2008 ANNUAL REPORT DICK’S SPORTING GOODS, INC. 300 Industry Drive RIDC Park West Pittsburgh, PA 15275 724-273-3400 www.dickssportinggoods.com SALES (DOLLARS IN MILLIONS) NET INCOME1 (DOLLARS IN MILLIONS) OPERATING MARGINS2 (PERCENTAGE) GROSS PROFIT MARGINS (PERCENTAGE) $2,109 $2,625 $3,114 $3,888 $4,130 $74.5 $94.5 $112.6 $155.0 $138.9 6.2% 6.5% 6.3% 6.9% 5.8% 27.8% 28.1% 28.8% 29.8% 28.7% 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 FINANCIAL HIGHLIGHTS Fiscal Year (Dollars in thousands, except per share data) Net sales Gross profi t Gross profi t margin Selling, general and administrative expenses Pre-opening expenses Merger and integration costs Impairment of goodwill and other intangible assets Impairment of store assets Income from operations Net income (loss) Adjusted net income2 Diluted earnings (loss) per common share Adjusted diluted earnings per common share2 Diluted weighted average shares outstanding (in thousands) Adjusted diluted weighted average shares outstanding (in thousands) Total stockholders’ equity EBITDA Adjusted EBITDA3 $ $ $ Comparable store net sales increase (decrease) (Dick’s stores) Store count (Dick’s stores) 2008 2007 2006 $ 4,130,128 $ 3,888,422 $ 3,114,162 1,184,049 1,158,063 28.7% 928,170 16,272 15,877 164,255 29,095 30,380 (35,094) 138,909 (0.31) 1.19 111,662 116,650 895,582 123,468 327,947 (4.8%) 384 29.8% 870,415 18,831 — — — 268,817 155,036 155,036 1.33 1.33 116,504 116,504 888,520 343,869 343,869 2.4% 340 $ $ $ $ $ $ $ $ $ 896,699 28.8% 682,625 16,364 — — — 197,710 112,611 112,611 1.02 1.02 110,790 110,790 620,550 252,639 252,639 6.0% 294 $ $ $ $ $ $ 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 October 19, 2007. 1 Results exclude goodwill, other intangible and store asset impairment charges, merger and integration costs, and gain on sale of investment. 2 Results exclude goodwill, other intangible and store asset impairment charges and merger and integration costs. 3 Results exclude goodwill, other intangible and store asset impairment charges, merger and integration costs, and gain on sale of asset. BOARD OF DIRECTORS Edward W. Stack Director since 1984 Chairman, CEO & President Dick’s Sporting Goods, Inc. William J. Colombo Director since 2002 Vice Chairman Dick’s Sporting Goods, Inc. Emanuel Chirico Director since 2003 Chairman & Chief Executive Offi cer Phillips-Van Heusen Corporation Brian J. Dunn Director since 2007 President & Chief Operating Offi cer Best Buy Co., Inc. David I. Fuente Director since 1993 Previous Chairman of the Board & Chief Executive Offi cer Offi ce Depot, Inc. Walter Rossi Director since 1993 Previous Chairman of the Retail Group at Phillips-Van Heusen Corporation & Chairman & Chief Executive Offi cer of Mervyn’s Lawrence J. Schorr Director since 1985 Chief Executive Offi cer, Boltaron Performance Products, LLC & Former Co-Managing Partner of Levene, Gouldin & Thompson, LLP Larry D. Stone Director since 2007 President & Chief Operating Offi cer Lowe’s Companies, Inc. 2008 CORPORATE OFFICERS Edward W. Stack Chairman, Chief Executive Offi cer & President Lee J. Belitsky Senior Vice President – Distribution & Transportation Jeffrey R. Hennion Executive Vice President & Chief Marketing Offi cer Timothy E. Kullman Executive Vice President, Finance, Administration & Chief Financial Offi cer Gwendolyn K. Manto Executive Vice President & Chief Merchandising Offi cer Joseph H. Schmidt Executive Vice President of Operations & Chief Operating Offi cer Diane E. Lazzaris Senior Vice President – Legal, General Counsel & Corporate Secretary Matthew J. Lynch Senior Vice President & Chief Information Offi cer Kathryn L. Sutter Senior Vice President – Human Resources Design: Mizrahi, Inc. www.mizrahionline.com SHOWCASING OUR ENDURANCE Dick’s Sporting Goods is the largest and most profi table publicly held OPPORTUNITIES FOR GROWTH full-line sporting goods retailer in the nation. We operate 384 Dick’s Sporting Goods stores in 39 states, 89 Golf Galaxy stores in 31 states, and 14 Chick’s Sporting Goods stores in Southern California. Our success is based on the disciplined execution of our strategy: to deliver an extensive selection of authentic sporting goods in a specialty store environment. Over the years, our steady commitment to this strategy has enabled us to produce strong fi nancial and operational performance, and to fuel our growth in a range of market environments. In 2008, we leveraged this momentum to deliver solid fi nancial results and steady operational growth despite intensely challenging market conditions. We enter 2009 with a focus on continuing to showcase our endurance, by reinforcing Dick’s Sporting Goods as the clear leader in 2009 and beyond. ■ Increase our presence and strengthen our leadership position within our industry ■ Target key growth regions, including Florida, Texas and California ■ Draw on our new distribution center in Atlanta, which gives us a total network capacity to service 670 stores ■ Leverage opportunities to more than double the size of our chain within our existing footprint to at least 800 locations nationwide over the long term 1 1 1 1 1 1 3 14 1 1 1 5 2 Corporate Headquarters Distribution Centers Dick’s Sporting Goods Stores 384 Golf Galaxy Store Chick’s Sporting Goods Stores 89 14 12 2 7 4 7 4 15 1 2 1 3 1 17 1 9 36 21 8 7 2 1 6 1 13 6 1 2 8 11 1 14 11 2 2 5 29 4 3 8 16 2 1 35 3 13 3 9 3 2 1 CONSISTENT STORE GROWTH (Dick’s Sporting Goods Stores) 1 4 1 3 6 1 4 3 2 5 5 2 4 9 2 0 4 3 4 8 3 4 20 4 22 5 8 10 5 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 1 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. DEAR FELLOW SHAREHOLDERS The course for the U.S. Open is always set up to be extremely diffi cult. Fairways are narrowed. The rough is fi ve inches to six inches high. The greens are fast and run as high as 12 feet on the Stimpmeter. Just a few years back, the course was set up to be so diffi cult that the head of the USGA was asked if he was trying to embarrass the best golfers in the world. His response was simply, “No, just identify them.” This past year, the retail environment has been similar to the setup at the U.S. Open. The conditions have been extremely diffi cult but they have also provided an opportunity for the best retailers in the world to be identifi ed. As 2008 began, it became clear to everyone that what constituted a winning performance would be redefi ned and expectations would need to be reset. The year quickly became about liquidity as opposed to earnings as the most strategic and proactive companies were assessing their relationships with banks, suppliers, service providers, and even their own employees. We at Dick’s Sporting Goods recognized the consumer slowdown early on and put into place a series of contingency plans that could be implemented quickly if business did not turn around. The backbone of these plans centered on a reduction in both inventory and expenses while working with our bank group to exercise $90 million of the $100 million accordion feature in our line of credit. All three of these tactics were implemented to support our strategy of maximizing liquidity during this economic crisis. DISCIPLI DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 2 In total, our overall sales increased 6% to $4.1 billion driven by the addition of 43 Dick’s Sporting Goods stores, 10 Golf Galaxy stores, and 15 Chick’s Sporting Good’s stores, which were included for a full year of sales following our acquisition of the stores in November 2007. Despite a 4.8% decline in our full year comparable sales, we were able to end the year with no borrowings under our $440 million line of credit facility and reduce our average borrowings during the year by 20%. To accomplish this, we had to be proactive and acknowledge that we were in a very different world. We worked with both our valued branded suppliers as well as our overseas manufacturing partners to reduce our inventory. At the end of the year, our inventory was down 13.9% on a consolidated basis and down 12.7% for Dick’s Sporting Goods stores only. Our team was able to accomplish this monumental feat while still increasing our merchandise margin by 16 basis points and maintaining strong relationships with our key vendors. Our inventory level and the quality of that inventory allowed us to be in a position to take advantage of off-price opportunities from our suppliers and deliver great promotional values to our customers. Our growth for the foreseeable future should be viewed as organic; although, we may look at opportunistic acquisitions as they become available. We ended the year with 384 Dick’s Sporting Goods stores, 89 Golf Galaxy stores, and 14 Chick’s Sporting Goods stores. During the year, we added 43 Dick’s Sporting Goods stores, approximately 35% of which were in new markets while the balance helped fi ll in existing markets. 2008 MANAGEMENT TEAM ( left to right ) Jeffrey R. Hennion Executive Vice President & Chief Marketing Offi cer Lee J. Belitsky Senior Vice President – Distribution & Transportation Kathryn L. Sutter Senior Vice President – Human Resources Edward W. Stack Chairman, Chief Executive Offi cer & President Joseph H. Schmidt Executive Vice President of Operations & Chief Operating Offi cer Gwendolyn K. Manto Executive Vice President & Chief Merchandising Offi cer Matthew J. Lynch Senior Vice President & Chief Information Offi cer Timothy E. Kullman Executive Vice President, Finance, Administration & Chief Financial Offi cer NE DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 3 E C N A R U D N E We completed the consolidation of Golf Galaxy by closing the Minneapolis offi ce and converting all of the operating and fi nancial systems. Golf Galaxy is now fully integrated within our supply chain, and experienced Dick’s Sporting Goods associates have been buying and marketing the Golf Galaxy product since November 2008. The Golf Galaxy business was off 7.7% on a comparable store sales basis for 2008, and, in the current environment, we expect the golf business will continue to be challenged as golf is a highly discretionary purchase. We expect to open only one new Golf Galaxy store in 2009 and may not open any in 2010. The conversion process of 12 Chick’s Sporting Goods stores located in Southern California is proceeding on schedule. We expect to complete the conversion by the end of the second quarter of 2009, and we continue to be very excited about these stores as this acquisition provided us with instant access to the important Southern California area. Although this area is among the hardest hit economically, we believe we have signifi cant business opportunities in California. We expect the tough economic conditions of 2008 to continue in 2009 and possibly into 2010. We will, however, continue to concentrate on our primary customer group of core athletes and outdoor enthusiasts; work with vendors to provide more exclusive products and better value to our customers; build our private brand program; and emphasize discipline and execution in everything we do. As the U.S. Open provides the opportunity for the best golfers in the world to be identifi ed as they perform in the toughest of conditions, we are confi dent these diffi cult times will provide the opportunity for Dick’s Sporting Goods to continue to be identifi ed as one of the world’s best retailers. Edward W. Stack Chairman and Chief Executive Offi cer 4 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 2008 HIGHLIGHTS PERFORMANCE GROWTH ■ Opened 43 new Dick’s Sporting Goods stores that positioned us in new areas, and increased our presence in key regions, such as Florida and Texas ■ Expanded Golf Galaxy by opening 10 new Golf Galaxy stores, ending the year with 89 Golf Galaxy stores in 31 states; and completed the integration of Golf Galaxy’s headquarters into our own ■ Capitalized on our 2007 acquisition of Chick’s Sporting Goods, successfully converting our fi rst Chick’s Sporting Goods store into a Dick’s Sporting Goods store ■ Opened a third distribution center in Atlanta, increasing our total network capacity to service up to 670 stores ■ Delivered improved sales, posting an increase of 6 percent over 2007 ■ Strengthened our merchandise margin by leveraging our growing purchasing power; improving inventory management and minimizing markdowns; and augmenting our private-label and private-brand programs ■ Fortifi ed our balance sheet by expanding our credit facility to $440 million, up from $350 million in 2007 ■ Demonstrated our fi nancial discipline by ending 2008 with no borrowings on our revolving credit facility for the fourth consecutive year, and decreasing average borrowings for the year by 20 percent compared with 2007 ■ Closed the year as the nation’s largest full-line sporting goods retailer, with $4.1 billion in sales, as well as the most profi table publicly held full-line sporting goods retailer in the nation CORPORATE RESPONSIBILITY Dick’s Sporting Goods has long been committed to responsible corporate citizenship. This year, our Community Youth Program provided sports equipment to more than one million children across the nation through donations to a growing roster of youth organizations, both large and small. In 2008, we continued to feature the LIVESTRONG collection of apparel and footwear, developed by Nike and the Lance Armstrong Foundation to help raise funds for cancer research, and we introduced a LIVESTRONG-branded Dick’s Sporting Goods Gift Card. We also continued our role as a corporate partner in Thanks and Giving, a fund- raising effort organized by St. Jude Children’s Research Hospital. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 5 UNIQUE SHOPPING EXPERIENCE At Dick’s, our passion for sports is matched only by that of our customers. We recognize that these core athletes and outdoor enthusiasts want a sporting goods resource that is as committed to excellence as they are, so we employ an innovative store-within-a-store concept, which enables us to deliver a genuine specialty store experience across a wide range of pursuits. Through this concept, we unite several sports specialty stores – the Golf Pro Shop, the Lodge, the Fitness Center, Footwear, Team Sports and Athletic Apparel – under one roof. Each of our stores offers true specialty store benefi ts, including authentic merchandise, value-added services and highly trained sales associates. Together, they deliver the one-stop convenience, access to exclusive products, solid in-stock levels and exceptional purchasing power of a best-in-class retail chain. This winning combination makes Dick’s the ultimate destination store for outdoor enthusiasts and athletes in every sport, in every season of the year. A U T H E N T I C M E R C H A N D I S E AUTHENTIC MERCHANDISE Serious athletes meet the challenge to play, train and compete in their sports all year long – and they count on Dick’s to provide the authentic equipment, high-quality apparel and performance footwear they need for every activity in every type of climate. We carry an extensive range of merchandise for sports that are in season, as well as a vast assortment of products for off-season activities, so our customers always have access to the gear they require to stay in the game. And because we regularly refresh our merchandise line-up with technology-based product releases and exclusives from both national name brands and our own private brands, core athletes and outdoor enthusiasts continue to make Dick’s their fi rst stop – reinforcing the fact that Every Season Starts at Dick’s. THE GOLF PRO SHOP For golfers, the ultimate challenge is the pursuit of improvement, and top-notch equipment can play an important role in their efforts. As a result, golf equipment manufacturers regularly unveil cutting-edge products designed to help players improve accuracy, increase distance and achieve greater consistency. As the largest specialty golf retailer in the nation, Dick’s is often among the fi rst-to-market with newly released golf merchandise from the industry’s most respected manufacturers, including TaylorMade, Callaway, Titleist, Cobra, Foot Joy and Nike. We also offer a growing assortment of products under our Walter Hagen, Slazenger and MAXFLI brands, all of which are available exclusively at Dick’s. Drawing on the extensive experience of our in-house golf professionals, our private brands continuously develop innovative, high-caliber equipment, apparel, shoes and accessories. Our Golf Pro Shop fulfi lls its mission of delivering an authentic specialty shop experience by offering the amenities serious golfers expect, including on-site PGA golf professionals, in-store simulators and putting greens, custom fi ttings, special order capabilities, and live broadcasts of golf tournaments and educational golf programming. G O L F P R O S H O P HIGHLIGHTS ■ Our assortment of golf merchandise includes high-quality apparel, outerwear and shoes, along with a broad selection of training devices and accessories. ■ Dick’s commitment to serving the needs of dedicated golfers is underscored by the fact that we are the single largest employer of PGA golf professionals in the nation. ■ We offer golfers informed product guidance, combined with a convenient range of value- added services, including custom fi tting, club repair and re-gripping. THE LODGE Outdoor enthusiasts test their endurance against a range of variables, from changing terrain to the unpredictable forces of nature. For these athletes, the quality and reliability of their equipment is a vital factor that enables them to face the challenges of their sports, participate safely and achieve new heights. The Lodge at Dick’s carries authentic merchandise from trusted brands, like Coleman, The North Face, Shimano, and Old Town Canoes & Kayaks, along with an extensive range of exclusive products from private-brands, including our popular Field & Stream line. We recognize that outdoor enthusiasts prefer to buy their equipment from professionals who have a genuine understanding of their needs, so we employ a specialized team of sales associates in The Lodge, many of whom are seasoned outdoor enthusiasts with direct experience in using our products. We demonstrate our belief that each of our specialty stores should have what it takes to stand on its own by providing a selection of value-added services, including rifl e scope mounting, bore sighting, fi shing line spooling and arrow cutting, as well as by offering on-site archery lanes where customers can test our products. T H E L O D G E HIGHLIGHTS ■ Our product assortment spans sports equipment, clothing, footwear and outerwear for a range of outdoor pursuits, from hunting and fi shing, to camping, kayaking, and paintball. ■ We feature some of the latest advances in technology, like high-performance apparel, binoculars, range fi nders and global positioning systems. ■ We display our merchandise in a “good- better-best” format so that our customers can quickly evaluate the different price points and benefi ts of each product. FITNESS CENTER Fitness enthusiasts never rest on their past accomplishments. Instead, day in and day out, they push themselves to set and conquer new goals. At Dick’s Fitness Center, we understand this level of motivation, so we’ve created a complete fi tness destination store. We stock an extensive selection of equipment for today’s most popular fi tness activities, from aerobic and cardio pursuits, to yoga and Pilates. Our assortment encompasses merchandise from the nation’s leading fi tness brands, including Bowfl ex and Everlast, and we collaborate with top manufacturers, like Sole and Horizon, to develop products that are exclusive to Dick’s. We further demonstrate our deep commitment to fi tness by employing certifi ed fi tness trainers who can offer advice and training tips, and help each customer select the right merchandise to realize his or her personal goals. We also streamline the shopping experience by employing bold signage that helps our customers to understand the various features and price distinctions of different products within each category. F I T N E S S C E N T E R HIGHLIGHTS ■ We simplify purchases of large equipment by offering home delivery and assembly, extended warranties and fi nancing. ■ We carry specialized accessories geared to help fi tness buffs reach their personal best, including pedometers, heart-rate monitors, body-fat scales and training videos, along with high-caliber performance athletic apparel and footwear. ■ Our dedicated cycle shop features bikes, accessories and riding apparel from top manufacturers like Diamondback, Mongoose, Iron Horse, Schwinn, Pearl Izumi and Bell Sports, as well as convenient services like assembly, safety inspections, custom fi ttings, repairs and tune-ups by certifi ed bike technicians. FOOTWEAR selection of highly specialized shoes to meet the demands of virtually every sport and athletic pursuit. In Dick’s Footwear store, we carry an extensive assortment of performance footwear, including the latest innovations from industry leaders like Nike, adidas, New Balance, Asics, Under Armour and more. Our product line-up ranges from cleats for baseball, football, soccer and lacrosse, to performance athletic wear for running, training and basketball. Many of these products unite advanced technology with next-generation materials to give athletes a competitive edge. We staff our Footwear stores with specially trained associates who understand the features and benefi ts of each new product so they can help customers select the best shoes for every sport, skill level and price point. F O O T W E A R HIGHLIGHTS ■ performance athletic footwear to offer our customers access to exclusive promotions, and unique products and styles. ■ Each of our selling fl oors has an authentic in-store track where customers can “test run” the latest footwear products. ■ We are often among the fi rst-to-market with new product releases and we maintain a solid in-stock position so our customers can get the products they want in the sizes they need. TEAM SPORTS Team sports hold a universal appeal for athletes of all ages and skill levels, and many of today’s players train and compete in their sports all year ‘round. At Dick’s, we manage our inventory to ensure that team players can replenish the equipment and apparel they need in every season of the year. We continuously stock gear for a wide range of sports, including baseball, softball, soccer, basketball, football, hockey and lacrosse. We recognize that many of our team sports customers are youths, whose parents and coaches may be making purchases for them. We help them make the right decisions by using a “good-better-best” format that enables quick and accurate product comparisons. We also staff our stores with