors; our inability to manage our growth, open new stores on a timely basis and expand successfully in new and existing markets; the availability of retail store sites on terms acceptable to us; the cost of real estate and other items related to our stores; our ability to access adequate capital; changes in consumer demand; risks relating to product liability claims and the availability of sufficient insurance coverage relating to those claims; our relationships with our suppliers, distributors or manufacturers and their ability to provide us with sufficient quantities of products; any serious disruption at our distribution or return facilities; the seasonality of our business; the potential impact of natural disasters or national and international security concerns on us or the retail environment; risks related to the economic impact or the effect on the U.S. retail environment relating to instability and conflict in the Middle East or elsewhere; risks relating to the regulation of the products we sell, such as hunting rifles; risks associated with relying on foreign sources of production; risks relating to the operation and implementation of new management information systems; risks relating to operational and financial restrictions imposed by our Credit Agreement; factors associated with our pursuit of strategic acquisitions; risks and uncertainties associated with assimilating acquired companies; the loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive Officer; our ability to meet our labor needs; changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular; our ability to repay or make the cash payments under our senior convertible notes, due 2024; changes in our business strategies and other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission. In addition, we operate in a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. We do not assume any obligation and do not intend to update any forward- looking statements except as may be required by the securities laws. On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common stock of Galyan’s Trading Company, Inc. (“Galyan’s”) which became a wholly owned subsidiary of Dick’s. Due to this acquisition, additional risks and uncertainties arise that could affect our financial performance and actual results and could cause actual results for 2006 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our management: risks associated with combining businesses and/or with assimilating acquired companies and the fact that lease liabilities associated with store closures due to the Galyan’s acquisition are difficult to predict with a level of certainty and may be greater than expected. 33 dick’s sporting goods, inc. 2005 annual report QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company’s net exposure to interest rate risk will consist primarily of borrowings under the senior secured revolving credit facility. The Company’s senior secured revolving credit facility bears interest at rates that are benchmarked either to U.S. short- term floating rate interest rates or one-month LIBOR rates, at the Company’s election. There were no borrowings outstanding under the senior secured revolving credit facility as of January 28, 2006. Outstanding borrowings under the senior secured revolving credit facility were $76.1 million as of January 29, 2005. The impact on the Company’s annual net income of a hypothetical one percentage point interest rate change on the average outstanding balances under the senior secured revolving credit facility would be approximately $0.8 million based upon fiscal 2005 average borrowings. Credit Risk In February 2004, the Company sold $172.5 million issue price of senior unsecured convertible notes due 2024 (“convertible notes”). In conjunction with the issuance of these convertible notes, we also entered into a five year convertible bond hedge and a five year separate warrant transaction with one of the initial purchasers (“the counterparty”) and/or certain of its affiliates. Subject to the movement in our common stock price, we could be exposed to credit risk arising out of net settlement of the convertible bond hedge and separate warrant transaction in our favor. Based on our review of the possible net settlements and the credit strength of the counterparty and its affiliates, we believe that we do not have a material exposure to credit risk as a result of these share option transactions. Impact of Inflation The Company does not believe that operating results have been materially affected by inflation during the preceding three fiscal years. There can be no assurance, however, that operating results will not be adversely affected by inflation in the future. Tax Matters Presently, the Company does not believe that there are any tax matters that could materially affect the consolidated financial statements. Seasonality and Quarterly Results The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s net sales and profits are realized during the fourth quarter of the Company’s fiscal year, which is due, in part, to the holiday selling season and, in part, to our sales of cold weather sporting goods and apparel. Any decrease in fiscal fourth quarter sales, whether because of a slow holiday selling season, unseasonable weather conditions, or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year. 34 dick’s sporting goods, inc. 2005 annual report MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Dick’s Sporting Goods, Inc. is responsible for the preparation and integrity of the consolidated financial statements included in this Annual Report to Shareholders. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments where necessary. Financial information included elsewhere in this Annual Report is consistent with these financial statements. The consolidated financial statements were audited by our independent registered public accounting firm. Their report is included herein on page 36. Report of Management on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of January 28, 2006. Management’s assessment of the effectiveness of our internal control over financial reporting as of January 28, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm. Edward W. Stack Chairman and Chief Executive Officer William R. Newlin Executive Vice President and Chief Administrative Officer Michael F. Hines Executive Vice President and Chief Financial Officer 35 dick’s sporting goods, inc. 2005 annual report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS To the Board of Directors and Stockholders of Dick’s Sporting Goods, Inc. We have audited the accompanying consolidated balance sheets of Dick’s Sporting Goods, Inc. and subsidiaries (the “Company”) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 28, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dick’s Sporting Goods, Inc. and subsidiaries as of January 28, 2006 and January 29, 2005, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 20, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Pittsburgh, Pennsylvania March 20, 2006 36 dick’s sporting goods, inc. 2005 annual report INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Stockholders of Dicks Sporting Goods, Inc. We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Dick’s Sporting Goods, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 28, 2006 of the Company and our reports dated March 20, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule. Pittsburgh, Pennsylvania March 20, 2006 37 January 28, 2006 January 29, 2005 January 31, 2004 $2,624,987 $2,109,399 $1,470,845 1,887,347 737,640 556,320 37,790 10,781 132,749 (1,844) 12,959 – 121,634 48,654 1,062,820 408,025 314,885 – 7,499 85,641 (3,536) 1,831 – 87,346 34,938 $ 72,980 $ 68,905 $ 52,408 1,522,873 586,526 443,776 20,336 11,545 110,869 (10,981) 8,009 (1,000) 114,841 45,936 $ $ 1.47 1.35 $ $ 1.44 1.30 $ $ 1.17 1.04 49,792 53,979 47,978 52,921 44,774 50,280 dick’s sporting goods, inc. 2005 annual report CONSOLIDATED STATEMENTS OF INCOME Fiscal Year Ended (Amounts in thousands, except per share data) Net sales Cost of goods sold, including occupancy and distribution costs Gross profit Selling, general and administrative expenses Merger integration and store closing costs Pre-opening expenses Income from operations Gain on sale of investment Interest expense, net Other income Income before income taxes Provision for income taxes NET INCOME EARNINGS PER COMMON SHARE: Basic Diluted WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic Diluted See notes to consolidated financial statements. 