knowledgeable sales associates who can offer product guidance to players at every skill level. In 2008, we underscored our commitment to the team sports arena by forging sponsorships with Major League Soccer and Major League Lacrosse, as well as by becoming the Offi cial Sporting Goods Retailer of Little League Baseball and Softball. As a result, we now provide discount coupons and equipment donations directly to Little League teams and coaches, and we function as a true Little League destination, hosting a variety of in-store events, from player registrations to instructional clinics. HIGHLIGHTS ■ We represent the industry’s top manufacturers, including Nike, adidas, Under Armour, Wilson, Mizuno, Easton, Rawlings and Warrior. ■ Our exclusive adidas baseball and Umbro soccer products leverage our relationships with industry leaders to provide Dick’s customers with access to exciting new merchandise. ■ Our ScoreCard Rewards Program offers loyal customers access to our Game On seasonal magazine, rewards saving certifi cates and regular members-only product previews, and savings events. T E A M S P O R T S ATHLETIC APPAREL Serious athletes pursue their sports throughout the year, driving athletic apparel manufacturers to continuously develop new, high-technology garments that can help them perform at their peak. Dick’s Athletic Apparel store carries a full assortment of specialized clothing for men, women and children to use across a spectrum of sports and athletic activities in every season. We take great care to stock garments that not only look great, but also provide clear, high-performance benefi ts, from helping athletes regulate their body temperatures in extreme climates, to enabling them to manage the challenges of a wide range of activities and conditions. Our assortment encompasses the latest sports apparel from the nation’s premier manufacturers, including Under Armour, Nike, Reebok and more. We further work with these manufacturers to produce exclusive product offerings, many of which incorporate next-generation fabrics and technologies. HIGHLIGHTS ■ Many of our associates are sports enthusiasts who can help our customers quickly zero in on the right garments for their particular sport. ■ We offer a wide array of garments that combine science and sports technology to help our customers deliver peak performance. ■ Our Athletic Apparel shop features an assortment of specialized Women’s clothing for virtually every athletic pursuit, from team sports and outdoor activities, to cycling and fi tness, to a growing range of “extreme” sports. A T H L E T I C A P P A R E L MOVING AHEAD Dick’s is moving ahead with determination. While we expect the diffi cult economic environment to persist in 2009, we are fi rmly positioned to meet the challenges ahead. We have a powerful brand that is recognized by consumers across the nation as a symbol of authentic sporting goods merchandise. We have strong relationships with the industry’s leading sporting goods manufacturers. We have a solid balance sheet, proven store operation skills, a highly experienced management team, and skilled employees. Moreover, we operate in a highly fragmented industry that we believe offers attractive growth opportunities for us. We will continue to direct our focus on lowering expenses and tightening inventory management controls. We will work to increase our operating margins by building our private brands and leveraging our relationships with leading vendors. We will continue to seek growth opportunities that can yield meaningful, long-term results for our shareholders. And, we will maintain the tradition of excellence in execution that has become our Company’s hallmark. We are confi dent that these measures will enable Dick’s Sporting Goods to meet the challenges of the current economic environment and to fortify our position as the clear leader in the sporting goods industry. CREATING THE CAPACITY TO GROW 2005 2006 2008 Introduced our transportation and warehouse management system, a highly scaleable supply chain platform geared to drive productivity and improve supply chain response times: • Implemented the transportation management segment centrally • Implemented the warehouse management segment in our Plainfi eld, Indiana distribution center Applied new reporting processes to provide our merchandising organization with more detailed and timely data Completed the expansion of our distribution center in Plainfi eld, Indiana, increasing our total network capacity to service 460 stores Opened the third distribution center in Atlanta, increasing our total network capacity to service 670 stores Enhanced our point-of-sale system to expedite transactions, create new effi ciencies and gather customer data for future marketing use Integrated Golf Galaxy’s headquarters into our own, creating new synergies Launched a redesigned website that delivers enhanced features and an improved customer experience 2007 Acquired Golf Galaxy, a specialty golf leader, which today operates 89 stores in 31 states Acquired Chick’s Sporting Goods, a specialty sporting goods chain, which today operates 14 stores in Southern California Announced plans for a third distribution center in Atlanta 22 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 2008 FINANCIAL REPORT Five-Year Financial Summary Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Management’s Responsibility for Financial Statements Independent Auditors’ Reports Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Comprehensive (Loss) Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Reconciliation of Non-GAAP Financial Measures Corporate and Stockholder Information 24 25 39 40 41 43 44 45 46 48 49 72 76 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 23 Five-Year Financial Summary Fiscal Year 20081 20071 20061 2005 2004 (Dollars in thousands, except per share and sales per square foot data) Statement of Income Data: Net sales Cost of goods sold 2 Gross profi t Selling, general and administrative expenses Impairment of goodwill and other intangible assets 3 Impairment of store assets 3 Merger integration and store closing costs Pre-opening expenses Income from operations Gain on sale of non-cash investment 4 Gain on sale of asset 4 Interest expense, net Other income Income before income taxes Provision for income taxes Net (loss) income Earnings per Common Share 5: Net (loss) income per common share — Basic Net (loss) income per common share — Diluted Weighted average number of common shares outstanding (in thousands): Basic Diluted Store Data: Comparable store net sales (decrease) increase 6 Number of stores at end of period 7 Total square feet at end of period 7 Net sales per square foot 8 Other Data: Gross profi t margin Selling, general and administrative percentage of net sales Operating margin Inventory turnover 9 Depreciation and amortization Balance Sheet Data: Inventories Working capital 10 Total assets Total debt including capital lease obligations Retained earnings Total stockholders’ equity $ $ $ $ 4,130,128 $ 2,946,079 1,184,049 928,170 164,255 29,095 15,877 16,272 30,380 — (2,356) 10,963 — 21,773 56,867 (35,094) $ 3,888,422 $ 2,730,359 1,158,063 870,415 — — — 18,831 268,817 — — 11,290 — 257,527 102,491 155,036 $ 3,114,162 $ 2,217,463 896,699 682,625 — — — 16,364 197,710 — — 10,025 — 187,685 75,074 112,611 $ 2,624,987 $ 1,887,347 737,640 556,320 — — 37,790 10,781 132,749 (1,844) — 12,959 — 121,634 48,654 72,980 $ 2,109,399 1,522,873 586,526 443,776 — — 20,336 11,545 110,869 (10,981) — 8,009 (1,000) 114,841 45,936 68,905 (0.31) $ (0.31) $ 1.42 $ 1.33 $ 1.10 $ 1.02 $ 0.73 $ 0.68 $ 0.72 0.65 111,662 111,662 109,383 116,504 102,512 110,790 99,584 107,958 95,956 105,842 (4.8%) 487 23,592,850 2.4% 434 21,084,292 6.0% 294 16,724,171 2.6% 255 14,650,459 $ 186 $ 196 $ 197 $ 188 $ 2.6% 234 13,514,869 195 28.7% 29.8% 28.8% 28.1% 27.8% 22.5% 0.7% 3.06x 90,732 $ 22.4% 6.9% 3.22x 75,052 $ 21.9% 6.3% 3.34x 54,929 $ 21.2% 5.1% 3.42x 49,861 $ 21.0% 5.3% 3.56x 37,621 854,771 $ 434,389 $ 1,966,524 $ 181,864 $ 433,880 $ 895,582 $ 887,364 $ 307,746 $ 2,035,635 $ 181,435 $ 468,974 $ 888,520 $ 641,464 $ 304,796 $ 1,524,265 $ 181,017 $ 315,453 $ 620,550 $ 535,698 $ 142,748 $ 1,187,789 $ 181,201 $ 202,842 $ 414,793 $ 457,618 128,388 1,085,048 258,004 129,862 313,667 $ $ $ $ $ $ $ 1 In the fi rst quarter of fi scal 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“123(R)”), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modifi ed prospective transition method as permitted by SFAS No. 123(R) and, accordingly, fi nancial results for years prior to fi scal 2006 have not been restated. Pre-tax stock-based compensation expense in fi scal 2008, 2007 and 2006 was $25.6 million, $29.0 million and $24.3 million, respectively. 2 Cost of goods sold includes the cost of merchandise, occupancy, freight and distribution costs, and shrink expense. 3 In fi scal 2008, the Company recorded non-cash impairment charges of $164.3 million attributable to the impairment of Golf Galaxy’s goodwill and other intangible assets. The Company also recorded non-cash impairment charges of $29.1 million in connection with certain underperforming Dick’s Sporting Goods, Golf Galaxy and Chick’s Sporting Goods stores. 4 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 to an equity ownership in that provider in lieu of royalties until Internet sales reached a predefi ned amount that resulted in this non-cash investment. Gain on sale of asset resulted from the Company exercising a buyout option on an aircraft lease and subsequently selling the aircraft. 5 Earnings per share data gives effect to two-for-one stock splits effected in October 2007 and April 2004. 6 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 Golf Galaxy stores will be included in the full year comparable store base beginning in fi scal 2009. 7 The store count and square footage amounts include Golf Galaxy and Chick’s for fi scal 2008 and 2007. 8 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 offi ce space that generally occupies approximately 18% of total store space in our Dick’s stores. 9 Calculated as cost of goods sold divided by the average monthly ending inventories of the last 13 months. 10 Defi ned as current assets less current liabilities. 24 DICK’S SPORTING GOODS, INC. 2008 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 “Selected Consolidated Financial and Other Data” and our consolidated fi nancial 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 37 – “Forward Looking Statements”. Overview Dick’s 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 February 13, 2007, the Company acquired Golf Galaxy by means of merger of our wholly-owned subsidiary with and into Golf Galaxy. On November 30, 2007, the Company completed its acquisition of Chick’s Sporting Goods, Inc. The Consolidated Statements of Operations include the results of Golf Galaxy and Chick’s for fi scal 2007 from their respective dates of acquisition. As of January 31, 2009 we operated 384 Dick’s stores, 89 Golf Galaxy stores and 14 Chick’s stores, with approximately 23.6 million square feet, in 42 states, the majority of which are located throughout the eastern half of the United States. On September 12, 2007, the Company’s board of directors approved a two-for-one stock split of the Company’s common stock and Class B common stock in the form of a stock dividend. The split was effected by issuing our stockholders of record as of September 28, 2007 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 fi scal 2007 included herein have been restated to give effect to this stock split. The primary factors which historically infl uenced the Company’s profi tability and success have been its growth in the number of stores and selling square footage, its positive comparable store sales, and its strong gross profi t margins. In the last fi ve years, the Company has grown from 163 stores as of the end of fi scal 2003 to 487 stores as of the end of fi scal 2008, refl ecting both organic growth and acquisitions. The Company continues to expand its presence through the opening of new stores although its rate of growth has decreased from the rate of growth experienced in earlier years refl ecting the current economic conditions, lack of available real estate, the Company’s larger size, its decision to adopt more manageable store growth goals and the more recent experience of negative same store sales. Fiscal 2008 was a diffi cult operating environment for our industry due to numerous external factors weighing on specialty retail sales. The pressures on the consumer have intensifi ed as unemployment has risen, equity markets have declined, and concerns about the broader economy have grown. These factors, combined with falling home prices and tight credit markets, suggest continued pressure on specialty retail consumers in the near term. The Company continues to see the greatest sales weakness in bigger ticket, discretionary purchases such as golf and exercise equipment, while the lodge business has benefi ted from higher gun and ammunition sales. However, since the balance of macroeconomic factors that impact the Company’s business remains unfavorable, the Company will continue to take a cautious approach to ensure that it is well-positioned to capitalize on opportunities as they develop. As a result, the Company has implemented numerous strategies to help it manage through these uncertain times, including remaining focused on reducing costs, conserving cash and managing inventories in line with sales trends. The Company has trimmed planned fi scal 2009 capital expenditures to approximately $60 million compared to $115 million in fi scal 2008, net of proceeds from sale leaseback transactions and allowances received from landlords. The Company believes its strong balance sheet, which includes $74.8 million in cash and cash equivalents, no outstanding borrowings under its $440 million Second Amended and Restated Credit Agreement (“Credit Agreement”) and an inventory per square foot reduction of 13.9% compared to fi scal 2007 year end, increases its fi nancial fl exibility and further strengthens its ability to successfully manage through this economic crisis. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 25 The Company expects to continue to generate positive cash fl ow to fund its operations and to take advantage of growth opportunities. The Company believes its existing Credit Agreement is suffi cient to support its ongoing operations and future plans for fi scal 2009. In order to monitor the Company’s success, the Company’s senior management monitors certain key performance indicators, including: • • • • – Fiscal 2008 comparable store sales decreased 4.8% compared to a 2.4% increase in fi scal 2007. Comparable same store sales growth The Company believes that its comparable stores sales performance was affected by numerous challenges including a diffi cult macroeconomic environment, declining consumer confi dence resulting in lower than anticipated customer traffi c and particularly cautious spending. Although the Company believes it has made noticeable progress in improving its merchandise offerings, the effect of those improvements have been hampered by the macroeconomic environment. The Company’s current strategy is to target a general overall trend to return to positive comparable store sales growth; although it recognizes that it continues to be affected by many of these factors. The Company believes that its ability to realize such a general overall positive trend in comparable store sales will prove to be a key factor in achieving its targeted levels of earnings per share and continuing its store expansion program to an ultimate goal of at least 800 locations across the United States. The Company generated $159.8 million of cash fl ow from operations in fi scal 2008 compared with Positive operating cash fl ow – $262.8 million in fi scal 2007. Although operating cash fl ow decreased in the current fi scal year compared to last year, the Company believes it will generate positive operating cash fl ow, together with its other sources of liquidity, suffi cient to fund the ongoing needs of the business. The Company believes that historically, a key strength of its business has been the ability to consistently generate positive cash fl ow from operations. Strong cash fl ow generation is critical to the future success of the Company, not only to support the general operating needs of the Company, but also to fund capital expenditures related to new store openings, relocations, expansions and remodels, costs associated with its corporate headquarters and its distribution centers, costs associated with continued improvement of information technology tools and costs associated with potential strategic acquisitions that may arise from time to time. See further discussion of the Company’s cash fl ows in the Liquidity and Capital Resources section herein. Quality of merchandise offerings – throughs, inventory turns, gross margins and markdown rates on a department and style level. This analysis helps the Company manage inventory receipts and markdowns to reduce cash fl ow requirements and deliver optimal gross margins by improving merchandise fl ow and establishing appropriate price points to minimize markdowns. To monitor and maintain acceptance of its merchandise offerings, the Company monitors sell- The Company implemented numerous initiatives during fi scal 2008 aimed at maintaining tighter expense Cost reduction efforts – controls. These initiatives included optimizing the Company’s overall advertising costs, costs associated with operating its stores and distribution centers as well as general and administrative costs. The Company has redirected a portion of its advertising costs to enhance consumer penetration by focusing on events, frequency, distribution, media types and sponsorships. The Company has adjusted store staffi ng levels and operating hours to refl ect current and anticipated traffi c levels and has focused on energy conservation programs to further lower store operating costs. Staffi ng adjustments at the Company’s distribution centers, including the planned closure of the Conklin return to vendor facility in March 2009, have been made to refl ect anticipated merchandise receipt volumes. The Company has also implemented various administrative cost reduction initiatives, including a freeze on corporate staffi ng levels other than those necessitated by our back offi ce consolidation of recently acquired businesses, efforts to manage compensation related expenses and reducing travel and entertainment expenses. • The Company expects to reduce its capital spending in fi scal 2009 to a projected target of $60 million Capital reduction efforts – compared to $115 million in fi scal 2008. The Company plans to scale back its store expansion program to approximately 20 stores during fi scal 2009. This level of store expansion is signifi cantly lower than historical levels and is largely driven by the current economic conditions. The Company has created a capital appropriations committee to approve all capital expenditures in excess of certain amounts and to group and prioritize all capital projects between required, discretionary and strategic. Executive Summary The Company reported a net loss for the year ended January 31, 2009 of $35.1 million, or $0.31 per diluted share, which included impairment charges of $161.7 million, net of tax, or $1.45 per share, and merger and integration costs of $12.3 million, net of tax, or $0.11 per share, as compared to net income of $155.0 million and earnings per diluted share of $1.33 in 2007. Net sales increased 6% to $4,130.1 million in 2008 from $3,888.4 million in 2007 due primarily to new store sales, which include Chick’s Sporting Goods in fi scal 2008, partially offset by a comparable store sales decrease of 4.8%. Golf Galaxy is included in the Company’s comparable store sales calculation beginning in the second quarter of 2008 and will be included in the full year comparable store sales calculation beginning in fi scal 2009. 26 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Income from operations decreased 89% to $30.4 million in 2008, which included impairment charges of $193.4 million and merger and integration costs of $15.9 million, from $268.8 million in 2007. As a percentage of sales, gross profi t decreased to 28.67% in 2008 from 29.78% in 2007. The gross profi t percentage decreased primarily due to a de-leverage of occupancy expenses resulting from the comparable store sales decline in the current year, lower vendor program income, partially offset by merchandise margin improvements across several of the Company’s product categories. Selling, general and administrative expenses increased by 9 basis points. The increase as a percentage of sales was due primarily to an increase in store payroll and other store costs that de-leveraged as a result of the comparable store sales decrease partially offset by decreases in advertising costs (18 basis points) and administrative costs, including payroll (45 basis points) as the Company took steps to reduce costs during a declining comparable store sales environment. We ended the year with no borrowings on our line of credit and excess borrowing availability of $417.5 million. Results of Operations The following table presents for the periods indicated selected items in the Consolidated Statements of Operations 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: Fiscal Year Net sales 1 Cost of goods sold, including occupancy and distribution costs 2 Gross profi t Selling, general and administrative expenses 3 Impairment of goodwill and other intangible assets 4 Impairment of store assets 5 Merger and integration costs 6 Pre-opening expenses 7 Income from operations Gain on sale of asset 8 Interest expense, net 9 Income before income taxes Provision for income taxes Net (loss) income A Column does not add due to rounding. 2008A 100.00% 2007A 100.00% 71.33 28.67 22.47 3.98 0.70 0.38 0.39 0.74 (0.06) 0.27 0.53 1.38 (0.85%) 70.22 29.78 22.38 — — — 0.48 6.91 — 0.29 6.62 2.64 3.99% Basis Point Increase/ (Decrease) in Basis Point Increase/ (Decrease) in Percentage of Net Percentage of Net Sales from Prior Sales from Prior Year 2006–2007A N/A Year 2007–2008A N/A 2006A 100.00% 71.21 28.79 21.92 — — — 0.53 6.35 — 0.32 6.03 2.41 3.62% 111 (111) 9 398 70 38 (9) (617) (6) (2) (609) (126) (484) (99) 99 46 — — — (5) 56 — (3) 59 23 37 1 Revenue from retail sales is recognized at the point of sale, net of sales tax. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. Revenue from gift cards and returned merchandise credits (collectively the “cards”) are deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized in the Consolidated Statements of Operations in selling, general and administrative expenses at the point at which redemption becomes remote. The Company performs an evaluation of the aging of the unredeemed cards, based on the elapsed time from the date of original issuance, to determine when redemption is remote. 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, fi xture lease expenses and certain insurance expenses. 3 Selling, general and administrative expenses include store and fi eld support payroll and fringe benefi ts, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company’s corporate headquarters. 4 Attributable to the impairment of Golf Galaxy’s goodwill and other intangible assets. 5 Impairment of store assets in connection with certain underperforming Dick’s Sporting Goods, Golf Galaxy and Chick’s Sporting Goods stores. 6 Merger and integration costs primarily include duplicative administrative costs, severance and system conversion costs related to the operational consolidation of Golf Galaxy and Chick’s Sporting Goods with the Company’s pre-existing business. 7 Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs incurred prior to a new store opening. 8 Gain on sale of asset resulted from the Company exercising a buyout option on an aircraft lease and subsequently selling the aircraft. 9 Interest expense, net, results primarily from interest on our senior convertible notes and Credit Agreement borrowings partially offset by interest income. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 27 Fiscal 2008 (52 weeks) Compared to Fiscal 2007 (52 weeks) Net (Loss) Income The Company reported a net loss of $35.1 million in 2008, which included impairment charges of $161.7 million, net of tax or $1.45 per share, and merger and integration costs of $12.3 million, net of tax or $0.11 per share, from net income of $155.0 million in 2007. Net Sales Net sales increased 6% to $4,130.1 million in 2008 from $3,888.4 million in 2007, due primarily to new store sales, which include Chick’s Sporting Goods in fi scal 2008, partially offset by a comparable store sales decrease of 4.8%. Golf Galaxy is included in the Company’s comparable store sales calculation beginning in the second quarter of 2008 and will be included in the full year comparable store sales calculation beginning in fi scal 2009. The decrease in comparable store sales is mostly attributable to sales decreases in exercise, other footwear and golf equipment and accessories. These sales decreases were partially offset by increases in hunting, guns and outerwear and outerwear accessories. The comparable store decrease was driven primarily by a decrease in transactions of approximately 4.4% and a decrease of approximately 0.4% in average unit retail price at Dick’s Sporting Goods stores, refl ecting declining consumer confi dence that resulted in lower traffi c and more cautious spending. Every 1% change in comparable store sales would have impacted fi scal 2008 earnings before income taxes by approximately $11 million. Store Count During 2008, we opened 43 Dick’s stores and ten Golf Galaxy stores, relocated one Dick’s store and converted one Chick’s Sporting Goods store to a Dick’s Sporting Goods store, resulting in an ending store count of 487 stores, with approximately 23.6 million square feet, in 42 states. Income from Operations Income from operations decreased 89% to $30.4 million in 2008, which included impairment charges of $193.4 million and merger and integration costs of $15.9 million, from $268.8 million in 2007. Gross profi t increased 2% to $1,184.0 million in 2008 from $1,158.1 million in 2007. As a percentage of sales, gross profi t decreased 111 basis points in the current year. The 111 basis point decrease in gross profi t is due primarily to a 124 basis point increase in occupancy expenses caused by the de-leverage related to the comparable store sales decline in the current year. Freight and distribution costs were consistent between years as the costs associated with the opening of a new distribution center in Atlanta, Georgia in the second quarter of 2008 were fully offset by initiatives to improve freight effi ciencies. The gross profi t decrease was partially offset by merchandise margin improvements across several of the Company’s product categories (16 basis points). Merchandise margin improvements were impacted by lower initial markups and higher markdowns to liquidate inventory and bring levels closer to the current sales trends. The Company’s inventory per square foot declined 13.9% to $36.23 at January 31, 2009 compared to February 2, 2008. Every 10 basis point change in merchandise margin would have impacted fi scal 2008 earnings before income taxes by approximately $4 million. Selling, general and administrative expenses increased to $928.2 million in 2008 from $870.4 million in 2007 due primarily to an increase in store count and continued investment in corporate and store infrastructure. The 9 basis point increase over last year was due primarily to an increase in store payroll and other store costs that de-leveraged as a result of the comparable store sales decrease partially offset by decreases in advertising costs (18 basis points) and administrative costs, including payroll (45 basis points) as the Company took steps to reduce costs during a declining comparable store sales environment. In 2008, the Company recorded an impairment charge related to goodwill and other intangible assets acquired in the Golf Galaxy acquisition of $164.3 million, before an income tax benefi t of $20.4 million. The deterioration of the economy experienced during the fourth quarter of fi scal 2008, lower than expected full year 2008 operating results, projections that fi scal 2009 will be in line with fourth quarter 2008 business trends and signifi cant uncertainty about when the economy will recover, caused signifi cant changes to the projected cash fl ows of Golf Galaxy used in our goodwill test compared to those used in our Golf Galaxy goodwill test in fi scal 2007 and carried forward through our earlier considerations. As a result of the goodwill and trade name impairment tests, the Company concluded that the carrying amounts of the Golf Galaxy reporting unit exceeded its fair value. The goodwill impairment charge of $111.3 million was determined by comparing the carrying value of goodwill of Golf Galaxy with the implied fair value of 28 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT goodwill of Golf Galaxy. The trade name impairment charge of $49.9 million, before an income tax benefi t of $19.2 million, was determined by comparing the carrying value of the trade name with the estimated fair value of the trade name. The Company also recorded an impairment charge of $3.1 million, before an income tax benefi t of $1.2 million, to reduce the carrying value of the customer list related to Golf Galaxy to its estimated fair value. No impairment charges were recorded during 2007. In 2008, the Company recorded an impairment charge related to certain underperforming Dick’s Sporting Goods, Golf Galaxy and Chick’s stores totaling $29.1 million, before an income tax benefi t of $11.3 million. The decline in sales performance during 2008 at these underperforming stores coupled with revised future projections, indicated that the carrying value of these stores exceeded their estimated fair values suggested by their estimated future cash fl ows. The Company recorded $15.9 million of merger and integration costs during 2008. These costs were incurred to integrate the operations of Golf Galaxy and Chick’s and included duplicative administrative costs, severance and system conversion costs related to the operational consolidation of Golf Galaxy and Chick’s with Dick’s pre-existing business. Pre-opening expenses decreased by $2.5 million to $16.3 million in 2008 from $18.8 million in 2007. Pre-opening expenses were for the opening of 43 new Dick’s stores and ten Golf Galaxy stores, as well as the relocation of one Dick’s store in 2008 compared to the opening of 46 new Dick’s and 16 Golf Galaxy stores and relocation of one store in 2007. Pre-opening expenses in any year fl uctuate depending on the timing and number of store openings and relocations. Gain on Sale of Asset The Company exercised its early buyout rights on an aircraft lease during the fi rst quarter of fi scal 2008. The Company recognized a $2.4 million pre-tax gain on the subsequent sale of the aircraft. Interest Expense, Net Interest expense, net, decreased by $0.3 million to $11.0 million in 2008 from $11.3 million in 2007 due primarily to costs related to the fi nancing of both the Golf Galaxy and Chick’s acquisitions during 2007. The Company ended fi scal 2008 with no outstanding borrowings under its Credit Agreement. The Company’s average outstanding borrowings on our Credit Agreement decreased to $74.8 million from $94.2 million in 2008 compared to 2007. The average interest rate on the Credit Agreement decreased by 298 basis points compared to last year, primarily refl ecting the decrease in LIBOR rates in the current year compared to last year as well as the reduction in applicable Credit Agreement interest rates charged to the Company that were amended in July 2007. Lower interest expense related to Credit Agreement borrowings was offset by higher interest expense totaling $2.0 million in fi scal 2008 compared to the fi scal 2007 due to overall stock market value declines which impacted the deferred compensation plan investment values. Income Tax The Company’s effective tax rate was 261.2% for the year ended January 31, 2009 as compared to 39.8% for the year ended February 2, 2008. This year’s effective tax rate was primarily impacted by the non-deductible $111.3 goodwill impairment charge and by non-deductible executive separation costs that increased income tax expense by $2.5 million. Fiscal 2007 (52 weeks) Compared to Fiscal 2006 (53 weeks) Net Income Net income increased to $155.0 million in 2007 from $112.6 million in 2006. This represented an increase in diluted earnings per share of $0.31, or 30%, to $1.33 from $1.02. The increase in earnings was attributable to an increase in net sales and gross profi t margin percentage, partially offset by an increase in selling, general and administrative expenses as a percentage of sales. Net Sales Net sales increased 25% to $3,888.4 million in 2007 from $3,114.1 million in 2006. This increase included a comparable store sales increase of 2.4%, or $66.4 million on a 52 week to 52 week basis. The remaining increase results from the net addition of new Dick’s stores in the preceding fi ve quarters which were not included in the comparable store base and the inclusion of Golf Galaxy and Chick’s during fi scal 2007 from their respective acquisition dates, partially offset by the inclusion of a 53rd week of sales in fi scal 2006. The increase in comparable store sales was mostly attributable to sales increases in higher margin categories including outerwear, outerwear accessories, men’s and women’s athletic apparel and licensed merchandise, partially offset by lower sales of exercise equipment and kids athletic footwear driven by the Company’s decision to exit the Heely’s wheeled shoe business in 2007. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 29 Store Count During 2007, we acquired 65 Golf Galaxy stores and 15 Chick’s Sporting Goods stores. In addition, we opened 46 Dick’s stores and 16 Golf Galaxy stores, relocated one Dick’s store, and closed two Golf Galaxy stores, resulting in an ending store count of 434 stores, with approximately 21.1 million square feet, in 40 states. Income from Operations Income from operations increased 36% to $268.8 million in 2007 from $197.7 million in 2006 due primarily to the increase in sales and gross profi t margin, partially offset by an increase in selling, general and administrative costs. Gross profi t increased 29% to $1,158.1 million in 2007 from $896.7 million in 2006. As a percentage of net sales, gross profi t increased to 29.78% in 2007 from 28.79% in 2006. The gross profi t percentage increased primarily due to improved merchandise margins in the majority of the Company’s product categories and lower freight and distribution costs as a percentage of sales (38 basis points) due to cost minimization practices at our distribution centers offset by higher occupancy costs as a percentage of sales (35 basis points) due to the leverage from higher sales in fi scal 2006 due to the 53rd week of sales. Selling, general and administrative expenses increased to $870.4 million in 2007 from $682.6 million in 2006 due primarily to an increase in store count and continued investment in corporate and store infrastructure. The 46 basis point increase over fi scal 2006 was due primarily to higher payroll and fringe related expenses related to bonus payments to employees (40 basis points), an increase in net advertising expense (3 basis points), and fi scal 2006 including a 53rd week of sales to offset fi xed costs included in selling, general and administrative expense. Pre-opening expenses increased by $2.4 million to $18.8 million in 2007 from $16.4 million in 2006. Pre-opening expenses were for the opening of 46 new Dick’s stores and 16 Golf Galaxy stores, as well as the relocation of one Dick’s store in 2007 compared to the opening of 39 new stores and relocation of two stores in 2006. Pre-opening expenses in any year fl uctuate depending on the timing and number of store openings and relocations. Interest Expense, Net Interest expense, net, increased by $1.3 million to $11.3 million in 2007 from $10.0 million in 2006 due primarily to costs related to the fi nancing of both the Golf Galaxy and Chick’s acquisitions during 2007. The Company ended fi scal 2007 with no outstanding borrowings under its Credit Agreement. 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 fi xtures and ongoing infrastructure improvements. 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 provided by fi nancing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Operating Activities January 31, 2009 159,811 $ (144,194) 9,048 (135) 24,530 $ February 2, 2008 262,834 $ (435,296) 86,693 134 (85,635) $ February 3, 2007 139,609 (130,486) 90,255 — 99,378 $ $ Cash fl ow from operations is seasonal in our business. Typically, we use cash fl ow 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 producing signifi cantly positive cash fl ow. 30 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Cash provided by operating activities decreased by $103.0 million in 2008 to $159.8 million, as compared to $262.8 million in fi scal 2007. The $35.1 million net loss in 2008 included non-cash impairment charges of $164.3 million attributable to the impairment of Golf Galaxy’s goodwill and other intangible assets and impairment charges of $29.1 million in connection with certain underperforming stores. The remaining decrease in cash provided by operating activities was due primarily to changes in income taxes payable and accounts payable, partially offset by changes in inventory levels. Changes in Assets and Liabilities The primary factors contributing to the decrease in the change in assets and liabilities were the changes in income taxes payable and accounts payable, partially offset by a decrease in the change in inventory. The decrease in the change in income taxes payable was primarily due to the timing of estimated tax payments, including the larger federal extension tax payment made in fi scal 2008 relating to fi scal 2007 than in previous years. Estimated tax payments made during 2008 were signifi cantly larger than estimated payments made during 2007 due to the impact previous stock option exercises had on reducing 2007 estimated tax payments. The change in accounts payable and inventory is primarily due to a decrease in the procurement of merchandise in the Company’s planned efforts to bring inventory levels closer to the sales trends in the fourth quarter of fi scal 2008. The Company believes that maintaining inventory levels in a manner consistent with sales trends will help preserve capital and stabilize gross margins in fi scal 2009. Investing Activities Cash used in investing activities decreased by $291.1 million, to $144.2 million as fi scal 2007 refl ected payments for the purchase of Golf Galaxy of $222.2 million, net of $4.9 million cash acquired, and Chick’s of $69.2 million. Gross capital expenditures used $191.4 million and sale-leaseback transactions generated proceeds of $44.9 million. Purchases of property and equipment were $191.4 million in fi scal 2008, $172.4 million in fi scal 2007 and $163.0 million in fi scal 2006. Capital expenditures in fi scal 2008 relate primarily to the opening of new stores, information systems and administrative and distribution facilities. The Company generated proceeds from the sale and leaseback of property and equipment totaling $44.9 million, $28.4 million and $32.5 million in fi scal 2008, 2007 and 2006, respectively. During 2008, we opened 43 Dick’s stores, ten Golf Galaxy stores, relocated one Dick’s store and converted one Chick’s Sporting Goods store to a Dick’s Sporting Goods store, compared to opening 46 Dick’s and 16 Golf Galaxy stores and the relocation of one store during 2007. Sale-leaseback transactions covering store fi xtures, 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 2008, 2007 and 2006. Financing Activities Cash provided by fi nancing activities typically consists of proceeds from construction allowances received prior to the completion of construction for stores where the Company is deemed the owner during the construction period, payments on the Company’s debt obligations and capital leases, bank overdraft activity and transactions in the Company’s common stock and the excess tax benefi t from stock-based compensation. As stock option grants are exercised, the Company will continue to receive proceeds and a tax deduction; however, the amounts and the timing cannot be predicted. Cash provided by fi nancing activities decreased by $77.7 million to $9.0 million in fi scal 2008, as compared to $86.7 million in fi scal 2007. The decrease in cash provided by fi nancing activities is primarily attributable to lower proceeds received from the exercise of stock options and lower excess tax benefi ts from stock-based compensation arrangements. On July 27, 2007, the Company entered into a Fourth Amendment to its Credit Agreement that, among other things, extended the maturity of the Credit Agreement from July 2008 to July 2012, increased the potential Aggregate Revolving Credit Commitment, as defi ned in the Credit Agreement, from $350 million to a potential commitment of $450 million and reduced certain applicable interest rates and fees charged under the Credit Agreement. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 31 On November 19, 2008, the Company entered into an Eighth Amendment to its Credit Agreement, the effect of which was to increase the aggregate revolving loan commitment by $90 million to a total of $440 million. To effectuate this increase, Wells Fargo Retail Finance and U.S. Bancorp were added as lenders under the Credit Agreement. The increase was sought to provide additional capacity in light of the economic environment. 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 Credit Agreement, including up to $75 million in the form of letters of credit. 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 specifi ed 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 minus the applicable margin of 0.25% or (ii) the LIBOR rate plus the applicable margin of 0.75% to 1.50%. The applicable margins are based on the level of total borrowings during the prior three months. The Credit Agreement’s term expires July 27, 2012. There were no outstanding borrowings under the Credit Agreement as of January 31, 2009 or February 2, 2008. Total remaining borrowing capacity, after subtracting letters of credit as of January 31, 2009 and February 2, 2008 was $417.5 million and $333.2 million, respectively. The Credit Agreement contains restrictions regarding the Company’s and related subsidiaries’ ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur certain specifi ed types of indebtedness or liens in excess of certain specifi ed amounts, to pay cash dividends or make distributions on the Company’s stock, to make certain investments or loans to other parties, or to engage in certain lending, borrowing or other commercial transactions with subsidiaries, affi liates or employees. Under the Credit Agreement, the Company may be obligated to maintain a fi xed 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 fi xtures. As of January 31, 2009, the Company was in compliance with the terms of the Credit Agreement. Cash fl ows generated by operations and funds available under the Company’s Credit Agreement in 2009 are used to satisfy our capital requirements through fi scal 2009. Normal capital requirements are expected to consist primarily of capital expenditures related to the addition of new stores, remodeling of existing stores, enhanced information technology and improved distribution infrastructure. Currently, the Company plans to open 19 new Dick’s stores, one new Golf Galaxy store and convert 12 Chick’s Sporting Goods stores to Dick’s Sporting Goods stores during fi scal 2009. The Company also plans to relocate one Dick’s Sporting Goods store and three Golf Galaxy stores during fi scal 2009. The Company plans to lease all of its 2009 new stores. This level of store expansion is signifi cantly lower than historical levels and is largely driven by the current economic conditions. Other new business opportunities or store expansion rates substantially in excess of those presently planned may require additional funding. The Company currently anticipates receiving landlord allowances at fi ve of its planned 2009 new stores totaling approximately $20 million. The amount and timing of receipt of these allowances depend, among other things, upon the timing of new store construction and the ability of landlords to satisfy their contractual obligations. The Company currently anticipates the completion of a new corporate headquarters building by January 2010. The building will be leased by the Company, and the project has been fi nanced by the developer except for any project scope changes requested by the Company. The Company does not anticipate any material changes to the project scope and therefore does not anticipate any material cash requirements in 2009 related to the new corporate headquarters building. The Company has created a capital appropriations committee to approve all capital expenditures in excess of certain amounts and to group and prioritize all capital projects between required, discretionary and strategic. 