38 CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) Assets Current Assets: Cash and cash equivalents Accounts receivable, net Income tax receivable Inventories, net Prepaid expenses and other current assets Deferred income taxes Total current assets PROPERTY AND EQUIPMENT, NET CONSTRUCTION IN PROGRESS – LEASED FACILITIES GOODWILL OTHER ASSETS: Deferred income taxes Investments Other Total other assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable Accrued expenses Deferred revenue and other liabilities Income taxes payable Current portion of other long-term debt and capital leases Total current liabilities LONG-TERM LIABILITIES: Senior convertible notes Revolving credit borrowings Other long-term debt and capital leases Non-cash obligations for construction in progress – leased facilities Deferred revenue and other liabilities Total long-term liabilities 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 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 Additional paid-in capital Retained earnings Accumulated other comprehensive income Total stockholders’ equity TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY See notes to consolidated financial statements. dick’s sporting goods, inc. 2005 annual report January 28, 2006 January 29, 2005 $ 36,564 29,365 – 535,698 11,961 429 614,017 370,277 7,338 156,628 $ 18,886 30,611 7,202 457,618 8,772 7,966 531,055 349,098 15,233 157,245 8,959 3,197 27,373 39,529 $ 1,187,789 871 3,388 28,158 32,417 $ 1,085,048 $ 253,395 136,520 62,792 18,381 181 471,269 $ 211,685 141,465 48,882 – 635 402,667 172,500 – 8,520 7,338 113,369 301,727 172,500 76,094 8,775 15,233 96,112 368,714 – – 365 348 137 209,526 202,842 1,923 414,793 $ 1,187,789 140 181,321 129,862 1,996 313,667 $ 1,085,048 39 dick’s sporting goods, inc. 2005 annual report CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal Year Ended (Dollars in thousands) NET INCOME OTHER COMPREHENSIVE INCOME: Unrealized gain on securities available-for-sale, net of tax Reclassification adjustment for gains realized in net income due to the sale of available-for-sale securities, net of tax COMPREHENSIVE INCOME See notes to consolidated financial statements. January 28, 2006 January 29, 2005 January 31, 2004 $ 72,980 $ 68,905 $ 52,408 1,126 5,417 6,016 (1,199) 72,907 $ (7,138) 67,184 $ (2,299) 56,125 $ 40 dick’s sporting goods, inc. 2005 annual report CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: January 28, 2006 January 29, 2005 January 31, 2004 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 72,980 $ 68,905 $ 52,408 Depreciation and amortization Deferred income taxes Tax benefit from exercise of stock options Gain on sale of investment Other non-cash items Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable Accrued expenses Income taxes payable Deferred construction allowances Deferred revenue and other liabilities Net cash provided by operating activities CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures Proceeds from sale-leaseback transactions Payment for the purchase of Galyan’s, net of $17,931 cash acquired Purchase of held-to-maturity securities Proceeds from sale of held-to-maturity securities Proceeds from sale of investment (Increase) decrease in recoverable costs from developed properties Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible notes Revolving credit (payments) borrowings, net (Payments) borrowings on long-term debt and capital leases Payment for purchase of bond hedge Proceeds from issuance of warrant Transaction costs for convertible notes Proceeds from sale of common stock under employee stock purchase plan Proceeds from exercise of stock options Increase in bank overdraft Other Net cash (used in) provided by financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS, END OF PERIOD Supplemental disclosure of cash flow information: Construction in progress – leased facilities Accrued property and equipment Cash paid during the year for interest Cash paid during the year for income taxes See notes to consolidated financial statements. 49,861 1,559 14,678 (1,844) 2,452 16,002 (77,872) (2,589) 35,119 (193) 19,144 11,032 29,201 169,530 (112,002) 18,837 – – – 1,922 (2,475) (93,718) – (76,094) (560) – – – 3,676 7,413 7,431 – (58,134) 17,678 18,886 36,564 (7,895) (4,969) 12,345 4,569 37,621 18,124 15,868 (10,981) 2,171 (3,470) (44,813) (2,177) (4,260) (4,707) – 29,072 6,488 107,841 (104,944) 35,687 (351,554) (57,942) 57,942 12,001 (5,962) (414,772) 172,500 76,094 (537) (33,120) 12,420 (6,239) 3,233 5,017 2,775 – 232,143 (74,788) 93,674 18,886 4,306 13,855 5,862 15,818 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 17,554 8,201 29,861 (3,536) 2,067 3,904 (20,863) 1,549 (19,850) 12,842 (12,763) 11,227 16,613 99,214 (67,064) 14,726 – – – 4,150 2,079 (46,109) – – 339 – – – 2,473 13,429 13,025 183 29,449 82,554 11,120 93,674 9,594 – 1,594 12,424 41 dick’s sporting goods, inc. 2005 annual report CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Common Stock Class B Common Stock Shares Dollars Shares Dollars (Dollars in thousands) BALANCE, February 1, 2003 Exchange of Class B common stock for common stock Sale of common stock under stock plans Exercise of stock options, including tax benefit of $29,861 Transaction costs related to initial public offering Net income Unrealized gain on securities available-for-sale, net of taxes of $2,001 BALANCE, January 31, 2004 Exchange of Class B common stock for common stock Sale of common stock under stock plans Exercise of stock options, including tax benefit of $15,868 Purchase of bond hedge net of sale of warrant, including tax benefit of $2,171 Net income Unrealized gain on securities available-for-sale, net of taxes of $2,917 Reclassification adjustment for gains realized in net income due to the sale of securities available-for-sale, net of taxes of $3,843 BALANCE, January 29, 2005 Exchange of Class B common stock for common stock Sale of common stock under stock plans Exercise of stock options, including tax benefit of $14,678 Tax benefit on convertible note bond hedge Net income Unrealized gain on securities available-for-sale, net of taxes of $606 Reclassification adjustment for gains realized in net income due to the sale of securities available-for-sale, net of taxes of $645 25,134,048 $ 1,254,372 238,906 6,425,556 – – – 33,052,882 68,115 137,240 1,532,121 – – – – 34,790,358 308,584 125,989 1,320,401 – – – – BALANCE, January 28, 2006 36,545,332 $ See notes to consolidated financial statements. 251 13 2 65 – – – 331 1 1 15 – – – – 348 3 1 13 – – – – 365 $ 15,362,016 (1,254,372) – – – – – 14,107,644 (68,115) – – – – – – 14,039,529 (308,584) – – – – – – 13,730,945 $ 154 (13) – – – – – 141 (1) – – – – – – 140 (3) – – – – – – 137 42 dick’s sporting goods, inc. 2005 annual report Additional Paid-In Capital $ 129,869 – 2,471 43,225 183 – – 175,748 – 3,232 20,870 (18,529) – – – 181,321 – 3,675 22,078 2,452 – – $ Retained Earnings 8,549 – – – – 52,408 – 60,957 – – – – 68,905 – – 129,862 – – – – 72,980 – Accumulated Other Comprehensive Income $ – – – – – – 3,717 3,717 – – – – – 5,417 (7,138) 1,996 – – – – – 1,126 $ Total 138,823 – 2,473 43,290 183 52,408 3,717 240,894 – 3,233 20,885 (18,529) 68,905 5,417 (7,138) 313,667 – 3,676 22,091 2,452 72,980 1,126 – $ 209,526 – $ 202,842 (1,199) 1,923 $ (1,199) 414,793 $ 43 dick’s sporting goods, inc. 2005 annual report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED 2005, 2004 AND 2003 1. Summary of Significant Accounting Policies Operations – Dick’s Sporting Goods, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer selling sporting goods, footwear and apparel through its 255 stores, the majority of which are located throughout the Eastern half of the United States. On July 29, 2004, a wholly owned subsidiary of Dick’s Sporting Goods, Inc. completed the acquisition of Galyan’s Trading Company, Inc. (“Galyan’s). The Consolidated Statements of Income include the operation of Galyan’s from the date of acquisition forward for the year ended January 29, 2005. Fiscal Year – The Company’s fiscal year ends on the Saturday closest to the end of January. Fiscal years 2005, 2004 and 2003 ended on January 28, 2006, January 29, 2005 and January 31, 2004. Principles of Consolidation – The consolidated financial statements include Dick’s Sporting Goods, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents – Cash and cash equivalents consist of cash on hand and all highly liquid instruments purchased with a maturity of three months or less at the date of purchase. Interest income was $0.1 million, $1.2 million and $0.1 million for fiscal 2005, 2004 and 2003, respectively. Cash Management – The Company’s cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at January 28, 2006 and January 29, 2005 include $68.0 million and $60.6 million, respectively, of checks drawn in excess of cash balances not yet presented for payment. Accounts Receivable – Accounts receivable consists principally of amounts receivable from vendors. The allowance for doubtful accounts totaled $1.9 million and $4.8 million, as of January 28, 2006 and January 29, 2005, respectively. Inventories – Inventories are stated at the lower of weighted average cost or market. Inventory cost consists of the direct cost of merchandise including freight. Inventories are net of shrinkage, obsolescence, other valuations and vendor allowances totaling $38.2 million and $37.7 million at January 28, 2006 and January 29, 2005, respectively. Property and Equipment – Property and equipment are recorded at cost and include capitalized leases. For financial reporting purposes, depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Buildings Leasehold improvements Furniture, fixtures and equipment Vehicles 40 years 10–23 years 3–7 years 5 years For leasehold improvements and property and equipment under capital lease agreements, depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. Renewals and betterments are capitalized and repairs and maintenance are expensed as incurred. The Company periodically evaluates its long-lived assets to assess whether the carrying values have been impaired, using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 44 dick’s sporting goods, inc. 2005 annual report Goodwill and Intangible Assets – 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 acquired in the acquisition of Galyan’s is 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 impairment of goodwill or intangible assets was recorded during the years ended January 28, 2006 and January 29, 2005. Investments – Investments consist of shares of unregistered common stock and are carried at fair value within other assets in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Fair value at the acquisition date was based upon the publicly quoted equity price of GSI Commerce Inc. (“GSI”) stock, less a discount resulting from the unregistered character of the stock. This discount was based on an independent appraisal obtained by the Company. Unrealized holding gains and losses on the stock are included in other comprehensive income and are shown as a component of stockholders’ equity as of the end of each fiscal year (see Note 12). Deferred Revenue and Other Liabilities – Deferred revenue and other liabilities is primarily comprised of gift cards, deferred rent, which represents the difference between rent paid and the amounts expensed for operating leases, deferred liabilities related to construction allowances, unamortized capitalized rent during construction that was previously required to be capitalized prior to the adoption of FSP 13-1, amounts deferred relating to the investment in GSI (see Note 12) and advance payments under the terms of building sale-leaseback agreements. Deferred liabilities related to construction allowances and capitalized rent, net of related amortization, was $73.3 million at both January 28, 2006 and January 29, 2005. Deferred revenue related to gift cards at January 28, 2006 and January 29, 2005 was $58.1 million and $47.0 million, respectively. Self-Insurance – The Company is self-insured for certain losses related to health, workers’ compensation and general liability insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities associated with these losses are estimated in part by considering historical claims experience, industry factors, severity factors and other actuarial assumptions. Pre-opening Expenses – Pre-opening expenses, which consist primarily of rent, marketing, payroll and recruiting costs, are expensed as incurred. Merger Integration and Store Closing Costs – Merger integration and store closing costs include the expense of closing Dick’s stores in connection with the Galyan’s acquisition, advertising the re-branding of Galyan’s stores, duplicative administrative costs, recruiting and system conversion costs. These costs were $37.8 million, $20.3 and $0 for fiscal 2005, 2004 and 2003 respectively. Stock Split – On February 10, 2004, the Company’s Board of Directors approved a two-for-one stock split, in the form of a stock dividend of the Company’s common shares for stockholders of record as of March 19, 2004. The split was affected by issuing our stockholders of record one additional share of common stock for every share of common stock held, and one additional share of Class B common stock for every share of Class B common stock held. The applicable share and per-share data for periods prior to fiscal 2004 included herein have been restated to give effect to this stock split. Earnings Per Share – The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per share is based on the weighted average number of shares outstanding plus the incremental shares that would be outstanding assuming the exercise of dilutive stock options and warrants, calculated by applying the treasury stock method. 45 dick’s sporting goods, inc. 2005 annual report Stock-Based Compensation – The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense has been recognized where the exercise price of the option was equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (see Note 9): Fiscal Year Ended (Dollars in thousands, except per share data) Net income, as reported Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects Proforma net income Earnings per share: Basic income applicable to common shareholders – as reported Basic income applicable to common shareholders – proforma Diluted income applicable to common shareholders – as reported Diluted income applicable to common shareholders – proforma January 28, 2006 January 29, 2005 January 31, 2004 $ $ $ $ $ $ 72,980 $ 68,905 $ 52,408 (13,484) 59,496 1.47 1.19 1.35 1.10 (11,761) 57,144 1.44 1.19 1.30 1.08 (3,908) 48,500 1.17 1.08 1.04 0.96 $ $ $ $ $ $ $ $ $ $ The fair value of stock-based awards to employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Employee Stock Options Employee Stock Purchase Plan Expected life (years) Expected volatility Risk-free interest rate Expected dividend yield Weighted average fair values 2005 5.29 39%–41% 2004 5 2003 3–5 48%–62% 2005 0.5 2004 0.5 2003 0.5 32%–47% 3.63%–4.44% 3.42%–3.96% 2.20%–3.52% 3.38%–4.40% 1.69%–2.61% 0.96–1.02% 27%–40% 26%–30% 52%–54% – 15.26 $ – 15.77 $ – 10.73 $ $ – 8.29 $ – 7.21 $ – 5.02 Income Taxes – The Company utilizes the asset and liability method of accounting for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes,” and provides deferred income taxes for temporary differences between the amounts reported for assets and liabilities for financial statement purposes and for income tax reporting purposes. Revenue Recognition – Revenue from retail sales is recognized at the point-of-sale. Revenue from cash received for gift cards is deferred, and the revenue is recognized upon the redemption of the gift card. Sales are recorded net of estimated returns. Revenue from layaway sales is recognized upon receipt of final payment from the customer. Advertising Costs – Production costs of advertising and the costs to run the advertisements are expensed the first time the advertisement takes place. Advertising expense, net of cooperative advertising was $96.1 million, $78.3 million and $54.4 million for fiscal 2005, 2004 and 2003, respectively. Vendor Allowances – Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are determined for each fiscal year and the majority are based on various quantitative contract terms. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction of cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are 46 dick’s sporting goods, inc. 2005 annual report recorded as a reduction to the related expense in the period that the related expense is incurred. The Company records an estimate of earned allowances based on the latest projected purchase volumes and advertising forecasts. On an annual basis at the end of the fiscal year, the Company confirms earned allowances with vendors to determine that the amounts are recorded in accordance with the terms of the contract. Fair Value of Financial Instruments – The Company has financial instruments, which include long-term debt and revolving debt. The carrying amounts of the Company’s debt instruments approximate their fair value, estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Segment Information – The Company is a specialty retailer that offers a broad range of products in its specialty retail stores in the Eastern United States. Given the economic characteristics of the store formats, the similar nature of the products sold, the type of customer, and method of distribution, the operations of the Company are one reportable segment. The following table sets forth the approximate amount of net sales attributable to hardlines, apparel and footwear for the periods presented: Merchandise Category (Dollars in millions) Hardlines Apparel Footwear Total net sales Fiscal Year 2005 2004 2003 $ $ 1,497 672 456 2,625 $ $ 1,216 530 363 2,109 $ $ 865 340 266 1,471 Newly Issued Accounting Pronouncements – In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” As permitted by FASB No. 123, the Company currently accounts for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, recognizes no compensation cost for employee stock options or our employee stock purchase plan. Accordingly, the adoption of SFAS 123R’s fair value method will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position or cash flows. Had the Company adopted SFAS 123R in prior periods, the impact of that standard for years ended January 28, 2006 and January 29, 2005 would have approximated the impact of FASB No. 123 as described in the disclosure of proforma net income and earnings per share in Note 1 of the Consolidated Financial Statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for such excess tax deductions were $14.7 million, $15.9 million and $29.9 million during fiscal 2005, 2004 and 2003, respectively. The Company will adopt the new requirements using the modified prospective transition method beginning in fiscal 2006. During 2006, the Company expects to incur approximately $25 million of stock option expense on a pre-tax basis, or $0.27 per share after tax. In October 2005, the FASB issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” This FSP requires rental costs associated with operating leases that are incurred during a construction period to be recognized as rental expense. The Company historically capitalized rental costs incurred during a construction period. The guidance permits either retroactive or prospective treatment for periods beginning after December 15, 2005. We will prospectively change our policy from capitalization to expensing beginning in fiscal 2006. The adoption of this FSP is not expected to have a significant effect on the Company’s consolidated financial statements. In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and waste materials are required to be recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 in fiscal 2006 is not expected to have a material effect on the Company’s consolidated financial statements. 47 dick’s sporting goods, inc. 2005 annual report 2. Acquisition On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common stock of Galyan’s for $16.75 per share in cash, and Galyan’s became a wholly owned subsidiary of Dick’s. The Company has recorded $156.6 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. The Company received an independent appraisal for certain assets to determine their fair value. The purchase price allocation is final, except for any potential income tax changes that may arise. The following table summarizes the fair values of the assets acquired and liabilities assumed: (In thousands) Inventory Other current assets Property and equipment, net Other long–term assets, excluding goodwill Goodwill Favorable leases Accounts payable Accrued expenses Other current liabilities Long-term debt Other long-term liabilities Fair value of net assets acquired, including intangibles $ 158,780 65,603 157,211 4,458 156,628 5,310 (93,944) (61,223) (9,937) (5,859) (7,455) $ 369,572 As of January 28, 2006, the Company had accrued expenses of $0.1 million related to Galyan’s associate severance and relocation, and a net receivable of $0.6 million as our projected sublease cash flows exceed our anticipated rent payments for two of the closed former Galyan’s stores. These costs were accounted for under Emerging Issues Task Force No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”. The following table summarizes the activity in fiscal 2005 and fiscal 2004: (In thousands) Liabilities and reserves established in conjuction with the Galyan’s acquisition at July 31, 2004 Cash paid Adjustments to the estimate Clearance of discontinued Galyan’s merchandise Balance at January 29, 2005 Cash paid (net of sublease receipts) Adjustments to the estimate Clearance of discontinued Galyan’s merchandise Balance at January 28, 2006 Associate severance, retention and Liabilities established for the closing of Galyan’s stores relocation and headquarters Inventory reserve for discontinued Galyan’s merchandise $ $ $ 15,600 (11,381) (599) – 3,620 (3,284) (216) – 120 $ $ $ 15,838 (3,834) (8,331) – 3,673 (4,242) – – (569) $ $ $ 22,686 – – (16,376) 6,310 – – (6,310) – $ $ $ Total 54,124 (15,215) (8,930) (16,376) 13,603 (7,526) (216) (6,310) (449) The $6.3 million and $16.4 million of inventory reserve utilized for the clearance of discontinued Galyan’s merchandise in fiscal 2005 and 2004, respectively, was recorded as a reduction of cost of sales. 48 dick’s sporting goods, inc. 2005 annual report The following unaudited proforma summary presents information as if Galyan’s had been acquired at the beginning of each period presented. The proforma amounts include certain reclassifications to Galyan’s amounts to conform them to the Company’s presentation, and an increase in interest expense of $3.9 million and $7.7 million for the years ended January 29, 2005 and January 31, 2004, respectively, to reflect the increase in borrowings under the amended credit facility to finance the acquisition as if it had occurred at the beginning of each period presented. The proforma amounts do not reflect any benefits from economies which may be achieved from combining the operations. The proforma information does not necessarily reflect the actual results that would have occurred had the companies been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies. Year Ended (Unaudited, in thousands, except per share amounts) Net sales Net income Basic earnings per share Diluted earnings per share January 29, 2005 January 31, 2004 $ 2,448,643 56,452 $ 1.18 $ 1.07 $ $ 2,159,065 51,624 $ 1.15 $ 1.03 $ 3. Goodwill and Other Intangible Assets In connection with the acquisition of Galyan’s on July 29, 2004, the Company recorded goodwill and other intangible assets in accordance with SFAS No. 141, “Business Combinations”. The Company recorded $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. 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 is 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 periodically reviewed for impairment. No amounts assigned to any intangible assets are deductible for tax purposes. The $0.6 million decrease in goodwill during 2006 was a result of income tax adjustments. Acquired intangible assets subject to amortization at January 28, 2006 were as follows: Intangible assets subject to amortization: (In thousands) Favorable leases 2005 2004 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization $ 5,310 $ (45) $ 5,310 $ 1 The estimated weighted average economic useful life is 11 years. The annual amortization expense of the favorable leases recorded as of January 28, 2006 is expected to be as follows: Fiscal Years (In thousands) 2006 2007 2008 2009 2010 Thereafter Total Estimated Amortization Expense 142 241 345 453 590 3,494 5,265 49 $ dick’s sporting goods, inc. 2005 annual report 4. Store and Corporate Office Closings As a result of the Galyan’s acquisition, the Company closed six Dick’s Sporting Goods stores and four Galyan’s stores, the Galyan’s clearance center and the Galyan’s corporate headquarters. See Note 2 for a summary of the activity of the Galyan’s store closing reserves during fiscal 2005 and 2004. The following table summarizes the activity of the Dick’s store closing reserves and write-offs established due to store closings as a result of the Galyan’s acquisition: (In thousands) Balance at January 29, 2005 Expense charged to earnings Cash payments for leases and other costs Balance at January 28, 2006 Lease and Other Costs $ $ 3,191 21,545 (4,555) 20,181 Of the $21.5 million of expense charged to earnings, essentially all was recorded in merger integration and store closing costs in the Consolidated Statements of Income. Of the $20.2 million total liability, $4.8 million is recorded in accrued expenses and $15.4 million is recorded in long-term deferred revenue and other liabilities in the Consolidated Balance Sheets. The amounts above relate to store rent, common area maintenance and real estate taxes, and other contractual obligations. 