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 $60 million in 2009, including Golf Galaxy and Chick’s capital expenditure requirements. 32 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT The Company believes that cash fl ows generated from operations and funds available under our Credit Agreement will be suffi cient to satisfy our capital requirements through fi scal 2009. Other new business opportunities or store expansion rates substantially in excess of those presently planned may require additional funding. In February 2004, the Company completed a private offering of $172.5 million issue price of senior unsecured convertible notes due 2024 (“Notes”). The Notes accrued 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. After February 18, 2009, the Notes do not pay cash interest, but instead the initial principal amount of the Notes will accrete daily at an original issue discount rate of 2.625% per year, until maturity on February 18, 2024 (the “Maturity Date”), when a holder would receive $1,000 per Note. The holders of the Notes had the right (the “Put Right”) to cause the Company to purchase all or a portion of the Notes held by them in cash at a price of $676.25 per $1,000 of Principal Amount at Maturity, plus $8.030499 per $1,000 of Principal Amount at Maturity cash interest accrued (the “Purchase Price”) on February 18, 2009 (the “Purchase Date”). Holders choosing to exercise the Put Right were required to deliver to the Company a notice of purchase by the close of business on February 17, 2009. As of the Purchase Date, the Company’s payment obligation with respect to those Notes that were submitted for purchase by the Company totaled $172,357,866 (or $254,873,000 of Principal Amount at Maturity), which $174,404,623 (including interest paid on the Notes that were not put for payment) was paid by the Company on February 18, 2009. The remaining amount of Notes outstanding following February 18, 2009 was $143,365 (represented as the accreted principal amount as of February 17, 2009 or $212,000 of Principal Amount at Maturity). The remaining outstanding Notes will mature by their terms on the Maturity Date, unless earlier redeemed, converted or put to the Company. The Company issued a redemption notice in March 2009 and currently anticipates redeeming the remaining Notes on March 31, 2009, at a redemption price equal to the sum of the issue price, accreted original issue discount and accrued cash interest, if any. Holders of the Notes that remain outstanding have the ability at any time to convert the Notes in accordance with and the terms and formulas described, including the period after the Notes have been called for redemption by the Company. Concurrently with the sale of the Notes in 2004, the Company purchased a bond hedge designed to mitigate the potential dilution to stockholders from the conversion of the Notes and sold a warrant exercisable for shares of the Company’s common stock to the counterparty with whom the Company entered into the bond hedge. The net effect of the bond hedge and the warrant was to reduce the potential dilution from the conversion of the Notes if the Company elected a net share settlement upon a conversion event. By their terms the warrant and bond hedge expired on February 18, 2009 and no longer have the ability to be exercised. As such, the mitigation protection against potential dilution that the Company had upon a conversion event is no longer available. Based on the current price of the Company’s common stock and the number of Notes remaining outstanding, the Company believes conversion of the remaining Notes would not have a dilutive effect on the Company’s estimated outstanding number of shares as a result of the Notes. The Company used availability under its Credit Agreement to fund the amounts due as a result of the Put Rights and believes that it will have adequate sources of liquidity to fund any redemption or conversion of the remaining Notes outstanding. Off-Balance Sheet Arrangements The Company’s off-balance sheet contractual obligations and commercial commitments as of January 31, 2009 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. The Company does not believe that any of these arrangements have, or are reasonably likely to have, a material effect on our fi nancial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or resources. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 33 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 31, 2009, 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 (see Note 9) A Capital lease obligations (see Note 9) Other long-term debt (see Note 9) Interest payments Operating lease obligations (see Note 10) B Unrecognized tax benefi ts C Naming rights, marketing, and other commitments (see Note 17) Future minimum guaranteed contractual payments (see Note 17) Total contractual obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years $ 172,500 $ 8,392 972 7,931 3,660,562 2,725 172,500 $ 536 72 834 360,532 2,725 — $ — $ 937 161 1,580 730,877 — 567 182 1,425 690,801 — — 6,352 557 4,092 1,878,352 — 415,245 29,586 41,419 33,318 310,922 87,940 $ 4,356,267 $ 9,456 576,241 $ 22,905 797,879 $ 20,331 35,248 746,624 $ 2,235,523 A Amounts refl ected as payable within the next year based upon the put right exercised by the holders of the notes subsequent to January 31, 2009, which caused the Company to purchase substantially all of the Notes on February 18, 2009 (see Note 19). B Amounts include the direct lease obligations, excluding any taxes, insurance and other related expenses. C Excludes $6,594 of accrued liability for unrecognized tax benefi ts as we can not reasonably estimate the timing of settlement. These payments include interest and penalties. The note references above are to the Notes to Consolidated Financial Statements included in Item 8 herein. The following table summarizes the Company’s other commercial commitments, including both on and off-balance sheet arrangements, in effect at January 31, 2009: (Dollars in thousands) Other commercial commitments: Documentary letters of credit Standby letters of credit Total other commercial commitments Total Less than 1 year $ 229 $ 22,245 22,474 $ $ 229 22,245 22,474 The Company expects to fund these commitments primarily with operating cash fl ows generated in the normal course of business. 34 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Outlook Full Year 2009 Comparisons to Fiscal 2008 • Based on an estimated 116 million diluted shares outstanding, the Company currently anticipates reporting consolidated earnings per diluted share of approximately $0.80–1.00, excluding merger and integration costs. For the full year 2008, the Company reported earnings per diluted share of $1.19, excluding the non-cash impairment charge and merger and integration costs. On a GAAP basis, the Company is anticipating reporting earnings per diluted share of $0.77–0.97 in 2009 compared to a net loss of $0.31 per diluted share in 2008. • • Comparable store sales are expected to decrease approximately 12 to 8% compared to a 4.8% decrease in 2008. The comparable store sales calculation for the full year 2009 includes Dick’s Sporting Goods stores and Golf Galaxy stores. The comparable store sales calculation for the full year 2008 includes Dick’s Sporting Goods stores only. The Company currently expects to open approximately 19 new Dick’s Sporting Goods stores, relocate one Dick’s Sporting Goods store and open one new Golf Galaxy store. The Company also anticipates closing two Chick’s Sporting Goods stores and converting the remaining 12 Chick’s Sporting Goods stores to Dick’s Sporting Goods stores. Newly Issued Accounting Standards In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R signifi cantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS 141R is effective for fi scal years beginning after December 15, 2008. We will adopt SFAS 141R beginning in the fi rst quarter of fi scal 2009. This standard will change our accounting treatment for business combinations on a prospective basis, including the treatment of any income tax adjustments related to past acquisitions. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defi nes fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, SFAS 157 does not require any new fair value measurements. The requirements of SFAS 157 are fi rst effective as of the beginning of our 2008 fi scal year. However, in February 2008 the FASB decided that an entity need not apply this standard to nonrecurring nonfi nancial assets and liabilities until the subsequent year. Accordingly, our adoption of SFAS 157 was limited to fi nancial assets and liabilities. The adoption of SFAS No. 157 for fi nancial assets and fi nancial liabilities did not have a signifi cant impact on the Company’s results of operations, fi nancial condition or liquidity. The adoption of SFAS No. 157 in 2009 for nonfi nancial assets and nonfi nancial liabilities is also not expected to have a signifi cant impact on the Company’s results of operations, fi nancial condition or liquidity. In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for entity-specifi c factors. FSP No. FAS 142-3 is effective as of the beginning of our 2009 fi scal year. We are currently evaluating the potential impact, if any, of the adoption of FSP No. FAS 142-3 on our consolidated fi nancial statements. In May 2008, the FASB issued FSP No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (“FSP APB 14-1”), which will change the accounting treatment for convertible securities which the issuer may settle fully or partially in cash. Under the fi nal FSP, cash settled convertible securities will be separated into their debt and equity components. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount refl ected as a debt liability will be recorded as additional paid-in capital. As a result, the debt will be recorded at a discount refl ecting its below market coupon interest rate. The debt will subsequently be accreted to its par value over its expected life, with the rate of interest that refl ects the market rate at issuance being refl ected on the income statement. This change in methodology will affect the calculations of net income and earnings per share for many issuers of cash settled convertible securities. The FSP is effective for fi nancial statements issued for fi scal years beginning after December 15, 2008, and requires retrospective application. Although FSP APB 14-1 will not impact the Company’s actual past or future cash fl ows, the Company expects the impact to pre-tax non-cash interest expense for fi scal, 2008, 2007 and 2006 to be approximately $8.0 million, $7.4 million and $6.9 million, respectively. The Company does not expect adoption of the FSP to have a material impact on the Company’s results in fi scal 2009. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 35 Critical Accounting Policies and Use of Estimates The Company’s signifi cant 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 fi nancial condition and results of operations, and require the Company’s most diffi cult, 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 fi nancial statements. 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 signifi cant occurrences of obsolescence or slow moving inventory. However, future changes, such as customer merchandise preference, unseasonable weather patterns, economic conditions 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 signifi cantly from actual results. Vendor Allowances Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are determined for each fi scal 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 treated as a reduction of inventory and reduce 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 confi rms earned allowances with vendors to ensure the amounts are recorded in accordance with the terms of the contract. Business Combinations In accounting for business combinations, we allocate the purchase price of an acquired business to its identifi able assets and liabilities based on estimated fair values and the excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The determination of fair value involves the use of estimates and assumptions which we believe provides a reasonable basis for determining fair value. Accordingly, we typically engage outside appraisal fi rms to assist in the fair value determination of inventory, identifi able intangible assets such as trade names, and any other signifi cant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. Goodwill and Intangible Assets Goodwill, indefi nite-lived and other fi nite-lived intangible assets are tested for impairment on an annual basis. Additional impairment assessments may be performed on an interim basis if the Company deems it necessary. Our evaluation for impairment requires accounting judgments and fi nancial estimates in determining the fair value of the reporting unit. If these judgments or estimates change in the future, we may be required to record impairment charges for these assets. The goodwill impairment test is a two-step impairment test. In the fi rst step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a combination of a discounted cash fl ow and a market value approach. The Company’s estimates may differ from actual results due to, among other things, economic conditions, changes to its business models, or changes in operating performance. Signifi cant differences between these estimates and actual results could result in future impairment charges and could materially affect the Company’s future fi nancial results. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair 36 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identifi ed tangible and intangible assets and liabilities. Intangible assets that have been determined to have indefi nite lives are also not subject to amortization and are reviewed at least annually for potential impairment, as mentioned above. The fair value of the Company’s intangible assets are estimated and compared to their carrying value. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefi ts of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. The Company recognizes an impairment charge when the estimated fair value of the intangible asset is less than the carrying value. Impairment of Long-Lived Assets and Closed Store Reserves 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 fl ows. Assets are reviewed at the lowest level for which cash fl ows can be identifi ed, which is the store level. In determining future cash fl ows, signifi cant 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. Based on an analysis of current and future store performance, management periodically evaluates the need to close underperforming stores. Reserves are established when the Company ceases to use the location for the present value of any remaining operating lease obligations, net of estimated sublease income, as prescribed by SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” If the timing or amount of actual sublease income differs from estimated amounts, this could result in an increase or decrease in the related reserves. 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. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123R. The Company uses the Black-Scholes option-pricing model which requires the input of assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the Consolidated Statements of Operations. Uncertain Tax Positions We account for uncertain tax positions in accordance with FIN 48. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the Consolidated Balance Sheets and Statements of Operations. Forward-Looking Statements We caution that any forward-looking statements (as such term is defi ned in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K 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 fi nancial results may differ materially from those expressed or implied in any such forward-looking statements. 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 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 37 things, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase profi t margins and return on invested capital, plans to grow our private label business, projections of our future profi tability, results of operations, capital expenditures or our fi nancial condition or other “forward-looking” information and includes statements about revenues, earnings, spending, margins, costs, 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 fi nancial performance and actual results and could cause actual results for fi scal 2009 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 current economic and fi nancial downturn may cause a continued decline in consumer spending; changes in macroeconomic factors and market conditions, including the housing market and fuel costs, that impact the level of consumer spending for the types of merchandise sold by the Company; changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular; our quarterly operating results and comparable store sales may fl uctuate substantially; potential volatility in our stock price; our ability to access adequate capital and the tightening of availability and higher costs associated with current and new sources of credit resulting from uncertainty in fi nancial markets; the intense competition in the sporting goods industry and actions by our competitors; the availability of retail store sites on terms acceptable to us, the cost of real estate and other items related to our stores, our inability to manage our growth, open new stores on a timely basis and expand successfully in new and existing markets; changes in consumer demand; unauthorized disclosure of sensitive or confi dential information; risks and costs relating to product liability claims and the availability of suffi cient insurance coverage relating to those claims and risks relating to the regulation of the products we sell, such as hunting rifl es and ammunition; our relationships with our suppliers, distributors and manufacturers and their ability to provide us with suffi cient quantities of products and risks associated with relying on foreign sources of production; the loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive Offi cer; currency exchange rate fl uctuations; costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to the sale of consumer products; risks relating to e-commerce; risks relating to problems with or disruption of our current management information systems; any serious disruption at our distribution or return facilities; the seasonality of our business; regional risks because our stores are generally concentrated in the eastern half of the United States; the outcome of litigation or legal actions against us; risks relating to operational and fi nancial restrictions imposed by our senior secured revolving credit agreement; factors associated with our pursuit of strategic acquisitions and risks, costs and uncertainties associated with combining business and/or assimilating acquired companies; our ability to meet our labor needs; we are controlled by our Chief Executive Offi cer and his relatives, whose interests may differ from our stockholders; risks related to the economic impact or the effect on the U.S. retail environment relating to instability and confl ict in the Middle East or elsewhere; various risks associated with our exclusive brand offerings; our current anti-takeover provisions could prevent or delay a change-in-control of the Company; impairment in the carrying value of goodwill or other acquired intangibles; changes in our business strategies and other factors discussed in other reports or fi lings fi led 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 February 13, 2007, Dick’s Sporting Goods, Inc. (“Dick’s”) acquired Golf Galaxy, Inc. (“Golf Galaxy”), which became a wholly-owned subsidiary of Dick’s by means of a merger of Dick’s subsidiary with and into Golf Galaxy. On November 30, 2007, Dick’s acquired all of the outstanding stock of Chick’s Sporting Goods, Inc. (“Chick’s”), which also became a wholly-owned subsidiary of Dick’s. Due to these acquisitions, additional risks and uncertainties arise that could affect our fi nancial performance and actual results and could cause actual results for fi scal 2009 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. Such risks, which are diffi cult to predict with a level of certainty and may be greater than expected, include, among others, risk and costs associated with combining businesses and/or with assimilating acquired companies (including our ability to estimate future integration costs related to the integration of the operations and achieving expected future costs savings from the integration). 38 DICK’S SPORTING GOODS, INC. 2008 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 Credit Agreement. The Company’s Credit Agreement bears interest at rates that are benchmarked either to U.S. short-term fl oating rate interest rates or one-month LIBOR rates, at the Company’s election. There were no borrowings outstanding under the Credit Agreement as of January 31, 2009 and February 2, 2008. 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 Credit Agreement would be approximately $0.8 million based upon fi scal 2008 average borrowings. Credit Risk In February 2004, the Company sold $172.5 million issue price of senior unsecured convertible notes due 2024. In conjunction with the issuance of these Notes, we also entered into a fi ve-year convertible bond hedge and a fi ve-year separate warrant transaction with one of the initial purchasers (“the counterparty”) and/or certain of its affi liates. Subject to the movement in our common stock price, we were exposed to credit risk arising out of net settlement of the convertible bond hedge and separate warrant transaction in our favor. The Company repaid substantially all of the Notes on February 18, 2009. Impact of Infl ation The Company does not believe that operating results have been materially affected by infl ation during the preceding three fi scal years. There can be no assurance, however, that operating results will not be adversely affected by infl ation in the future. Tax Matters Presently, the Company does not believe that there are any tax matters that could materially affect the consolidated fi nancial statements. Seasonality and Quarterly Results The Company’s business is subject to seasonal fl uctuations. Signifi cant portions of the Company’s net sales and profi ts are realized during the fourth quarter of the Company’s fi scal 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 fi scal 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, fi nancial condition and operating results for the entire fi scal year. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 39 Management’s Responsibility for Financial Statements The management of Dick’s Sporting Goods, Inc. is responsible for the preparation and integrity of the consolidated fi nancial statements included in this Annual Report to Shareholders. The consolidated fi nancial 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 fi nancial statements. The consolidated fi nancial statements were audited by our independent registered public accounting fi rm. Their report is included herein on page 42. Report of Management on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over fi nancial reporting. Internal control over fi nancial reporting is a process to provide reasonable assurance regarding the reliability of our fi nancial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over fi nancial reporting includes maintaining records that in reasonable detail accurately and fairly refl ect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our fi nancial 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 fi nancial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over fi nancial reporting is not intended to provide absolute assurance that a misstatement of our fi nancial statements would be prevented or detected. Our management conducted an evaluation of the effectiveness of our internal control over fi nancial 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 fi nancial reporting was effective as of January 31, 2009. Deloitte & Touche LLP, an independent registered public accounting fi rm, has issued an attestation report on the Company’s internal control over fi nancial reporting included on the following page of this document. Edward W. Stack Chairman and Chief Executive Offi cer Timothy E. Kullman Executive Vice President – Finance, Administration, Chief Financial Offi cer and Treasurer 40 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Dick’s Sporting Goods, Inc. Pittsburgh, Pennsylvania We have audited the internal control over fi nancial reporting of Dick’s Sporting Goods, Inc. and subsidiaries (the “Company”) as of January 31, 2009, 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 fi nancial reporting and for its assessment of the effectiveness of internal control over fi nancial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over fi nancial 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 fi nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over fi nancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over fi nancial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal fi nancial offi cers, 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 fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial 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 fi nancial statements. Because of the inherent limitations of internal control over fi nancial 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 fi nancial 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, the Company maintained, in all material respects, effective internal control over fi nancial reporting as of January 31, 2009, 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 fi nancial statements as of and for the fi scal year ended January 31, 2009 of the Company and our report dated March 20, 2009 expressed an unqualifi ed opinion on those fi nancial statements and included an explanatory paragraph regarding the Company’s adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on February 4, 2007. Deloitte & Touche LLP Pittsburgh, Pennsylvania March 20, 2009 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 41 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Dick’s Sporting Goods, Inc. Pittsburgh, Pennsylvania We have audited the accompanying consolidated balance sheets of Dick’s Sporting Goods and subsidiaries (the “Company”) as of January 31, 2009 and February 2, 2008, and the related consolidated statements of operations, stockholders’ equity, comprehensive (loss) income, and cash fl ows for each of the three fi scal years in the period ended January 31, 2009. These fi nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fi nancial 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 fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of Dick’s Sporting Goods and subsidiaries as of January 31, 2009 and February 2, 2008, and the results of their operations and their cash fl ows for each of the three fi scal years in the period ended January 31, 2009, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated fi nancial statements, on February 4, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over fi nancial reporting as of January 31, 2009, 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, 2009 expressed as an unqualifi ed opinion on the Company’s internal control over fi nancial reporting. Deloitte & Touche LLP Pittsburgh, Pennsylvania March 20, 2009 42 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Consolidated Statements of Operations Fiscal Year Ended (Amounts in thousands, except per share data) Net sales Cost of goods sold, including occupancy and distribution costs Gross profi t Selling, general and administrative expenses Impairment of goodwill and other intangible assets Impairment of store assets Merger and integration costs Pre-opening expenses Income from operations Gain on sale of asset Interest expense, net Income before income taxes Provision for income taxes Net (loss) income Earnings (loss) per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted See notes to consolidated fi nancial statements. January 31, 2009 February 2, 2008 February 3, 2007 $ 4,130,128 $ 3,888,422 $ 3,114,162 2,217,463 896,699 682,625 — — — 16,364 197,710 — 10,025 187,685 75,074 112,611 2,946,079 1,184,049 928,170 164,255 29,095 15,877 16,272 30,380 (2,356) 10,963 21,773 56,867 (35,094) $ 2,730,359 1,158,063 870,415 — — — 18,831 268,817 — 11,290 257,527 102,491 155,036 $ $ $ $ (0.31) $ (0.31) $ 1.42 $ 1.33 $ 1.10 1.02 111,662 111,662 109,383 116,504 102,512 110,790 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 43 Consolidated Balance Sheets (Dollars in thousands, except share and 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 Intangible assets, net 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 $0.01 per share, authorized shares 5,000,000; none issued and outstanding Common stock, par value $0.01 per share, authorized shares 200,000,000; issued and outstanding shares 87,087,161 and 84,837,642, at January 31, 2009 and February 2, 2008, respectively Class B common stock, par value, $0.01 per share, authorized shares 40,000,000; issued and outstanding shares 25,251,554 and 26,307,480, at January 31, 2009 and February 2, 2008, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income Total stockholders’ equity Total liabilities and stockholders’ equity See notes to consolidated fi nancial statements. 44 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT January 31, 2009 February 2, 2008 $ 74,837 $ 57,803 5,638 854,771 46,194 10,621 1,049,864 515,982 52,054 46,846 200,594 50,307 62,035 — 887,364 50,274 19,714 1,069,694 531,779 23,744 80,038 304,366 67,709 2,629 30,846 101,184 6,366 3,225 16,423 26,014 $ 1,966,524 $ 2,035,635 $ 299,113 $ 209,866 102,866 3,024 606 615,475 172,500 — 8,758 52,054 222,155 455,467 365,750 228,816 104,549 62,583 250 761,948 172,500 — 8,685 23,744 180,238 385,167 — — 871 848 253 459,076 433,880 1,502 895,582 263 416,423 468,974 2,012 888,520 $ 1,966,524 $ 2,035,635 Consolidated Statements of Comprehensive (Loss) Income Fiscal Year Ended (Dollars in thousands) Net (loss) income Other comprehensive (loss) income: Unrealized (loss) gain on securities available-for-sale, net of tax Foreign currency translation adjustment, net of tax Comprehensive (loss) income See notes to consolidated fi nancial statements. January 31, 2009 February 2, 2008 February 3, 2007 $ (35,094) $ 155,036 $ 112,611 (375) (135) (35,604) $ 78 134 155,248 $ (123) — 112,488 $ DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 45 Consolidated Statements of Changes in Stockholders’ Equity Common Stock Class B Common Stock Shares Dollars Shares Dollars (Dollars in thousands) Balance, January 28, 2006 Exchange of Class B common stock for common stock Sale of common stock under stock plans Exercise of stock options Tax benefi t on convertible note bond hedge Net income Stock-based compensation Total tax benefi t from exercise of stock options Unrealized loss on securities available-for-sale, net of taxes of $66 Balance, February 3, 2007 Cumulative effect of adoption of FIN 48 Adjusted balance, February 3, 2007 Exchange of Class B common stock for common stock Stock options issued for acquisition Sale of common stock under stock plan Exercise of stock options Tax benefi t on convertible note bond hedge Net income Stock-based compensation Total tax benefi t from exercise of stock options Foreign currency translation adjustment, net of taxes of $87 Unrealized gain on securities available-for-sale, net of taxes of $46 Balance, February 2, 2008 Exchange of Class B common stock for common stock Sale of common stock under stock plan Exercise of stock options Restricted stock vested Repurchase of common stock Tax benefi t on convertible note bond hedge Net loss Stock-based compensation Total tax benefi t from exercise of stock options Foreign currency translation adjustment, net of taxes of $83 Unrealized loss on securities available-for-sale, net of taxes of $221 Balance, January 31, 2009 73,090,664 $ 674,210 245,964 5,371,716 — — — — 79,382,554 $ — 79,382,554 $ 480,200 — 204,955 4,769,933 — — — — — — 84,837,642 $ 1,055,926 380,438 686,905 150,000 (23,750) — — — — — — 87,087,161 $ See notes to consolidated fi nancial statements. 730 6 4 54 — — — — 794 — 794 5 — 2 47 — — — — — — 848 10 4 7 2 — — — — — — — 871 27,461,890 $ (674,210) — — — — — — 26,787,680 $ — 26,787,680 $ (480,200) — — — — — — — — — 26,307,480 $ (1,055,926) — — — — — — — — — 25,251,554 $ 274 (6) — — — — — — 268 — 268 (5) — — — — — — — — — 263 (10) — — — — — — — — — 253 46 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Additional Paid-In Capital $ 209,024 — 3,730 22,988 2,686 — 24,303 39,504 — $ 302,235 — $ 302,235 — 9,117 4,505 30,212 2,811 — 29,039 38,504 — — $ 416,423 — 5,170 7,313 (2) (386) 3,017 — 25,600 1,941 — — $ 459,076 Retained Earnings $ 202,842 — — — — 112,611 — — — $ 315,453 (1,515) $ 313,938 — — — — — 155,036 — — — — $ 468,974 — — — — — (35,094) — — — — $ 433,880 Accumulated Other Comprehensive Income $ $ $ $ $ 1,923 — — — — — — — (123) 1,800 — 1,800 — — — — — — — — 134 78 2,012 — — — — — — — — (135) (375) 1,502 Total $ 414,793 — 3,734 23,042 2,686 112,611 24,303 39,504 (123) $ 620,550 (1,515) $ 619,035 — 9,117 4,507 30,259 2,811 155,036 29,039 38,504 134 78 $ 888,520 — 5,174 7,320 (386) 3,017 (35,094) 25,600 1,941 (135) (375) $ 895,582 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 47 Consolidated Statements of Cash Flows Fiscal Year Ended (Dollars in thousands) Cash fl ows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization Impairment of goodwill and other intangible assets Impairment of store assets Deferred income taxes Stock based compensation Excess tax benefi t from stock-based compensation Tax benefi t from exercise of stock options Tax benefi t from convertible bond hedge Gain on sale of asset Changes in assets and liabilities, net of acquired assets and liabilities: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable Accrued expenses Income taxes payable / receivable Deferred construction allowances Deferred revenue and other liabilities Net cash provided by operating activities Cash fl ows used in investing activities: Capital expenditures Purchase of corporate aircraft Proceeds from sale of corporate aircraft Proceeds from sale-leaseback transactions Payment for the purchase of Golf Galaxy, net of $4,859 cash acquired Payment for the purchase of Chick’s Sporting Goods Net cash used in investing activities Cash fl ows from fi nancing activities: Revolving credit (payments) borrowings, net Construction allowance receipts Payments on long-term debt and capital leases Proceeds from sale of common stock under employee stock purchase plan Proceeds from exercise of stock options Excess tax benefi t from stock-based compensation Repurchase of common stock (Decrease) increase in bank overdraft Net cash provided by fi nancing activities Effect of exchange rate changes on cash and cash equivalents 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 fl ow 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 Stock options issued for acquisition (net of $2,024 tax benefi t upon exercise) See notes to consolidated fi nancial statements. 48 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT January 31, 2009 February 2, 2008 February 3, 2007 See Note 2 $ (35,094) $ 155,036 $ 112,611 90,732 164,255 29,095 (45,906) 25,600 (1,786) 369 3,017 (2,356) 3,090 29,581 (10,554) (56,709) (7,575) (63,089) 19,452 17,689 159,811 (191,423) (25,107) 27,463 44,873 — — (144,194) — 11,874 (6,793) 5,174 7,320 1,786 (386) (9,927) 9,048 (135) 24,530 50,307 74,837 $ 28,310 $ (18,986) $ 8,021 $ 167,721 $ 7,093 $ 75,052 — — (32,696) 29,039 (34,918) 5,396 2,811 — (10,982) (127,027) (4,267) 12,337 26,222 114,706 22,256 29,869 262,834 (172,366) — — 28,440 (222,170) (69,200) (435,296) — 13,282 (1,058) 4,507 30,259 34,918 — 4,785 86,693 134 (85,635) 135,942 50,307 $ 10,657 $ (6,928) $ 12,314 $ 17,832 $ 7,307 $ 54,929 — — (1,110) 24,303 (36,932) 2,572 2,686 — (2,142) (105,766) (29,039) 24,444 42,479 4,750 19,264 26,560 139,609 (162,995) — — 32,509 — — (130,486) — 17,902 (184) 3,734 23,042 36,932 — 8,829 90,255 — 99,378 36,564 135,942 5,749 11,475 9,286 68,483 — $ $ $ $ $ $ Notes to Consolidated Financial Statements for the Fiscal Years Ended 2008, 2007 and 2006 1. Basis of Presentation and Summary of Signifi cant 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 487 stores, the majority of which are located throughout the eastern half of the United States. On February 13, 2007, the Company acquired Golf Galaxy, Inc. (“Golf Galaxy”) by means of merger of our wholly-owned subsidiary with and into Golf Galaxy. On November 30, 2007, the Company acquired all of the outstanding stock of Chick’s Sporting Goods, Inc. (“Chick’s”). The Consolidated Statements of Operations include the operations of Golf Galaxy and Chick’s from their dates of acquisition forward for fi scal 2007. Fiscal Year – The Company’s fi scal year ends on the Saturday closest to the end of January. Fiscal years 2008, 2007 and 2006 ended on January 31, 2009, February 2, 2008 and February 3, 2007, respectively. All fi scal years presented include 52 weeks of operations except fi scal 2006, which includes 53 weeks. Principles of Consolidation – The consolidated fi nancial 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 fi nancial 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 fi nancial 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, $1.6 million and $0.8 million for fi scal 2008, 2007 and 2006, 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 31, 2009 and February 2, 2008 include $74.8 million and $84.7 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 and landlords. The allowance for doubtful accounts totaled $3.3 million and $2.9 million, as of January 31, 2009 and February 2, 2008, 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 $78.0 million and $72.8 million at January 31, 2009 and February 2, 2008, respectively. Property and Equipment – Property and equipment are recorded at cost and include capitalized leases. For fi nancial reporting purposes, depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Buildings Leasehold improvements Furniture, fi xtures and equipment Vehicles 40 years 10-25 years 3-7 years 5 years DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 49 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. Depreciation expense was $90.9 million, $75.2 million and $54.0 million for fi scal 2008, 2007 and 2006, respectively. Renewals and betterments are capitalized and repairs and maintenance are expensed as incurred. Impairment of Long-Lived Assets and Costs Associated with Exit Activities – The Company evaluates its long-lived assets to assess whether the carrying values have been impaired whenever events and circumstances indicate that the carrying value of these assets may not be recoverable based on estimated undiscounted future cash fl ows, using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment loss is recognized when the estimated undiscounted cash fl ows expected to result from the use of the asset plus eventual net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value as determined based on quoted market prices or through the use of other valuation techniques. Based upon the Company’s review of the current and projected performance of certain underperforming Dick’s Sporting Goods, Golf Galaxy and Chick’s Sporting Goods stores, the Company determined that the carrying value of these stores exceeds their estimated fair values, resulting in a non-cash impairment charge of $29.1 million in fi scal 2008. No store asset impairment charges were recorded during the years ended February 2, 2008 and February 3, 2007. A liability is recognized for costs associated with location closings, primarily future lease costs (net of estimated sublease income), and is charged to income when the Company ceases to use the location. Goodwill and Intangible Assets – Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired entities. In accordance with SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets,” the Company is required to assess the carrying value of goodwill and other intangible assets annually or whenever circumstances indicate that a decline in value may have occurred, utilizing a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete fi nancial information is prepared and regularly reviewed by segment management. Finite-lived intangible assets are amortized over their estimated useful economic lives and are reviewed for impairment when factors indicate that an impairment may have occurred. The goodwill impairment test is a two-step impairment test. In the fi rst step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a combination of a discounted cash fl ow and a market value approach. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identifi ed tangible and intangible assets and liabilities. The fair value of the Dick’s Sporting Goods reporting unit exceeded the carrying value of the assigned net assets, therefore no further testing was required and an impairment charge was not required. Based on macroeconomic factors impacting the specialty golf business and recent and forecasted specialty golf operating performance, the Company determined that indicators of potential impairment were present for its Golf Galaxy reporting unit during the fi scal quarter ended January 31, 2009. As a result, the Company assessed the carrying value of goodwill and intangible assets for impairment acquired in its purchase of Golf Galaxy. Upon completion of the impairment test, the Company determined that the goodwill of its Golf Galaxy reporting unit was fully impaired and recorded a non-cash impairment charge of $111.3 million. No impairment charges were recorded for goodwill during the years ended February 2, 2008 and February 3, 2007. 50 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Intangible assets that have been determined to have indefi nite lives are also not subject to amortization and are reviewed at least annually for potential impairment, as mentioned above. The fair value of the Company’s intangible assets are estimated and compared to their carrying value. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefi ts of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. The Company recognizes an impairment charge when the estimated fair value of the intangible asset is less than the carrying value. As a result of the impairment analysis performed in connection with the Company’s intangible assets with indefi nite lives, the Company determined that the carrying value of the trade name related to its Golf Galaxy reporting unit exceeded its estimated fair value. Accordingly, during 2008, the Company recorded a non-cash impairment charge of $49.9 million ($30.7 million after-tax) to reduce the value of the trade name to its estimated fair value. No impairment charges were recorded for indefi nite-lived intangible assets during the years ended February 2, 2008 and February 3, 2007. The Company’s intangible assets that are subject to amortization primarily include customer lists and favorable leases. As a result of the impairment analysis performed in connection with the Company’s intangible assets, the Company determined that the carrying value of the customer list related to its Golf Galaxy reporting unit exceeded its estimated fair value. As a result, the Company recorded a non-cash impairment charge of $3.1 million ($1.9 million after-tax) in fi scal 2008 to reduce the value of the customer list to its estimated fair value. No impairment charges were recorded for fi nite-lived intangible assets during the years ended February 2, 2008 and February 3, 2007. Investments – Investments consist of shares of unregistered common stock and is 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. 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 fi scal year (see Note 15). 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 capitalized prior to the adoption of FSP 13-1, amounts deferred relating to the investment in GSI (see Note 15) 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 $105.6 million at January 31, 2009 and $102.8 million at February 2, 2008. Deferred revenue related to gift cards at January 31, 2009 and February 2, 2008 was $91.6 million and $96.6 million, respectively. Deferred rent, including deferred pre-opening rent, at January 31, 2009 and February 2, 2008 was $42.9 million and $34.9 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. Stock Split – On September 12, 2007, the Company’s Board of Directors declared a two-for-one stock split, in the form of a stock dividend, of the Company’s common shares for stockholders of record on September 28, 2007. The split became effective on October 19, 2007 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. Par value of the stock remains at $0.01 per share. Accordingly, an immaterial reclassifi cation was made from additional paid-in capital to common stock for the cumulative number of shares issued as of January 31, 2009. The capital accounts, share data, and earnings per share data in this report give effect to the stock split, applied retroactively, to all periods presented. The applicable share and per-share data for all periods included herein have been restated to give effect to this stock split. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 51 Merger and Integration Costs – The Company recorded $15.9 million in merger and integration costs in the accompanying consolidated fi nancial statements for fi scal 2008. These integration costs primarily include duplicative administrative costs, severance and system conversion costs related to the operational consolidation of Golf Galaxy and Chick’s Sporting Goods with the Company’s pre-existing business. In addition, the Company recorded $2.5 million in the provision for income taxes refl ecting the tax impact of non-deductible executive separation costs resulting from the departure of certain executive offi cers of Golf Galaxy during July 2008. 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. Stock-Based Compensation – The Company has the availability to grant stock options to purchase common stock under Dick’s Sporting Goods, Inc. 2002 Stock Option Plan and the Golf Galaxy, Inc. 2004 Incentive Plan (the “Plans”). The Company also has an employee stock purchase plan (“ESPP”) which provides for eligible employees to purchase shares of the Company’s common stock (see Note 11). 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 fi nancial statement purposes and for income tax reporting purposes. The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”), on February 4, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefi ts. At the adoption date of February 4, 2007, the Company recorded a decrease to retained earnings of $1.5 million. Also at the date of adoption, the Company had $12.0 million of unrecognized tax benefi ts, of which approximately $9.1 million would affect our effective tax rate if recognized. Revenue Recognition – Revenue from retail sales is recognized at the point of sale, net of sales tax. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. Revenue from gift cards and returned merchandise credits (collectively the “cards”) are deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized in the Consolidated Statements of Operations in selling, general and administrative expenses at the point at which redemption becomes remote. The Company performs an evaluation of the aging of the unredeemed cards, based on the elapsed time from the date of original issuance, to determine when redemption is remote. Cost of Goods Sold – Cost of goods sold includes the cost of merchandise, inventory shrinkage, freight, distribution and store occupancy costs. Occupancy costs include rent, common area maintenance charges, real estate and other asset based taxes, general maintenance, utilities, depreciation, fi xture lease expenses and certain insurance expenses. Selling, General and Administrative Expense – Selling, general and administrative expenses include store and fi eld support payroll and fringe benefi ts, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company’s corporate headquarters. Advertising Costs – Production costs of advertising and the costs to run the advertisements are expensed the fi rst time the advertisement takes place. Advertising expense, net of cooperative advertising was $154.3 million, $152.4 million and $122.9 million for fi scal 2008, 2007 and 2006, respectively. 52 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Vendor Allowances – Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are determined for each fi scal 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 fi scal year, the Company confi rms earned allowances with vendors to determine that the amounts are recorded in accordance with the terms of the contract. Segment Information – The Company is a specialty retailer that offers a broad range of products in its specialty retail stores primarily 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 Company’s operating segments are aggregated within 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 2008 2007 2006 $ $ 2,217 $ 1,254 659 4,130 $ 2,163 $ 1,077 648 3,888 $ 1,768 811 535 3,114 Newly Issued Accounting Pronouncements – In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R signifi cantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS 141R is effective for fi scal years beginning after December 15, 2008. We will adopt SFAS 141R beginning in the fi rst quarter of fi scal 2009. This standard will change our accounting treatment for business combinations on a prospective basis, including the treatment of any income tax adjustments related to past acquisitions. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defi nes fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, SFAS 157 does not require any new fair value measurements. The requirements of SFAS 157 are fi rst effective as of the beginning of our 2008 fi scal year. However, in February 2008 the FASB decided that an entity need not apply this standard to nonrecurring nonfi nancial assets and liabilities until the subsequent year. Accordingly, our adoption of SFAS 157 was limited to fi nancial assets and liabilities. The adoption of SFAS No. 157 for fi nancial assets and fi nancial liabilities did not have a signifi cant impact on the Company’s results of operations, fi nancial condition or liquidity. The adoption of SFAS No. 157 in 2009 for nonfi nancial assets and nonfi nancial liabilities is also not expected to have a signifi cant impact on the Company’s results of operations, fi nancial condition or liquidity. In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for entity-specifi c factors. FSP No. FAS 142-3 is effective as of the beginning of our 2009 fi scal year. We are currently evaluating the potential impact, if any, of the adoption of FSP No. FAS 142-3 on our consolidated fi nancial statements. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 53 In May 2008, the FASB issued FSP No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (“FSP APB 14-1”), which will change the accounting treatment for convertible securities which the issuer may settle fully or partially in cash. Under the fi nal FSP, cash settled convertible securities will be separated into their debt and equity components. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount refl ected as a debt liability will be recorded as additional paid-in capital. As a result, the debt will be recorded at a discount refl ecting its below market coupon interest rate. The debt will subsequently be accreted to its par value over its expected life, with the rate of interest that refl ects the market rate at issuance being refl ected on the income statement. This change in methodology will affect the calculations of net income and earnings per share for many issuers of cash settled convertible securities. The FSP is effective for fi nancial statements issued for fi scal years beginning after December 15, 2008, and requires retrospective application. Although FSP APB 14-1 will not impact the Company’s actual past or future cash fl ows, the Company expects the impact to pre-tax non-cash interest expense for fi scal, 2008, 2007 and 2006 to be approximately $8.0 million, $7.4 million and $6.9 million, respectively. The Company does not expect adoption of the FSP to have a material impact on the Company’s results in fi scal 2009 since the Company repaid substantially all of its convertible notes on February 18, 2009 (See Note 19). 2. Correction to Previously Reported Amounts Certain corrections have been made for the reporting of the Company’s cash fl ows related to the receipt of construction allowances. Our Consolidated Statement of Cash Flows for the fi scal year ended February 3, 2007 has been revised to correct an immaterial error in our accounting for the receipt of construction allowances, which should have been presented as fi nancing activities when such construction allowances related to stores where the Company is considered the owner at the time of receipt, rather than as operating or investing activities, as previously reported. The effect of this correction for the year ended February 3, 2007 was to decrease cash provided by operating activities by $3.0 million, increase cash used in investing activities by $14.9 million and increase cash provided by fi nancing activities by $17.9 million. The correction did not affect the previously reported results of operations of the Company nor did it change the amount of total cash fl ows for the Company. Fiscal 2006 (In thousands) Net cash provided by operating activities Net cash used in investing activities Net cash provided by fi nancing activities As previously reported Correction As corrected $ 142,568 $ (115,543) $ 72,353 $ (2,959) $ (14,943) 17,902 $ 139,609 (130,486) 90,255 Construction Allowances – The Company conducts a substantial portion of its business in leased properties. The Company may receive reimbursement from a landlord for some of the cost of the structure, subject to satisfactory fulfi llment of applicable lease provisions. These reimbursements may be referred to as tenant allowances, construction allowances, or landlord reimbursements (“construction allowances”). The Company’s accounting for construction allowances differs if a store lease is accounted for under the provisions of EITF 97-10, “The Effect of Lessee Involvement in Asset Construction.” Some of the Company’s leases have a cap on the construction allowance which places the Company at risk for cost overruns and causes the Company to be deemed the owner during the construction period. In cases where the Company is deemed to be the owner during the construction period, a sale and leaseback of the asset occurs when construction of the asset is complete and the lease term begins, if relevant sale-leaseback accounting criteria are met. Any gain or loss from the transaction is deferred and amortized as rent expense on a straight-line basis over the base term of the lease. The Company reports the amount of cash received for the construction allowance as “Construction Allowance Receipts” within the fi nancing activities section of its Consolidated Statements of Cash Flows when such allowances are received prior to completion of the sale-leaseback transaction. The Company reports the amount of cash received from construction allowances as “Proceeds from sale leaseback transactions” within the investing activities section of its Consolidated Statements of Cash Flows when such amounts are received after the sale-leaseback accounting criteria have been achieved. 54 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT In instances where the Company is not deemed to be the owner during the construction period, reimbursement from a landlord for tenant improvements is classifi ed as an incentive and included in deferred revenue and other liabilities on the consolidated balance sheets. The deferred rent credit is amortized as rent expense on a straight-line basis over the base term of the lease. Landlord reimbursements from these transactions are included in cash fl ows from operating activities as a change in “Deferred construction allowances.” 3. Acquisitions On February 13, 2007, the Company acquired Golf Galaxy, Inc. (“Golf Galaxy”), which became a wholly–owned subsidiary of Dick’s by means of a merger of Dick’s subsidiary with and into Golf Galaxy. The Company paid $227.0 million which was fi nanced using approximately $79 million of cash and cash equivalents and the balance from borrowings under our Second Amended and Restated Credit Agreement, as amended to date (the “Credit Agreement”). The acquisition was accounted for using the purchase method in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” with Dick’s as the accounting acquirer. Accordingly, the purchase price was allocated to tangible and identifi able intangible assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. Based upon the purchase price allocation, the Company recorded $111.3 million of goodwill as a result of the acquisition. None of the goodwill is deductible for tax purposes. The Company received an independent appraisal for certain assets to determine their fair value. The purchase price allocation is fi nal. The following table summarizes the fair values of the assets acquired and liabilities assumed: (In thousands) Inventory Other current assets (including cash) Property and equipment, net Other long term assets, excluding goodwill and other intangible assets Trade name Customer lists and other intangibles Goodwill Accounts payable Accrued expenses Other current liabilities Other long-term liabilities Fair value of net assets acquired, including intangibles $ $ 70,711 19,685 47,875 246 65,749 5,659 111,312 (33,890) (13,999) (9,683) (29,329) 234,336 The following unaudited proforma summary presents information as if Golf Galaxy had been acquired at the beginning of the period presented. The proforma amounts include certain reclassifi cations to Golf Galaxy’s amounts to conform them to the Company’s reporting calendar and an increase in pre-tax interest expense of $11.8 million for the year ended February 3, 2007, to refl ect the increase in borrowings under the Credit Agreement to fi nance the acquisition as if it had occurred at the beginning of the period. In addition, the proforma net income excludes $1.4 million of pre-tax merger related expenses. The proforma amounts do not refl ect any benefi ts from economies which might be achieved from combining the operations. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 55 The proforma information does not necessarily refl ect the actual results that would have occurred had the companies been combined during the period 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 February 3, 2007 $ 3,388,837 111,958 $ 1.09 $ 1.01 $ On November 30, 2007, the Company acquired all of the outstanding stock of Chick’s Sporting Goods, Inc. for approximately $69.2 million. Chick’s shareholders did not subsequently meet specifi ed performance criteria that would have enabled them to earn up to $5 million in additional contingent consideration. The acquisition was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. Accordingly, the purchase price was allocated to tangible and identifi able intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. Goodwill and identifi able intangible assets recorded in the acquisition will be tested for impairment as required by SFAS No. 142. Based upon the purchase price allocation, the Company recorded $43.3 million of goodwill as a result of the acquisition. None of the goodwill is deductible for tax purposes. The Company received an independent appraisal for certain assets to determine their fair value. The purchase price allocation is fi nal. 4. Goodwill and Other Intangible Assets As of January 31, 2009 and February 2, 2008, the Company had goodwill of $200.6 million and $304.4 million, respectively. The changes in carrying value of goodwill during the years ended January 31, 2009 is as follows: (In thousands) Balance as of February 3, 2007 Acquisitions of Golf Galaxy and Chick’s Purchase price adjustments Balance as of February 2, 2008 Purchase price adjustments Impairment Balance as of January 31, 2009 $ $ 156,628 147,041 697 304,366 7,540 (111,312) 200,594 Based on macroeconomic factors impacting the specialty golf business and recent and forecasted specialty golf operating performance, the Company determined that indicators of potential impairment were present during the fi scal quarter ended January 31, 2009. As a result, the Company assessed the carrying value of goodwill and intangible assets with indefi nite lives for impairment acquired in its purchase of Golf Galaxy. Upon completion of the impairment test, the Company determined that the goodwill of its Golf Galaxy reporting unit was fully impaired and recorded a non-cash impairment charge of $111.3 million. No impairment charges were recorded for goodwill during the years ended February 2, 2008 and February 3, 2007. The Company acquired intangible assets totaling approximately $21.4 million during fi scal 2008, consisting primarily of the acquisition of a trademark covering certain golf equipment, golf balls, golf accessories and other sporting goods and equipment. The trademarks are indefi nite-lived intangible assets, which are not being amortized. The Company acquired intangible assets totaling approximately $71.4 million during fi scal 2007, consisting primarily of a trade name and customer list resulting from the Company’s Golf Galaxy acquisition. The trade name is an indefi nite-lived intangible asset, which is not being amortized. The customer list will be amortized over fi ve years. 56 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT As a result of the impairment analysis performed in connection with the Company’s intangible assets, the Company determined that the carrying value of the trade name and customer list related to its Golf Galaxy reporting unit exceeded its estimated fair value. Accordingly, during 2008, the Company recorded a non-cash charge of $53.0 million ($32.6 million after-tax) to reduce the value of these intangible assets to their estimated fair value. No impairment charges were recorded during the years ended February 2, 2008 and February 3, 2007. As of January 31, 2009 and February 2, 2008, the Company had indefi nite-lived and fi nite-lived intangible assets of $38.0 million and $69.9 million, and $8.8 million and $10.1 million, respectively. The components of intangible assets were as follows: (In thousands) Trademarks Trade name (indefi nite-lived) Trade name (fi nite-lived) Customer list Favorable leases and other Total intangible assets 2008 2007 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization $ $ 22,070 $ 15,900 800 1,200 8,802 48,772 $ — $ — (658) — (1,268) (1,926) $ 4,219 $ 65,749 — 5,153 5,849 80,970 $ — — — (429) (503) (932) Amortization expense for the Company’s fi nite-lived intangible assets is included in selling, general and administrative expenses, and was $1.7 million, $0.7 million and $0.1 million for fi scal 2008, 2007 and 2006, respectively. The estimated weighted average economic useful life is eleven years. The annual amortization expense of the fi nite-lived intangible assets recorded as of January 31, 2009 is expected to be as follows: Fiscal Years (In thousands) 2009 2010 2011 2012 2013 Thereafter Total Estimated Amortization Expense $ $ 994 1,026 1,146 1,202 1,086 3,422 8,876 5. Integration Activities and Facility Closures In connection with the Golf Galaxy and Chick’s acquisitions, we have incurred costs associated with the termination of employees, facility closures and other costs directly related to the acquisition and integration initiatives implemented. For those costs recognized in conjunction with the cost from the Company’s acquisitions, we have accounted for these costs in accordance with EITF 95-3, “Recognition of Liabilities Assumed in Connection with a Purchase Business Combination” and therefore these costs are recognized as liabilities in connection with the acquisition and charged to goodwill. Costs incurred in connection with all other business integration activities have been recognized in merger and integration costs in the Consolidated Statements of Operations. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 57 The following table summarizes the activity in fi scal 2008, 2007 and 2006: Associate Severance, Retention and Relocation Liabilities Established for the Closing of Acquired Locations Inventory Reserve for Discontinued Merchandise (In thousands) Balance at January 28, 2006 $ 120 $ Cash paid (net of sublease receipts) Adjustments to the estimate Clearance of discontinued Galyan’s merchandise Balance at February 3, 2007 Cash paid (net of sublease receipts) Adjustments to the estimate Store closing reserves established in conjuction with the Golf Galaxy acquisition Balance at February 2, 2008 Liabilities and reserves established in connection with Golf Galaxy acquisition and integration Liabilities and reserves established in connection with Chick’s acquisition and integration Cash paid (net of sublease receipts) Estimate adjustments and interest accretion Clearance of discontinued Chick’s merchandise Balance at January 31, 2009 $ $ $ Total (449) (205) — — (654) 121 — (120) — — — $ — — (569) $ (85) — — (654) $ 121 — — $ — — — — $ — — — — $ 2,059 1,526 $ — — $ 2,059 1,526 5,491 615 — 6,106 970 (2,906) — — 3,555 $ 15,143 (307) 3,122 — 20,099 $ 3,012 — — (934) 2,078 $ 19,125 (3,213) 3,122 (934) 25,732 For the year ended January 31, 2009, $18.2 million of the $25.2 million liabilities and reserves established in connection with the Golf Galaxy and Chick’s acquisition and integration impacted previously recorded goodwill amounts. As of January 31, 2009 and February 2, 2008, the Company had a sublease receivable of $0.3 million and $3.3 million as our projected sublease cash fl ows exceed our anticipated rent payments for one of the closed former Galyan’s stores for each of the relative periods. 6. Store and Corporate Offi ce Closings At a store’s closing or relocation date, estimated lease termination and other costs to close or relocate a store are recorded in cost of goods sold, including occupancy and distribution costs on the Consolidated Statements of Operations. The Company also records store closing reserves for acquired locations it plans to close as described in Note 5. The calculation of accrued lease termination and other costs primarily includes future minimum lease payments, maintenance costs and taxes from the date of closure or relocation to the end of the remaining lease term, net of contractual or estimated sublease income. The liability is discounted using a credit-adjusted risk-free rate of interest. The assumptions used in the calculation of the accrued lease termination and other costs are evaluated each quarter. 58 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT The following table summarizes the activity of the Company’s store closing reserves: (In thousands) Accrued store closing and relocation reserves, beginning of period Expense charged to earnings Closing reserves related to Golf Galaxy (see Note 5) Closing reserves related to Chick’s (see Note 5) Cash payments Interest accretion and other changes in assumptions Accrued store closing and relocation reserves, end of period Less: current portion of accrued store closing and relocation reserves Long-term portion of accrued store closing and relocation reserves 2008 2007 $ $ 29,840 $ — 615 15,143 (4,125) 3,148 44,621 (9,001) 35,620 $ 26,096 1,530 2,059 — (7,291) 7,446 29,840 (9,404) 20,436 The current portion of accrued store closing and relocation reserves is recorded in accrued expenses and the long-term portion is recorded in long-term deferred revenue and other liabilities in the Consolidated Balance Sheets. 