5. Property and Equipment Property and equipment are recorded at cost and consist of the following as of the end of the fiscal periods: (In thousands) Buildings and land Leasehold improvements Furniture, fixtures and equipment Less accumulated depreciation and amortization Net property and equipment 6. Accrued Expenses Accrued expenses consist of the following as of the end of the fiscal periods: (In thousands) Accrued payroll, withholdings and benefits Accrued property and equipment Other accrued expenses Total accrued expenses 2005 2004 $ 31,820 313,075 280,376 625,271 (254,994) $ 370,277 $ 34,280 290,236 255,318 579,834 (230,736) $ 349,098 2005 2004 $ 36,859 23,062 76,599 $ 136,520 $ 41,245 23,428 76,792 $ 141,465 50 dick’s sporting goods, inc. 2005 annual report 7. Debt The Company’s outstanding debt at January 28, 2006 and January 29, 2005 was as follows: (In thousands) Senior convertible notes Revolving line of credit Capital leases Third-party debt Related party debt Total debt Less current portion Total long-term debt 2005 2004 $ 172,500 – 7,909 752 40 181,201 (181) $ 181,020 $ $ 172,500 76,094 8,427 793 190 258,004 (635) 257,369 Senior Convertible Notes – On February 18, 2004, the Company completed a private offering of $172.5 million issue price of senior unsecured convertible notes due 2024 (“senior convertible notes”) in transactions pursuant to Rule 144A under the Securities Act of 1933, as amended. Net proceeds of $145.6 million to the Company are net of transaction costs associated with the offering of $6.2 million, and the net cost of a convertible bond hedge and a separate warrant transaction. The hedge and warrant transactions effectively increase the conversion price associated with the senior convertible notes during the term of these transactions from 40% to 100%, or from $39.31 to $56.16 per share, thereby reducing the potential dilutive economic effect to shareholders upon conversion. The senior convertible notes bear interest at an annual rate of 2.375% of the issue price payable semi-annually on August 18th and February 18th of each year until February 18, 2009, with the first interest payment made on August 18, 2004. After February 18, 2009, the senior convertible notes will not pay cash interest but the initial principal amount of the notes will accrete daily at an original issue discount rate of 2.625%, until maturity on February 18, 2024, when a holder will receive $1,000 per note. The senior convertible notes are convertible into the Company’s common stock (the “common stock”) at an initial conversion price in each of the first 20 fiscal quarters following issuance of the notes of $39.31 per share, upon the occurrence of certain events. Thereafter, the conversion price per share of common stock increases each fiscal quarter by the accreted original issue discount for the quarter. Upon conversion of a note, the Company is obligated to pay cash in lieu of issuing some or all of the shares of common stock, in an amount up to the accreted principal amount of the note, and whether any shares of common stock are issuable in addition to this cash payment would depend upon the then market price of the Company’s common stock. The senior convertible notes will mature on February 18, 2024, unless earlier converted or repurchased. The Company may redeem the notes at any time on or after February 18, 2009, at its option, at a redemption price equal to the sum of the issue price, accreted original discount and any accrued cash interest, if any. The total face amount of the senior convertible notes was $255.1 million prior to the original discount of $82.6 million. Concurrently with the sale of the senior convertible notes, the Company purchased a bond hedge designed to mitigate the potential dilution to shareholders from the conversion of the senior convertible notes. Under the five year terms of the bond hedge, one of the initial purchasers (“the counterparty”) will deliver to the Company upon a conversion of the bonds a number of shares of common stock based on the extent to which the then market price exceeds $39.31 per share. The aggregate number of shares that the Company could be obligated to issue upon conversion of the senior convertible notes is 4,388,024 shares. The cost of the purchased bond hedge was partially offset by the sale of warrants (the “warrants”) to acquire up to 8,775,948 shares of the common stock to the counterparty with whom the Company entered into the bond hedge. The warrants are exercisable in year five at a price of $56.16 per share. The warrants may be settled at the Company’s option through a net share settlement or a net cash settlement, either of which would be based on the extent to which the then market price exceeds $56.16 per share. 51 dick’s sporting goods, inc. 2005 annual report The net effect of the purchased bond hedge and the warrants is to either reduce the potential dilution from the conversion of the senior convertible notes if the Company elects a net share settlement or to increase the net cash proceeds of the offering if a net cash settlement is elected if the senior convertible notes are converted at a time when the market price of the common stock exceeds $39.31 per share. There would be dilution from the conversion of the senior convertible notes to the extent that the then market price per share of the common stock exceeds $56.16 at the time of conversion. Revolving Credit Agreement – On July 28, 2004, the Company executed its Second Amended and Restated Credit Agreement (the “Credit Agreement”), between Dick’s and lenders named therein. The Credit Agreement became effective on July 29, 2004 and provides for a revolving credit facility in an aggregate outstanding principal amount of up to $350 million, including up to $75 million in the form of letters of credit. The Credit Agreement’s term was extended to May 30, 2008. As of January 28, 2006 and January 29, 2005, the Company’s total remaining borrowing capacity, after subtracting letters of credit, under the Credit Agreement was $275.6 million and $184.1 million, respectively. Borrowing availability under the Company’s Credit Agreement is generally limited to the lesser of 70% of the Company’s eligible inventory or 85% of the Company’s inventory’s liquidation value, in each case net of specified reserves and less any letters of credit outstanding. Interest on outstanding indebtedness under the Credit Agreement is based upon a formula at either (a) the prime corporate lending rate or (b) the one-month London Interbank Offering Rate (“LIBOR”), plus the applicable margin of 1.25% to 1.75% based on the level of excess borrowing availability. Borrowings are collateralized by the assets of the Company, excluding store and distribution center equipment and fixtures that have a net carrying value of $98.4 million as of January 28, 2006. At January 28, 2006 and January 29, 2005, the prime rate was 7.25% and 5.25%, respectively, and LIBOR was 4.57% and 2.59%, respectively. There were no outstanding borrowings at January 28, 2006. The borrowings outstanding at January 29, 2005 were $76.1 million. The Credit Agreement contains restrictive covenants including the maintenance of a certain fixed charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances and prohibits payment of any dividends. The Credit Agreement provides for letters of credit not to exceed the lesser of (a) $75 million, (b) $350 million less the outstanding loan balance and (c) the borrowing base minus the outstanding loan balance. As of January 28, 2006 and January 29, 2005, the Company had outstanding letters of credit totaling $17.8 million and $17.1 million, respectively. The following table provides information about the Credit Agreement borrowings as of and for the periods: (Dollars in thousands) Balance, fiscal period end Average interest rate Maximum outstanding during the year Average outstanding during the year 2005 2004 $ – 4.76% $ 251,963 134,610 $ $ $ $ 76,094 3.30% 290,755 94,682 52 dick’s sporting goods, inc. 2005 annual report Other Debt – Other debt, exclusive of capital lease obligations, consists of the following as of the end of the fiscal periods: (Dollars in thousands) Third-Party: Note payable, due in monthly installments of approximately $3, including interest at 4%, through 2020 Related Party: Note payable to a former principal stockholder, due in monthly installments of approximately $14, including interest at 12%, through May 1, 2006 Total debt Less current portion of: Third-party Related party Total Long-Term Debt 2005 2004 $ 752 $ 793 40 792 (44) (40) 708 $ 190 983 (41) (149) 793 $ Certain of the agreements pertaining to long-term debt contain financial and other restrictive covenants, none of which are more restrictive than those of the Credit Agreement as discussed herein. Scheduled principal payments on other long-term debt as of January 28, 2006 are as follows: Fiscal Year (In thousands) 2006 2007 2008 2009 2010 Thereafter $ $ 84 46 48 49 52 513 792 Capital Lease Obligations – The Company leases two buildings from the estate of a former stockholder, who is related to current stockholders of the Company, under a capital lease entered into May 1, 1986 which expires in April 2021. In addition, the Company has a capital lease for a store location with a fixed interest rate of 10.6% that matures in 2024. The gross and net carrying values of assets under capital leases are approximately $8.2 million and $4.6 million, respectively as of January 28, 2006 and $9.0 million and $5.3 million, respectively as of January 29, 2005. 53 dick’s sporting goods, inc. 2005 annual report Scheduled lease payments under capital lease obligations as of January 28, 2006 are as follows: Fiscal Year (In thousands) 2006 2007 2008 2009 2010 Thereafter Less amount representing interest Present value of net scheduled lease payments Less amounts due in one year $ $ 888 888 905 953 953 13,113 17,700 9,791 7,909 97 7,812 8. Operating Leases The Company leases substantially all of its stores, office facilities, distribution centers and equipment, under noncancelable operating leases that expire at various dates through 2027. Certain of the store lease agreements contain renewal options for additional periods of five to ten years and contain certain rent escalation clauses. The lease agreements provide primarily for the payment of minimum annual rentals, costs of utilities, property taxes, maintenance, common areas and insurance, and in some cases contingent rent stated as a percentage of gross sales over certain base amounts. Rent expense under these operating leases was approximately $196.3 million, $144.0 million and $97.1 million for fiscal 2005, 2004 and 2003, respectively. The Company entered into sale-leaseback transactions related to store fixtures, buildings and equipment that resulted in cash receipts of $18.8 million, $35.7 million and $14.7 million for fiscal 2005, 2004 and 2003, respectively. Scheduled lease payments due (including lease commitments for 47 stores not yet opened at January 28, 2006) under noncancelable operating leases as of January 28, 2006 are as follows: Fiscal Year (In thousands) 2006 2007 2008 2009 2010 Thereafter $ 218,824 232,051 232,243 228,970 224,319 1,745,131 $ 2,881,538 The Company has subleases related to certain of its operating lease agreements. During each of fiscal 2005, 2004 and 2003, the Company recognized sublease income of $1.0 million. 54 dick’s sporting goods, inc. 2005 annual report 9. Stockholders’ Equity and Employee Stock Plans Stock Option Plans – At January 28, 2006, the aggregate number of common shares reserved for grant under the Company’s 2002 Stock Option Plan (the “Plan”) is 19,866,000 shares. The stock option activity during the fiscal years ended is as follows: Outstanding, February 1, 2003 Granted Exercised Cancelled Outstanding, January 31, 2004 Granted Exercised Cancelled Outstanding, January 29, 2005 Granted Exercised Cancelled Outstanding, January 28, 2006 Shares Subject to Options 15,759,202 4,776,906 (6,425,556) (469,326) 13,641,226 380,010 (1,532,121) (384,705) 12,104,410 1,243,944 (1,320,401) (388,566) 11,639,387 Weighted Average Exercise Price Per Share 3.46 23.16 2.10 3.70 10.99 31.60 3.24 15.25 12.47 35.79 5.65 25.58 15.32 $ $ $ $ Shares Subject to Exercisable Options 8,909,490 – – – 4,607,322 – – – 4,242,361 – – – 3,871,740 Weighted Average Exercise Price Per Share 2.05 – – – 2.58 – – – 5.91 – – – 8.72 $ $ $ $ Stock options generally vest over four years in 25% increments from the date of grant and expire 10 years from the date of grant. As of January 28, 2006, there were 9,606,303 shares of common stock available for issuance pursuant to future stock option grants. Additional information regarding options outstanding as of January 28, 2006, is as follows: Range of Exercise Prices $1.08 – $2.17 $6.00 – $10.48 $15.29 – $22.87 $25.07 – $36.17 $1.08 – $36.17 Shares 2,068,498 3,867,821 2,501,255 3,201,813 11,639,387 Options Outstanding Weighted Average Remaining Contractual Life (Years) 4.17 6.74 7.71 8.47 6.97 $ $ Options Exercisable Weighted Average Exercise Price 1.93 6.51 21.69 29.64 15.32 Weighted Average Exercise Price 1.93 7.73 18.36 26.03 8.72 $ $ Shares 2,068,498 740,939 468,219 594,084 3,871,740 Employee Stock Purchase Plan – The Company has an employee stock purchase plan, which provides that eligible employees may purchase shares of the Company’s common stock. There are two offering periods in a fiscal year, one ending on June 30 and the other on December 31, or as otherwise determined by the Company’s compensation committee. The employee’s purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of the semi-annual offering period. Employees may purchase shares having a fair market value of up to $25,000 for all purchases ending within the same calendar year. No compensation expense is recorded in connection with the plan. The total number of shares issuable under the plan is 2,310,000. There were 125,989 and 137,240 shares issued under the plan during fiscal 2005 and 2004 and 940,877 shares available for future issuance. 55 dick’s sporting goods, inc. 2005 annual report Common Stock, Class B Common Stock and Preferred Stock – During fiscal 2002, the Company amended its corporate charter to, among other things, provide for the authorization of the issuance of up to 100,000,000 shares of common stock, 20,000,000 shares of Class B common stock, and 5,000,000 shares of preferred stock. The holders of common stock generally have rights identical to holders of Class B common stock, except that holders of common stock are entitled to one vote per share and holders of Class B common stock are entitled to ten votes per share. A related party and relatives of the related party hold all of the Class B common stock. These shares can only be held by members of this group and are not publicly tradeable. Class B common stock can be converted to common stock at the holder’s option. During fiscal 2004, the Company amended and restated its Certificate of Incorporation to increase the number of authorized shares of our common stock, par value $0.01 per share from 100,000,000 to 200,000,000 and Class B common stock, par value $0.01 per share from 20,000,000 to 40,000,000. 10. Income Taxes The components of the provision for income taxes are as follows: (In thousands) Current: Federal State Deferred: Federal State Total provision 2005 2004 2003 $ $ 41,961 7,295 49,256 (928) 326 (602) 48,654 $ $ 22,645 7,280 29,925 15,603 408 16,011 45,936 $ $ 21,543 3,696 25,239 8,491 1,208 9,699 34,938 The provision for income taxes differs from the amounts computed by applying the federal statutory rate as follows for the following periods: Federal statutory rate State tax, net of federal benefit Other permanent items Effective income tax rate 2005 35.0% 4.6% 0.4% 40.0% 2004 35.0% 4.3% 0.7% 40.0% 2003 35.0% 5.0% 0.0% 40.0% 56 dick’s sporting goods, inc. 2005 annual report Components of deferred tax assets (liabilities) consist of the following as of the fiscal periods ended: (In thousands) Store closings expense Employee benefits Other accrued expenses not currently deductible for tax purposes Deferred rent Insurance State net operating loss carryforwards Total deferred tax assets Property and equipment Inventory Total deferred tax liabilities Net deferred tax asset 2005 2004 $ $ 14,269 8,454 8,273 7,709 3,491 2,242 44,438 (16,288) (18,762) (35,050) 9,388 $ $ 3,614 6,356 12,035 6,232 2,892 4,203 35,332 (14,530) (11,965) (26,495) 8,837 The gross deferred tax asset from tax loss carryforwards of $2.2 million represents approximately $49.3 million of state net operating loss carryforwards, of which $1.9 million expires in the next ten years. The remaining $47.4 million expires between 2019 and 2025. In 2005, of the $9.4 million net deferred tax asset, $0.4 million is recorded in current assets and $9.0 million is recorded in other long-term assets in the Consolidated Balance Sheets. In 2005, of the $8.8 million net deferred tax asset, $8.0 million is recorded in current assets and $0.8 million is recorded in other long-term assets in the Consolidated Balance Sheets. 11. Earnings Per Common Share Earnings per common share is calculated using the principles of SFAS No. 128, “Earnings Per Share” (“EPS”). The number of incremental shares from the assumed exercise of stock options is calculated by applying the treasury stock method. The aggregate number of shares, totaling 4,388,024, that the Company could be obligated to issue upon conversion of our $172.5 million issue price of senior convertible notes was excluded from the 2005 calculation as they were anti-dilutive. The earnings per share calculations are as follows: Fiscal Year Ended (In thousands, except per share data) Earnings per common share – Basic: Net income Weighted average common shares outstanding Earnings per common share Earnings per common share – Diluted: Net income Weighted average common shares outstanding – basic Stock options Weighted average common shares outstanding Earnings per common share 2005 2004 2003 $ $ $ $ 72,980 49,792 1.47 72,980 49,792 4,187 53,979 1.35 $ $ $ $ 68,905 47,978 1.44 68,905 47,978 4,943 52,921 1.30 $ $ $ $ 52,408 44,774 1.17 52,408 44,774 5,506 50,280 1.04 12. Investments In April 2001, the Company entered into an Internet commerce agreement with GSI. Under the terms of this 10-year agreement, GSI is responsible for all financial and operational aspects of the Internet site, which operates under the domain name “DicksSportingGoods.com,” which name has been licensed to GSI by the Company. The Company and GSI entered into a royalty arrangement that was subsequently converted into an equity ownership at a price that was less than the GSI market value per share. The equity ownership consists of unregistered common stock of GSI and warrants to purchase unregistered common stock of GSI (see Note 1). The Company recognized the difference between the fair value of the GSI stock and its cost as deferred revenue to be amortized over the 10-year term of the agreement. Deferred revenue at January 28, 2006 and January 29, 2005 was $2.3 million and $2.8 million, respectively. In total, the number of shares the Company holds represents less than 5% of GSI’s outstanding common stock. 57 dick’s sporting goods, inc. 2005 annual report During fiscal 2005, 2004 and 2003, the Company realized a pre-tax gain of $1.8 million, $11.0 million and $3.5 million, respectively, resulting from the sale of a portion of the Company’s investment in GSI. 13. Retirement Savings Plan The Company’s retirement savings plan, established pursuant to Section 401(k) of the Internal Revenue Code, covers all employees who have completed one year of service and have attained 21 years of age. Under the terms of the retirement savings plan, the Company provides a matching contribution equal to 50% of each participant’s contribution up to 10% of the participant’s compensation, and may make a discretionary contribution. Total expense recorded under the plan was $2.6 million, $1.8 million and $1.9 million for fiscal 2005, 2004 and 2003, respectively. The fiscal 2003 expense included a discretionary contribution of $0.6 million. 14. Commitments and Contingencies The Company enters into licensing agreements for the exclusive rights to use certain trademarks extending through 2020. Under specific agreements, the Company is obligated to pay an annual guaranteed minimum royalty. The aggregate amount of required payments at January 28, 2006 is as follows: Fiscal Year (In thousands) 2006 2007 2008 2009 2010 Thereafter $ $ 500 1,000 1,250 1,500 1,700 25,900 31,850 In addition, certain agreements require the Company to pay additional royalties if the qualified purchases are in excess of the guaranteed minimum. There were no payments made under agreements requiring minimum guaranteed contractual amounts during fiscal 2005. The Company is involved in legal proceedings incidental to the normal conduct of its business. Although the outcome of any pending legal proceedings cannot be predicted with certainty, management believes that adequate insurance coverage is maintained and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s liquidity, financial position or results of operations. 15. Quarterly Financial Information (Unaudited) Summarized quarterly financial information in fiscal years 2005 and 2004 is as follows: (In thousands, except earnings per share) 2005 Net sales Gross profit (Loss) income from operations Net (loss) income Net (loss) earnings per common share 2004 Net sales Gross profit (Loss) income from operations Net (loss) income Net (loss) earnings per common share 58 First Quarter Second Quarter Third Quarter Fourth Quarter $ $ $ $ 570,843 151,972 (9,423) (7,331) (0.15) 364,207 102,758 17,322 10,608 0.20 $ $ $ $ 621,972 174,416 38,066 22,098 0.41 $ 582,665 153,454 10,868 4,183 0.08 $ $ 849,507 257,798 92,238 54,030 1.00 $ 416,135 119,164 30,805 17,908 0.34 $ 541,009 138,251 194 (1,956) (0.04) $ $ 788,048 226,353 62,548 42,345 0.79 $ dick’s sporting goods, inc. 2005 annual report RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION This Annual Report to Stockholders contains certain non-GAAP financial information. The adjusted financial information is considered non-GAAP and is not preferable to GAAP financial information; however, the Company believes this information provides additional measures of performance that the Company’s management and investors can use to compare core, operating results between reporting periods. The Company has provided reconciliations below for EBITDA, ROIC, net income, earnings per share and operating income adjusted for merger integration and store closing costs, the acquisition of Galyan’s on July 29, 2004 and the gain on sale of investment. EBITDA EBITDA should not be considered as an alternative to net income or any other generally accepted accounting principles measure of performance or liquidity. EBITDA, as the Company has calculated it, may not be comparable to similarly titled measures reported by other companies. EBITDA is a key metric used by the Company that provides a measurement of profitability that eliminates the effect of changes resulting from financing decisions, tax regulations, and capital investments. EBITDA 2005 2004 2003 2005 Adjusted 2004 Adjusted 2003 Adjusted $ 72,980 48,654 12,959 49,861 $ 184,454 $ 68,905 45,936 8,009 37,621 $ 160,471 $ 52,408 34,938 1,831 17,554 $ 106,731 $ 94,548 63,032 12,959 48,992 $ 219,531 $ 74,518 49,678 8,009 33,594 $ 165,799 $ 50,286 33,524 1,831 17,554 $ 103,195 15% 32% 50% 61% (Dollars in thousands) Net income Provision for income taxes Interest expense, net Depreciation and amortization EBITDA GAAP EBITDA % increase over GAAP Prior Year Adjusted EBITDA % increase over Adjusted Prior Year EBITDA Fiscal 2005 (Adjusted)1 Net income Provision for income taxes Interest expense, net Depreciation and amortization EBITDA $ Year Ended Add: Merger integration and January 28, 2006 store closing costs 22,674 15,116 – (869) 36,921 72,980 48,654 12,959 49,861 $ 184,454 $ $ 1 Presents EBITDA adjusted for merger integration and store closing costs and gain on sale of investment. EBITDA Fiscal 2004 (Adjusted)1 Net income Provision for income taxes Interest expense, net Depreciation and amortization EBITDA $ Year Ended Add: Merger integration and January 29, 2005 store closing costs 12,202 8,134 – (4,027) 16,309 68,905 45,936 8,009 37,621 $ 160,471 $ $ 1 Presents EBITDA adjusted for merger integration and store closing costs and gain on sale of investment. EBITDA Fiscal 2003 (Adjusted)2 Net income Provision for income taxes Interest expense, net Depreciation and amortization EBITDA 2 Presents EBITDA adjusted for the gain on sale of investment. $ Year Ended January 31, 2004 52,408 34,938 1,831 17,554 $ 106,731 Results excluding Less: merger integration and gain on sale of investment 94,548 63,032 12,959 48,992 $ 219,531 Gain on sale of investment 1,106 738 – – 1,844 $ Results excluding Less: merger integration and gain on sale of investment 74,518 49,678 8,009 33,594 $ 165,799 Gain on sale of investment 6,589 4,392 – – 10,981 $ Less: Results excluding gain on sale of investment 50,286 33,524 1,831 17,554 $ 103,195 Gain on sale of investment 2,122 1,414 – – 3,536 $ 59 $ $ $ $ $ $ dick’s sporting goods, inc. 2005 annual report Adjusted Net Income and Adjusted Earnings Per Share Reconciliation (in thousands, except per share data) Reported net income (GAAP) Add: Merger integration and store closing costs, after tax Less: Gain on sale of investment, after tax Less: Galyan’s net loss Adjusted net income and earnings per share Fiscal 2005 Fiscal 2004 Proforma1 Fiscal 2004 Fiscal 2003 Amounts Per Share Amounts Per Share Amounts Per Share Amounts Per Share $ 72,980 $1.35 $ 68,905 $1.30 $ 68,905 $1.30 $ 52,408 $1.04 22,674 0.42 12,202 0.23 12,202 0.23 – – (1,106) – (0.02) – (6,589) – (0.12) – (6,589) (12,453) (0.12) (0.24) (2,122) – (0.04) – $ 94,548 $1.75 $ 74,518 $1.41 $ 62,065 $1.17 $ 50,286 $1.00 Adjusted net income % increase over adjusted prior year 52% 1 Proforma includes the operations of Galyan’s as if it had been acquired at the beginning of the period. Adjusted Operating Income Reconciliation (in thousands) Reported income from operations (GAAP) Add: Merger integration and store closing costs Add: Galyan’s Trading Company Adjusted operating income Fiscal 2005 Fiscal 2004 Proforma2 Fiscal 2004 Amounts % Amounts % Amounts % $ 132,749 5.06% $110,869 5.26% $110,869 5.26% 37,790 – $170,539 1.44 – 20,336 – 6.50% $131,205 0.96 – 20,336 (14,992) 6.22% $ 116,213 0.96 (1.47) 4.75% 2 Proforma presents operating income adjusted for merger integration and store closing costs and includes the operations of Galyan’s as if it had been acquired at the beginning of the period. 60 dick’s sporting goods, inc. 2005 annual report Return On Invested Capital (ROIC) (Dollars in thousands) Net income Discontinued operations Merger integration and store closing costs, after tax (Gain) on sale/loss on write-down of non cash investment, after tax Adjusted net income Net Income for ROIC Calculation Interest expense, net, after tax Rent expense, net, after tax Net Income for ROIC after adjustments (numerator) Total stockholders’ equity Total mandatorily redeemable preferred stock Total stockholders’ equity for ROIC calculation Total debt Operating leases capitalized at 8x annual rent expense Total debt and operating leases 2005 2004 2003 2002 2001 2000 1999 $ 72,980 $ 68,905 $ 52,408 $ 38,137 $ 23,241 $ – – 22,674 12,202 – – – – (1,106) 94,548 (6,589) 74,518 (2,122) 50,286 1,468 39,605 94,548 7,775 117,801 74,518 4,805 86,369 50,286 1,099 58,232 39,605 1,718 50,999 – – – 23,241 23,241 3,745 43,223 8,411 $ 10,962 3,514 7,304 – – – 15,715 15,715 4,178 35,516 – 14,476 14,476 2,112 27,748 $ 220,124 $ 165,692 $ 109,617 $ 92,322 $ 70,209 $ 55,409 $ 44,336 $ 415,001 $ 313,667 $ 240,894 $ 138,823 $ 61,556 $ 37,423 $ (63,901) – – – – – – 152,170 415,001 313,667 240,894 138,823 61,556 37,423 88,269 181,201 258,004 3,916 3,577 80,861 73,647 14,931 1,570,680 1,151,587 776,427 679,987 576,307 473,542 369,968 capitalized at 8x annual rent expense 1,751,881 1,409,591 780,343 683,564 657,168 547,189 384,899 Total capital (total stockholders’ equity + total debt and operating leases capitalized at 8x annual rent expense) 2,166,882 1,723,258 1,021,237 822,387 718,724 584,612 473,168 Average total capital (denominator)1 $1,945,070 $1,372,247 $ 921,812 $ 770,555 $ 651,668 $ 528,890 $ 438,730 ROIC ROIC using GAAP amounts 2 11.3% 10.2% 12.1% 11.7% 11.9% 12.1% 12.0% 11.8% 10.8% 10.8% 10.5% 10.5% 10.1% 13.9% 1 Average total capital is calculated as the sum of the current and prior year ending total capital divided by two. 2 ROIC using GAAP amounts was derived as the quotient of GAAP Net Income for ROIC not adjusted (numerator) and average total capital not adjusted for the mandatorily redeemable preferred stock (denominator). The after-tax amounts were calculated using a 40% effective tax rate. 61 dick’s sporting goods, inc. 2005 annual report CORPORATE AND STOCKHOLDER INFORMATION Corporate Office 300 Industry Drive RIDC Park West Pittsburgh, PA 15275 724-273-3400 The Dick’s Sporting Goods Website www.dickssportinggoods.com Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 Independent Registered Public Accounting Firm Deloitte & Touche LLP 2500 One PPG Place Pittsburgh, PA 15222 Dividend Policy We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. In addition, our credit agreement restricts our ability to pay dividends. Non-GAAP Financial Information For any non-GAAP financial measures used in this report, see pages 59–61 for a presentation of the most directly comparable GAAP financial measure and a quantitative reconciliation to that GAAP financial measure. Annual Meeting June 7th at 1:30 p.m. Hyatt Regency 1111 Airport Boulevard Pittsburgh, PA Common Stock The shares of Dick’s Sporting Goods, Inc. common stock are listed and traded on the New York Stock Exchange (NYSE), under the symbol “DKS.” The shares of the Company’s Class B common stock are neither listed nor traded on any stock exchange or other market. Form 10-K A Form 10-K is available without charge online at www.dickssportinggoods.com/investors, e-mail at investors@dcsg.com or through www.sec.gov. It is also available upon request to: The number of holders of record of shares of the Company’s common stock and Class B common stock as of March 31, 2006 was 171 and 9, respectively. Quarterly Stock Price Range Set forth below, for the applicable periods indicated, are the high and low closing sales prices per share of the Company’s common stock as reported by the NYSE. 2005 Fiscal Quarter Ended April 30, 2005 July 30, 2005 October 29, 2005 January 28, 2006 2004 Fiscal Quarter Ended May 1, 2004 July 31, 2004 October 30, 2004 January 29, 2005 High $ 36.73 $ 40.13 $ 40.08 $ 37.36 High $ 30.78 $ 34.30 $ 36.84 $ 38.05 Low $ 30.66 $ 30.56 $ 27.00 $ 29.93 Low $ 25.32 $ 25.00 $ 26.77 $ 33.25 Note: The closing prices have been adjusted for the two-for-one stock split in the form of a stock dividend, which became effective April 5, 2004. Investor Relations 300 Industry Drive RIDC Park West Pittsburgh, PA 15275 724-273-3400 Management Certifications On June 22, 2005, in accordance with Section 3.03A.12(a) of the New York Stock Exchange Listed Company Manual, our Chief Executive Officer submitted a certification to the NYSE stating that he was not aware of any violations by Dick’s Sporting Goods, Inc. of the NYSE’s Corporate Governance listing standards as of that date. The certifications required by Section 302 of the Sarbanes- Oxley Act with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 have been filed with the Securities and Exchange Commission as Exhibits 31.1 and 31.2 thereto. 62 BOARD OF DIRECTORS Edward W. Stack Director since 1984 Chairman and Chief Executive Officer Dick’s Sporting Goods, Inc. Emanuel Chirico Director since 2003 Chief Executive Officer Phillips-Van Heusen Corporation William J. Colombo Director since 2002 President and Chief Operating Officer Dick’s Sporting Goods, Inc. David I. Fuente Director since 1993 Previous Chairman of the Board and Chief Executive Officer Office Depot, Inc. Walter Rossi Director since 1993 Previous Chairman of the Retail Group at Phillips-Van Heusen Corporation and Chairman and Chief Executive Officer of Mervyn’s Lawrence J. Schorr Director since 1985 Chief Executive Officer, Boltaron Performance Products, LLC and Co-Managing Partner of Levene, Gouldin & Thompson, LLP CORPORATE OFFICERS Edward W. Stack Chairman and Chief Executive Officer William J. Colombo President and Chief Operating Officer Michael F. Hines Executive Vice President and Chief Financial Officer Gwen Manto Executive Vice President and Chief Merchandising Officer William R. Newlin Executive Vice President and Chief Administrative Officer Lee Belitsky Senior Vice President Distribution and Transportation Jay Crosson Senior Vice President Human Resources Eileen Gabriel Senior Vice President and Chief Information Officer Jeffrey R. Hennion Senior Vice President Marketing Joseph H. Schmidt Senior Vice President Store Operations Douglas Walrod Senior Vice President Real Estate and Development . m o c n g i s e d h a r z i i . m w w w . c n I , s e t a i c o s s A n g i s e D i h a r z i M n g i s e D DICK’S SPORTING GOODS, INC. 300 INDUSTRY DRIVE RIDC PARK WEST PITTSBURGH, PA 15275 724-273-3400 WWW.DICKSSPORTINGGOODS.COM