7. Property and Equipment Property and equipment are recorded at cost and consist of the following as of the end of the fi scal periods: (In thousands) Buildings and land Leasehold improvements Furniture, fi xtures and equipment Less: accumulated depreciation and amortization Net property and equipment 2008 2007 $ 34,003 $ 478,445 479,827 992,275 (476,293) 515,982 $ $ 34,003 452,723 425,522 912,248 (380,469) 531,779 The amounts above include construction in progress of $30.1 million and $66.9 million for fi scal 2008 and 2007, respectively. 8. Accrued Expenses Accrued expenses consist of the following as of the end of the fi scal periods: (In thousands) Accrued payroll, withholdings and benefi ts Accrued property and equipment Other accrued expenses Total accrued expenses 2008 2007 $ $ 71,848 $ 14,371 123,647 209,866 $ 74,495 33,200 121,121 228,816 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 59 9. Debt The Company’s outstanding debt at January 31, 2009 and February 2, 2008 was as follows: (In thousands) Senior convertible notes Revolving line of credit Capital leases Other debt Total debt Less: current portion Total long-term debt 2008 2007 $ $ 172,500 $ — 8,392 972 181,864 (606) 181,258 $ 172,500 — 7,721 1,214 181,435 (250) 181,185 Senior Convertible Notes – In February 2004, the Company completed a private offering of $172.5 million issue price of senior unsecured convertible notes due 2024 (“notes”). The 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. After February 18, 2009, the notes do not pay cash interest, but the initial principal amount of the notes will accrete daily at an original issue discount rate of 2.625% per year, until maturity on February 18, 2024, when a holder will receive $1,000 per note. Subject to the Company’s obligations to pay cash for a certain portion of the notes and its right, if it elects, to pay all amounts due under the notes in cash as more fully described below, the notes are convertible into the Company’s common stock (upon the occurrence of certain events) at the election of the holder in each of the fi rst 20 fi scal quarters following their issuance when the price per share of the Company’s common stock (calculated for a certain period of time) exceeds $23.59 per share. This conversion threshold trigger price permitting the notes to be converted by the holders has been met and the notes are eligible and will remain convertible for so long as they remain outstanding. Upon conversion of a note, the Company is obligated to pay cash for each $1,000 of face amount of a note equal to the lesser of: (i) the accreted principal amount (the sum of the initial issue price of $676.25 per $1,000 face amount and the accrued original issue discount as of the conversion date (no original issue discount occurs until 2009)), and (ii) the product of (a) the number of shares of the Company’s common stock into which the note otherwise would have been converted if no cash payment were made by the Company (i.e. 34.4044 shares per $1,000 face amount), multiplied by (b) the average of the closing per share sale price on the 15 consecutive trading days commencing on the fourth trading day after the conversion date. In addition, the Company at its election has the ability to pay cash or deliver shares for any “balance shares” due under the notes. The number of “balance shares” is equal to the number of shares of common stock into which a note otherwise would be converted if no cash payment were made by the Company, less the accreted principal amount (the sum of the initial issue price of $676.25 and the accrued original issue discount as of the conversion date of), divided by the average sale price (the average of the closing per share sale price on the fi fteen consecutive trading days commencing on the fourth trading day after the conversion date) of a share of common stock. All such calculations are controlled by and governed by the promissory note under which the notes are issued and the indenture, as amended, governing the notes. If the number of balance shares is a positive number, the Company has the option to deliver cash or a combination of cash and shares of common stock for the balance shares by electing for each full balance share for which the Company has chosen to deliver cash to pay cash in an amount equal to the average sale price of a share of common stock. The 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 issue discount and any accrued cash interest, if any. Concurrently, with the sale of the notes, the Company purchased a bond hedge designed to mitigate the potential dilution to stockholders from the conversion of the notes. Under the fi ve year term 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 $19.66 per share. The aggregate number of shares that the Company could be obligated to issue upon conversion of the notes is 8,776,048 shares of common stock. The cost of the purchased bond hedge was partially offset by the sale of warrants to acquire up to 17,551,896 shares of the common stock to the counterparty with whom the Company entered into the bond hedge. The warrants are exercisable by the counterparty in year fi ve at a price of $28.08 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 60 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT extent to which the then market price exceeds $28.08 per share. The net effect of the bond hedge and the warrants is to reduce the potential dilution from the conversion of the notes if the Company elects a net share settlement. There would be dilution impact from the conversion of the notes to the extent that the then market price per share of the common stock exceeds $28.08 per share at the time of conversion. As described in Note 19, the Company repaid substantially all of the notes on February 18, 2009. By their terms, the warrant and bond hedge concurrently expired and no longer had the ability to be exercised. Based on the current price of the Company’s common stock and the number of Notes remaining outstanding, the Company believes conversion of the remaining notes would not have a dilutive effect on the Company’s estimated outstanding number of shares as a result of the notes. Revolving Credit Agreement – On July 27, 2007, the Company entered into a Fourth Amendment to its Second Amended and Restated Credit Agreement (the “Credit Agreement”) that, among other things, extended the maturity of the Credit Agreement from July 2008 to July 2012, increased the potential Aggregate Revolving Credit Commitment, as defi ned in the Credit Agreement, from $350 million to a potential commitment of $450 million and reduced certain applicable interest rates and fees charged under the Credit Agreement, including up to $75 million in the form of letters of credit. The Credit Agreement’s term was extended to July 27, 2012. On November 19, 2008, the Company entered into an Eighth Amendment to its Credit Agreement, the effect of which was to increase the aggregate revolving loan commitment by $90 million to a total of $440 million. As of January 31, 2009 and February 2, 2008, the Company’s total remaining borrowing capacity, after subtracting letters of credit, under the Credit Agreement was $417.5 million and $333.2 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 specifi ed 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 minus the applicable margin of 0.25% or (b) the London Interbank Offering Rate (“LIBOR”), plus the applicable margin of 0.75% to 1.50%. The applicable margins are based on the level of total borrowings during the prior three months. Borrowings are collateralized by the assets of the Company, excluding store and distribution center equipment and fi xtures that have a net carrying value of $133.8 million as of January 31, 2009. At January 31, 2009 and February 2, 2008, the prime rate was 3.25% and 6.00%, respectively, and LIBOR was 4.19% and 3.14%, respectively. There were no outstanding borrowings under the Credit Agreement at January 31, 2009 and February 2, 2008. The Credit Agreement contains restrictive covenants including the maintenance of a certain fi xed charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances and prohibits payment of any dividends. As of January 31, 2009, the Company was in compliance with the terms of the Credit Agreement. 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 31, 2009 and February 2, 2008, the Company had outstanding letters of credit totaling $22.5 million and $16.8 million, respectively. The following table provides information about the Credit Agreement borrowings as of and for the periods: (Dollars in thousands) Balance, fi scal period end Average interest rate Maximum outstanding during the year Average outstanding during the year 2008 2007 $ $ $ — $ 3.51% 244,598 $ 74,845 $ — 6.50% 210,208 94,185 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 61 Other Debt – Other debt, exclusive of capital lease obligations, consists of the following as of the end of the fi scal periods: (Dollars in thousands) Note payable, due in monthly installments of approximately $4, including interest at 4%, through 2019 Note payable, due in monthly installments of approximately $5, including interest at 11%, through 2018 Other Total other debt Less current portion: Total Other Long-Term Debt 2008 2007 $ 614 $ 662 358 — 972 (72) 900 $ 378 174 1,214 (117) 1,097 $ Certain of the agreements pertaining to long-term debt contain fi nancial 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 31, 2009 are as follows: Fiscal Year (In thousands) 2009 2010 2011 2012 2013 Thereafter $ $ 72 78 83 88 94 557 972 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 fi xed 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 $3.4 million, respectively, as of January 31, 2009 and $8.2 million and $3.8 million, respectively, as of February 2, 2008. Scheduled lease payments under capital lease obligations as of January 31, 2009 are as follows: Fiscal Year (In thousands) 2009 2010 2011 2012 2013 Thereafter Less: amounts representing interest Present value of net scheduled lease payments Less: amounts due in one year 62 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT $ $ 1,347 1,345 1,117 953 971 10,233 15,966 (7,574) 8,392 (534) 7,858 10. Operating Leases The Company leases substantially all of its stores, offi ce facilities, distribution centers and equipment, under noncancelable operating leases that expire at various dates through 2039. Certain of the store lease agreements contain renewal options for additional periods of fi ve-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 $319.2 million, $267.5 million and $205.8 million for fi scal 2008, 2007 and 2006, respectively. The Company entered into sale-leaseback transactions related to store fi xtures, buildings and equipment that resulted in cash receipts of $44.9 million, $28.4 million and $32.5 million for fi scal 2008, 2007 and 2006, respectively. Scheduled lease payments due (including lease commitments for 32 stores not yet opened at January 31, 2009) under noncancelable operating leases as of January 31, 2009 are as follows: Fiscal Year (In thousands) 2009 2010 2011 2012 2013 Thereafter $ 360,532 369,937 360,940 348,479 342,322 1,878,352 $ 3,660,562 The Company has subleases related to certain of its operating lease agreements. The Company recognized sublease rental income of $1.1 million, $1.1 million and $1.2 million for fi scal 2008, 2007 and 2006, respectively. 11. Stock-Based Compensation and Employee Stock Plans The Company has the availability to grant stock options to purchase common stock under Dick’s Sporting Goods, Inc. 2002 Stock Option Plan and the Golf Galaxy, Inc. 2004 Incentive Plan (the “Plans”). The Company also has an employee stock purchase plan (“ESPP”) which provides for eligible employees to purchase shares of the Company’s common stock. The following represents total stock based compensation and ESPP expense recognized in the Consolidated Statements of Operations: (In thousands) Stock option expense Restricted stock expense ESPP expense Total stock-based compensation expense Total related tax benefi t 2008 2007 2006 $ $ $ 20,345 $ 3,465 1,790 25,600 $ 6,514 $ 26,387 $ 1,198 1,454 29,039 $ 10,982 $ 23,075 — 1,228 24,303 9,277 Stock Option Plans – The Company grants stock options to purchase common stock under the Plans. Stock options generally vest over four years in 25% increments from the date of grant and expire 7 to 10 years from date of grant. As of January 31, 2009, there were 12,638,397 shares of common stock available for issuance pursuant to future stock option grants. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes (“Black Scholes”) option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to refl ect market conditions and the Company’s experience. These options are expensed on a straight-line basis over the vesting period, which is considered to be the requisite service period. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 63 The fair value of stock-based awards to employees is estimated on the date of grant using the Black Scholes valuation with the following weighted average assumptions: Black–Scholes Valuation Assumptions 1 Expected life (years) 2 Expected volatility 3 Weighted average volatility Risk-free interest rate 4 Expected dividend yield Weighted average grant date fair values Employee Stock Options Employee Stock Purchase Plan 2008 5.51 2007 5.29 2006 5.29 2008 0.5 2007 0.5 35.89%–41.80 % 36.08%–37.39 % 36.96 % 3.39%–4.94 % 36.34 % 2.01%–3.51 % 37%–39 % 53.93%–88.03 % 25.66%–39.19 % 34.29 % 3.32%–5.02 % 67.26 % 0.28%–2.13 % 38.79 % 4.44%–4.97 % — — — — — $ 10.26 $ 11.45 $ 8.34 $ 3.75 $ 6.87 $ 2006 0.5 24%–32 % 28.44 % 5.09%–5.31 % — 5.12 1 This table excludes valuation assumptions related to the assumption of outstanding Golf Galaxy options by Dick’s in conjunction with the acquisition of Golf Galaxy on February 13, 2007. 2 The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. 3 Expected volatility is based on the historical volatility of the Company’s common stock. 4 The risk-free interest rate is based on the implied yield available on U.S. Treasury constant maturity interest rates whose term is consistent with the expected life of the stock options. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to refl ect market conditions and experience. The stock option activity from January 28, 2006, through January 31, 2009 is presented in the following table: Shares Subject to Options 23,278,774 $ 2,756,916 (5,371,716) (1,031,146) 19,632,828 $ 5,324,866 (4,769,933) (911,316) 19,276,445 $ 795,455 (686,905) (761,560) 18,623,435 $ 14,047,827 $ Weighted Average Exercise Price per Share 7.66 19.61 4.30 14.86 9.88 25.86 6.34 20.62 14.66 26.96 10.56 23.23 14.99 11.62 Weighted Average Remaining Contractual Life (Years) 8.72 $ Aggregate Intrinsic Value (in thousands) 249,432 6.64 $ 324,610 6.35 $ 352,494 5.43 $ 4.71 $ 37,135 37,125 Outstanding, January 28, 2006 Granted Exercised Forfeited / Expired Outstanding, February 3, 2007 Granted Exercised Forfeited / Expired Outstanding, February 2, 2008 Granted Exercised Forfeited / Expired Outstanding, January 31, 2009 Exercisable, January 31, 2009 64 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT The aggregate intrinsic value in the table above is based on the Company’s closing stock prices for the last business day of the period indicated. The total intrinsic value for stock options exercised for 2008, 2007 and 2006 was $8.5 million, $107.0 million and $106.9 million, respectively. The total fair value of options vested for 2008, 2007 and 2006 was $23.9 million, $38.1 million and $26.2 million, respectively. The nonvested stock option activity for the year ended January 31, 2009 is presented in the following table: Nonvested, February 2, 2008 Granted Vested Forfeited Nonvested, January 31, 2009 Shares 7,075,779 $ 795,455 (2,787,477) (508,149) 4,575,608 $ Weighted Average Fair Value 10.40 10.26 8.56 10.51 11.48 As of January 31, 2009, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $30.4 million, which is expected to be recognized over a weighted average period of approximately 2.20 years. The Company issues new shares of common stock upon exercise of stock options. Additional information regarding options outstanding as of January 31, 2009, is as follows: Options Outstanding Options Exercisable Range of Exercise Prices $0.54–$1.08 $3.00–$5.24 $6.74–$10.37 $11.11–$16.91 $17.34–$26.01 $26.77–$33.40 $0.54–$33.40 Shares 758,963 3,548,000 918,154 5,399,202 3,545,067 4,454,049 18,623,435 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price 0.87 3.20 9.14 11.95 19.21 28.34 14.99 Shares 758,963 $ 3,548,000 908,356 5,305,826 2,057,012 1,469,670 14,047,827 $ Weighted Average Exercise Price 0.87 3.20 9.13 11.89 18.85 27.99 11.62 2.12 $ 3.73 3.67 4.86 6.82 7.28 5.43 $ Restricted Stock – Beginning in fi scal 2007, the Company issued shares of restricted stock to eligible employees, subject to forfeiture until the end of an applicable vesting period, which is determined based on the employee’s continuing employment. The awards generally vest on the third anniversary of the date of grant. The restricted stock activity from February 3, 2007, through January 31, 2009 is presented in the following table: Nonvested, February 3, 2007 Granted Vested Forfeited / Expired Nonvested, February 2, 2008 Granted Vested Forfeited / Expired Nonvested, January 31, 2009 Weighted Average Grant Date Fair Value — 26.01 — — 26.01 27.39 26.01 26.40 27.33 Shares — $ 300,000 — — 300,000 $ 413,843 (150,000) (190,381) 373,462 $ DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 65 As of January 31, 2009, total unrecognized stock-based compensation expense related to nonvested shares of restricted stock was approximately $7.6 million, before income taxes, which is expected to be recognized over a weighted average period of approximately 2.14 years. Effective July 18, 2008, two executives at the Company’s Golf Galaxy subsidiary stepped down from their positions. Stock options granted to these executives exercisable for up to 630,000 shares of the Company’s common stock at an exercise price of $27.30 per share and all stock options previously granted to these executives that were exercisable for Golf Galaxy common stock (converted to options exercisable for Company’s common stock as a result of the acquisition of Golf Galaxy by the Company) became fully vested upon their departure. The 150,000 shares of restricted common stock granted to these executives on February 13, 2007 that were to vest based only on the passage of time also became fully vested. The executives forfeited any rights to an additional 150,000 shares of restricted common stock granted to them on February 13, 2007 that were to vest based on the attainment of certain performance metrics. The accelerated vesting of these stock options and restricted stock net of the reversal of previously recognized compensation expense for these individuals resulted in a pre-tax charge of $0.5 million, which is recorded in merger and integration costs on the Consolidated Statements of Operations. 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 fi scal 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 fi rst 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. The total number of shares issuable under the plan is 4,620,000. There were 380,438 and 204,955 shares issued under the plan during fi scal 2008 and 2007, respectively, leaving 1,050,397 shares available for future issuance. The fi scal 2008 shares were issued at an average price of $13.60. Common Stock, Class B Common Stock and Preferred Stock – During fi scal 2004, the Company fi led an amendment to its Amended and Restated Certifi cate 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. In addition, the Company’s corporate charter provides for the authorization of the issuance of up to 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 tradable. Each share of Class B common stock can be converted into one share common stock at the holder’s option. 12. Income Taxes The components of the provision for income taxes are as follows: (In thousands) Current: Federal State Deferred: Federal State Total provision 2008 2007 2006 $ 88,874 $ 13,899 102,773 118,305 $ 16,882 135,187 62,573 11,247 73,820 (42,105) (3,801) (45,906) 56,867 $ (28,983) (3,713) (32,696) 102,491 $ 631 623 1,254 75,074 $ 66 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 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 benefi t Non-deductible compensation Goodwill impairment Other permanent items Effective income tax rate 2008 35.0% 3.7% 12.8% 208.4% 1.3% 261.2% 2007 35.0% 3.6% 0.0% 0.0% 1.2% 39.8% 2006 35.0% 4.2% 0.0% 0.0% 0.8% 40.0% The 2008 effective income tax rate includes $2.5 million of non-deductible executive separation costs resulting from the departure of certain executive offi cers of Golf Galaxy and the impairment of non-deductible goodwill related to the 2007 acquisition of Golf Galaxy. Components of deferred tax assets (liabilities) consist of the following as of the fi scal periods ended: (In thousands) Store-closing expense Stock-based compensation Employee benefi ts Other accrued expenses not currently deductible for tax purposes Deferred rent Insurance Gift cards Deferred revenue currently taxable Non-Income based tax reserves Uncertain income tax positions Property and equipment Net operating loss carryforwards Total deferred tax assets Inventory Intangibles Total deferred tax liabilities Net deferred tax asset 2008 2007 16,769 $ 22,161 11,791 3,664 21,434 1,891 7,176 4,651 3,055 2,723 11,401 742 107,458 (20,932) (8,196) (29,128) 78,330 $ 10,605 15,760 6,527 2,252 16,117 2,753 5,704 4,148 2,787 3,896 279 1,740 72,568 (17,525) (28,963) (46,488) 26,080 $ $ The deferred tax asset from tax loss carryforwards of $0.7 million represents approximately $15.6 million of state net operating loss carryforwards, of which $0.9 million expires in the next ten years. The remaining $14.7 million expires between 2019 and 2026. In 2008, of the $78.3 million net deferred tax asset, $10.6 million is recorded in current assets and $67.7 million is recorded in other long-term assets in the Consolidated Balance Sheets. In 2007, of the $26.1 million net deferred tax asset, $19.7 million is recorded in current assets and $6.4 million is recorded in other long term assets in the Consolidated Balance Sheets. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 67 As of January 31, 2009, the total liability for uncertain tax positions, including related interest and penalties, was approximately $9.3 million. The following table represents a reconciliation of the Company’s total unrecognized tax benefi ts balances, excluding interest and penalties for the year ended January 31, 2009: (In thousands) Beginning of year Increases as a result of tax positions taken in a prior period Decreases as a result of tax positions taken in a prior period Increases as a result of tax positions taken in the current period Decreases as a result of settlements during the current period Reductions as a result of a lapse of statute of limitations during the current period End of year 2008 2007 $ $ 9,715 $ 1,303 (2,627) 1,188 (1,545) (205) 7,829 $ 10,342 1,721 (1,527) 1,473 (2,190) (104) 9,715 The entire $7.8 million in unrecognized tax benefi ts, excluding interest and penalties, would impact our effective tax rate if recognized. The Company recognizes accrued interest and penalties related to unrecognized tax benefi ts in income tax expense. As of January 31, 2009, the liability for uncertain tax positions included $1.5 million for the accrual of interest and penalties. During the years ended January 31, 2009 and February 2, 2008, the Company recorded interest and penalties in its Consolidated Statements of Operations of $0.7 million and $0.9 million, respectively. The Company has federal, state and local examinations currently ongoing. It is possible that these examinations may be resolved within 12 months. Due to the potential for resolution of these examinations, and the expiration of various statutes of limitation, it is reasonably possible that $2.1 million of the Company’s gross unrecognized tax benefi ts at January 31, 2009 could be recognized within the next 12 months. The Company does not anticipate that changes in its unrecognized tax benefi ts will have a material impact on the Consolidated Statements of Operations during fi scal 2009. The tax years 2004–2007 remain open to examination by the major taxing jurisdictions to which we are subject. The Internal Revenue Service examination for tax years 2004–2005 is open and currently is expected to close in 2009. Management does not anticipate any potential settlement to result in a material change to the company’s fi nancial position. 13. Interest Expense, Net Interest expense, net is comprised of the following: (In thousands) Interest expense Interest income Interest expense, net 2008 2007 2006 $ $ 11,104 $ (141) 10,963 $ 12,856 $ (1,566) 11,290 $ 10,836 (811) 10,025 68 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 14. Earnings per Common Share The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share is based upon the weighted average number of shares outstanding plus the incremental shares that would be outstanding assuming exercise of dilutive stock options. The number of incremental shares from the assumed exercise of stock options is calculated by applying the treasury stock method. The aggregate common shares, totaling 8,776,048, 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 calculations for fi scal 2008, 2007 and 2006. The computations for basic and diluted earnings per share are as follows: Fiscal Year Ended (In thousands, except per share data) Earnings per common share – Basic: Net (loss) income Weighted average common shares outstanding (Loss) earnings per common share Earnings per common share – Diluted: Net (loss) income Weighted average common shares outstanding – Basic Stock options, restricted stock and warrants Weighted average common shares outstanding – Diluted (Loss) earnings per common share 2008 2007 2006 $ (35,094) $ 111,662 155,036 $ 109,383 $ (0.31) $ 1.42 $ 112,611 102,512 1.10 $ (35,094) $ 111,662 — 111,662 155,036 $ 109,383 7,121 116,504 $ (0.31) $ 1.33 $ 112,611 102,512 8,278 110,790 1.02 Due to the net loss for fi scal 2008, 19.0 million shares were excluded from the calculation of diluted loss per share, as these shares were anti-dilutive. Additionally, potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. Anti-dilutive shares totaled 4.5 million and 0.4 million for fi scal 2007 and 2006, respectively. 15. 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 fi nancial 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 permitted the Company, at its election, to purchase an equity ownership in GSI at a price that was less than the GSI market value per share in lieu of royalties until Internet sales reached a predefi ned amount. 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. In August 2008, the Company amended its agreement with GSI that among other things, extended the term of the agreement to February 1, 2024. The deferred revenue is being amortized through the term of the amended agreement. Deferred revenue at January 31, 2009 and February 2, 2008 was $1.1 million and $1.5 million, respectively. In total, the number of shares the Company holds represents less than 5% of GSI’s outstanding common stock. 16. Retirement Savings Plans The Company’s retirement savings plan, established pursuant to Section 401(k) of the Internal Revenue Code, covers regular status full-time hourly and salaried employees as of their date of hire and part-time regular employees once they work 1,000 hours or more in a year and have attained 21 years of age. Under the terms of the retirement savings plan, the Company provides a discretionary matching contribution which has typically been equal to 50% of each participant’s contribution up to 10% of the participant’s compensation, and may make an additional discretionary matching contribution. Total expense recorded under the plan was $4.1 million, $5.0 million and $3.0 million for fi scal 2008, 2007 and 2006, respectively. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 69 We have non-qualifi ed deferred compensation plans for highly compensated employees whose contributions are limited under qualifi ed defi ned contribution plans. Amounts contributed and deferred under the deferred compensation plans are credited or charged with the performance of investment options offered under the plans and elected by the participants. In the event of bankruptcy, the assets of these plans are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company’s plans was $8.1 million and $1.8 million at January 31, 2009, and February 2, 2008, respectively, and is included in long-term liabilities. Total expense recorded under these plans was $0.5 million, $5.5 million and $0.1 million for fi scal 2008, 2007 and 2006, respectively. 17. Commitments and Contingencies The Company enters into licensing agreements for the exclusive or preferential rights to use certain trademarks extending through 2020. Under specifi c agreements, the Company is obligated to pay annual guaranteed minimum royalties. The aggregate amount of required payments at January 31, 2009 is as follows: Fiscal Year (In thousands) 2009 2010 2011 2012 2013 Thereafter $ $ 9,456 10,790 12,115 14,935 5,396 35,248 87,940 Also, the Company is required to pay additional royalties when the royalties that are based on the qualifi ed purchases or retail sales (depending on the agreement) exceed the guaranteed minimum. The aggregate payments made under these agreements requiring minimum guaranteed contractual amounts were $9.7 million, $1.9 million and $0.7 million during fi scal 2008, 2007 and 2006, respectively. The Company also has certain naming rights, marketing, and other commitments extending through 2026 of $94.5 million. Payments under these commitments were $25.2 million for the 52 weeks ended January 31, 2009. Payments under these commitments are scheduled to be made as follows: 2009, $29.6 million; 2010, $11.7 million; 2011, $5.7 million; 2012, $6.0 million; 2013, $3.2 million; thereafter, $38.3 million. During fi scal 2008, the Company entered into a lease agreement for a new corporate headquarters building that it expects to occupy beginning in February 2010. The Company expects this lease to be classifi ed as a capital lease obligation. Payments scheduled to be made under this lease agreement are $12.1 million annually in 2010 through 2013. Scheduled payments thereafter total $272.5 million through February 2035. 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, fi nancial position or results of operations. 18. Fair Value Measurements The Company adopted SFAS 157 as of February 3, 2008 for its fi nancial assets and liabilities. SFAS 157 defi nes fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS 157 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. 70 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Financial assets measured at fair value as of January 31, 2009 are set forth in the table below: Description Assets: Unregistered common stock of GSI Commerce (see Note 15) Deferred compensation plan assets held in trust (see Note 16) Total assets 19. Subsequent Event Level 1 Level 2 Level 3 $ $ 2,629 $ 8,065 10,694 $ — $ — — $ — — — As of February 18, 2009, the Company received notice from the holders of its senior convertible notes issued in February 2004 who exercised their right to cause the Company to purchase their notes outstanding on February 18, 2009 at a price equal to the sum of the issuance price plus accrued original issue discount of such notes on the redemption date ($676.25 per note). The Company had $172.5 million aggregate principal amount of such notes outstanding at January 31, 2009. On February 18, 2009, the Company purchased $172.4 million of these notes. The Company used availability under its Credit Agreement to fund the redemption. 20. Quarterly Financial Information (Unaudited) Summarized quarterly fi nancial information in fi scal years 2008 and 2007 is as follows: (In thousands, except earnings (loss) per share) Fiscal 2008 Net sales Gross profi t Income (loss) from operations 2 Net income (loss) Net earnings (loss) per share: Basic 2 Diluted 2 Weighted average number of shares of common stock outstanding: Basic Diluted Fiscal 2007 Net sales 2 Gross profi t Income from operations Net income 2 Net earnings per share: Basic 2 Diluted 2 Weighted average number of shares of common stock outstanding: Basic Diluted First Quarter Second Quarter Third Quarter Fourth Quarter $ 912,112 $ 1,086,294 $ 259,106 34,218 20,775 319,658 75,431 41,115 924,191 $ 1,207,531 352,183 253,100 (92,872) 13,602 (104,377)1 7,393 $ $ 0.19 $ 0.18 $ 0.37 $ 0.35 $ 0.07 $ 0.06 $ (0.93) (0.93) 111,216 117,295 111,483 116,806 111,906 116,774 112,115 112,115 $ 823,553 $ 1,013,421 $ 244,419 39,291 21,701 298,660 83,194 47,930 838,831 $ 1,212,615 376,320 238,663 124,650 21,682 73,171 12,233 $ $ 0.20 $ 0.19 $ 0.44 $ 0.41 $ 0.11 $ 0.10 $ 0.66 0.62 107,098 114,442 108,580 115,528 110,804 118,305 111,033 117,721 1 The net loss in the fourth quarter of 2008 includes non-cash impairment charges of $193.4 million. 2 Quarterly results for fi scal 2008 and 2007 do not add to full year results due to rounding. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 71 Reconciliation of Non-GAAP Financial Measures This Annual Report to Stockholders contains certain non-GAAP fi nancial information. The adjusted fi nancial information is considered non-GAAP and is not preferable to GAAP fi nancial 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 and earnings per share adjusted for merger and integration costs, non-cash impairment charges and the gain on sale of asset. EBITDA EBITDA should not be considered as an alternative to net income or any other generally accepted accounting prinviples 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 profi tability that eliminates the effect of changes resulting from fi nancial decisions, tax regulations, and capital investments. EBITDA (Dollars in thousands) Net (loss) income Provision for income taxes Interest expense, net Depreciation and amortization EBITDA 2008 2008 Adjusted 2007 2006 $ $ (35,094) $ 56,867 10,963 90,732 123,468 $ 137,495 $ 91,149 10,963 88,340 327,947 $ 155,036 $ 102,491 11,290 75,052 343,869 $ 112,611 75,074 10,025 54,929 252,639 GAAP EBITDA % increase over Prior Year Adjusted EBITDA % increase over Prior Year (64%) (5%) 36% EBITDA Fiscal 2008 (Adjusted) 1 Net (loss) income Provision for income taxes Interest expense, net Depreciation and amortization EBITDA Add: Merger and integration costs Fiscal 2008 Add: Non- cash impairment charges 161,662 $ 12,341 $ 3,536 — (2,392) 13,485 $ 31,688 — — 193,350 $ $ $ (35,094) $ 56,867 10,963 90,732 123,468 $ Less: Gain on sale of asset Results adjusted for merger and integration costs, gain on sale of asset and non- cash impairment charges 137,495 91,149 10,963 88,340 327,947 1,414 $ 942 — — 2,356 $ 1 Presents EBITDA adjusted for merger and integration costs, non-cash impairment charges and gain on sale of asset. 72 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Return On Invested Capital (ROIC) (Dollars in thousands) Net (loss) income Impairment of goodwill and other intangible assets, after tax Impairment of store assets, after tax Merger integration and store closing costs, after tax Gain on sale of asset, after tax Gain on sale 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 debt Operating leases capitalized at 8x annual rent expense Total debt and operating leases capitalized at 8x annual rent expense Total capital (total stockholders’ equity + total debt and operating leases capitalized at 8x annual rent expense) Average total capital (denominator) 1 ROIC ROIC using GAAP amounts 2 2008 2007 2006 2005 2004 2003 $ (35,094) $ 155,036 $ 112,611 $ 72,980 $ 68,905 $ 52,408 143,888 17,774 12,341 (1,414) — 137,495 137,495 6,578 191,538 — — — — — — — — — — — — 22,674 — 12,202 — — — — — — 155,036 155,036 6,797 161,045 — 112,611 112,611 6,015 123,473 (1,106) 94,548 94,548 7,775 117,801 (6,589) 74,518 74,518 4,805 86,369 (2,122) 50,286 50,286 1,099 58,232 $ $ 335,611 $ 895,582 $ 181,864 322,878 $ 888,520 $ 181,435 242,099 $ 620,550 $ 181,017 220,124 $ 414,793 $ 181,201 165,692 $ 313,667 $ 258,004 109,617 240,894 3,916 2,553,843 2,140,138 1,646,311 1,570,680 1,151,587 776,427 2,735,707 2,321,573 1,827,328 1,751,881 1,409,591 780,343 3,631,289 2,447,878 $ 3,420,691 $ 2,828,985 $ 2,307,276 $ 1,944,966 $ 1,372,247 $ 3,210,093 2,166,674 1,723,258 1,021,237 921,812 9.8% 4.8% 11.4% 11.4% 10.5% 10.5% 11.3% 10.2% 12.1% 11.7% 11.9% 12.1% 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. DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 73 Non-GAAP Net Income and Earnings Per Share Reconciliation Fiscal 2008 Year Ended January 31, 2009 (In thousands, except per share data) Net sales Cost of goods sold, including occupancy and distribution costs Gross profi t Selling, general and administrative expenses Impairment of goodwill and other intangible assets Impairment of store assets Merger and integration costs Pre-opening expenses Income from operations Gain on sale of asset Interest expense, net Income before income taxes Provision for income taxes, excluding tax impact of non-deductible executive separation costs Tax impact of non-deductible executive separation costs Provision for income taxes Net income (loss) Earnings (loss) per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Notes: As Reported Merger and Integration Costs Impairment Charges Non-GAAP Pro-forma Total $ 4,130,128 $ 2,946,079 1,184,049 928,170 164,255 29,095 15,877 16,272 30,380 (2,356) 10,963 21,773 — $ — — — — — (15,877) — 15,877 — — 15,877 — $ 4,130,128 2,946,079 — 1,184,049 — 928,170 — (164,255) (29,095) — — 193,350 — — 193,350 — — 16,272 239,607 (2,356) 10,963 231,000 $ $ $ 54,362 2,505 56,867 (35,094) $ (6,041) 2,505 (3,536) 12,341 $ (31,688) — (31,688) 161,662 $ 92,091 — 92,091 138,909 (0.31) (0.31) 111,662 111,662 $ $ 1.24 1.19 111,662 116,650 1 Costs related to the Golf Galaxy and Chick’s Sporting Goods integration total $18.4 million, which includes $15.9 million of pre tax “merger and integration costs” and $2.5 million included in the Company’s provision for income taxes refl ecting the “tax impact of non-deductible executive separation costs.” The net income impact of merger and integration costs equals $12.3 million, which includes $9.8 million for the after tax amount of “merger and integration costs” and the $2.5 million included in the Company’s provision for income taxes refl ecting the “tax impact of non-deductible executive separation costs.” 2 Due to the net loss, as reported diluted earnings per share is calculated using basic weighted average common shares outstanding. 3 The goodwill impairment charge of $111,312 is not deductible for tax purposes. 74 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT Comparison of Cumulative Total Returns The following graph compares the performance of the Company’s common stock with the performance of the Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500”), the S&P Specialty Retail Index, and Hibbett Sports (NASDAQ: HIBB) for the periods indicated below. The graph assumes that $100 was invested on October 15, 2002 in the Company’s common stock, the S&P 500, the S&P Specialty Retail Index and Hibbett Sports and that all dividends were reinvested. 1100 1000 900 800 700 600 500 400 300 200 100 0 X E D N I 2 0 - t c O - 5 1 3 0 - n a J - 1 3 3 0 - y a M - 2 3 0 - g u A - 1 3 0 - t c O - 1 3 4 0 - n a J - 0 3 4 0 - r p A - 0 3 4 0 - l u J - 0 3 4 0 - t c O - 9 2 5 0 - n a J - 9 2 5 0 - r p A - 9 2 5 0 - l u J - 9 2 5 0 - t c O - 8 2 6 0 - n a J - 8 2 6 0 - r p A - 8 2 6 0 - l u J - 8 2 6 0 - t c O - 7 2 7 0 - b e F - 3 7 0 - y a M - 5 7 0 - g u A - 4 7 0 - v o N - 3 8 0 - b e F - 2 8 0 - y a M - 3 8 0 - g u A - 2 8 0 - v o N - 1 9 0 - n a J - 1 3 The stock performance graph is not necessarily indicative of future performance. ■ ■ ■ ■ Dick’s Sporting Goods (DKS) Hibbett Sports (HIBB) S&P Specialty Retail Index S&P 500 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 75 Corporate and Stockholder Information Corporate Offi ce 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 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. The number of holders of record of shares of the Company’s common stock and Class B common stock as of April 6, 2009 was 214 and 7 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. 2008 Fiscal Quarter Ended May 3, 2008 August 2, 2008 November 1, 2008 January 31, 2009 2007 Fiscal Quarter Ended May 5, 2007 August 4, 2007 November 3, 2007 February 2, 2008 High 33.40 29.52 23.97 16.36 High 29.54 29.53 35.84 32.93 $ $ $ $ $ $ $ $ Low 24.64 15.65 13.11 9.56 Low 24.67 25.11 26.36 25.74 $ $ $ $ $ $ $ $ Note: The closing prices have been adjusted for the two-for-one stock split in the form of a stock dividend, which became effective October 19, 2007. 76 DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT 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 Measures For any non-GAAP fi nancial measures used in this report, see pages 72–74 for a presentation of the most directly comparable GAAP fi nancial measure and a quantitative reconciliation to that GAAP fi nancial measure. Annual Meeting June 3rd at 1:30 p.m. Hyatt Regency 1111 Airport Boulevard Pittsburgh, PA 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: Investor Relations 300 Industry Drive RIDC Park West Pittsburgh, PA 15275 724-273-3400 Management Certifi cations On June 17, 2008, in accordance with Section 3.03A.12(a) of the New York Stock Exchange Listed Company Manual, our Chief Executive Offi cer submitted a certifi cation 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 certifi cations required by Section 302 of the Sarbanes-Oxley Act with respect to the Company’s Annual Report on Form 10-K for the fi scal year ended January 31, 2009 have been fi led with the Securities and Exchange Commission as Exhibits 31.1 and 31.2 thereto. SALES (DOLLARS IN MILLIONS) NET INCOME1 (DOLLARS IN MILLIONS) OPERATING MARGINS2 (PERCENTAGE) GROSS PROFIT MARGINS (PERCENTAGE) $2,109 $2,625 $3,114 $3,888 $4,130 $74.5 $94.5 $112.6 $155.0 $138.9 6.2% 6.5% 6.3% 6.9% 5.8% 27.8% 28.1% 28.8% 29.8% 28.7% 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 FINANCIAL HIGHLIGHTS Fiscal Year (Dollars in thousands, except per share data) Net sales Gross profi t Gross profi t margin Selling, general and administrative expenses Pre-opening expenses Merger and integration costs Impairment of goodwill and other intangible assets Impairment of store assets Income from operations Net income (loss) Adjusted net income2 Diluted earnings (loss) per common share Adjusted diluted earnings per common share2 Diluted weighted average shares outstanding (in thousands) Adjusted diluted weighted average shares outstanding (in thousands) Total stockholders’ equity EBITDA Adjusted EBITDA3 $ $ $ Comparable store net sales increase (decrease) (Dick’s stores) Store count (Dick’s stores) 2008 2007 2006 $ 4,130,128 $ 3,888,422 $ 3,114,162 1,184,049 1,158,063 28.7% 928,170 16,272 15,877 164,255 29,095 30,380 (35,094) 138,909 (0.31) 1.19 111,662 116,650 895,582 123,468 327,947 (4.8%) 384 29.8% 870,415 18,831 — — — 268,817 155,036 155,036 1.33 1.33 116,504 116,504 888,520 343,869 343,869 2.4% 340 $ $ $ $ $ $ $ $ $ 896,699 28.8% 682,625 16,364 — — — 197,710 112,611 112,611 1.02 1.02 110,790 110,790 620,550 252,639 252,639 6.0% 294 $ $ $ $ $ $ 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 October 19, 2007. 1 Results exclude goodwill, other intangible and store asset impairment charges, merger and integration costs, and gain on sale of investment. 2 Results exclude goodwill, other intangible and store asset impairment charges and merger and integration costs. 3 Results exclude goodwill, other intangible and store asset impairment charges, merger and integration costs, and gain on sale of asset. BOARD OF DIRECTORS Edward W. Stack Director since 1984 Chairman, CEO & President Dick’s Sporting Goods, Inc. William J. Colombo Director since 2002 Vice Chairman Dick’s Sporting Goods, Inc. Emanuel Chirico Director since 2003 Chairman & Chief Executive Offi cer Phillips-Van Heusen Corporation Brian J. Dunn Director since 2007 President & Chief Operating Offi cer Best Buy Co., Inc. David I. Fuente Director since 1993 Previous Chairman of the Board & Chief Executive Offi cer Offi ce Depot, Inc. Walter Rossi Director since 1993 Previous Chairman of the Retail Group at Phillips-Van Heusen Corporation & Chairman & Chief Executive Offi cer of Mervyn’s Lawrence J. Schorr Director since 1985 Chief Executive Offi cer, Boltaron Performance Products, LLC & Former Co-Managing Partner of Levene, Gouldin & Thompson, LLP Larry D. Stone Director since 2007 President & Chief Operating Offi cer Lowe’s Companies, Inc. 2008 CORPORATE OFFICERS Edward W. Stack Chairman, Chief Executive Offi cer & President Lee J. Belitsky Senior Vice President – Distribution & Transportation Jeffrey R. Hennion Executive Vice President & Chief Marketing Offi cer Timothy E. Kullman Executive Vice President, Finance, Administration & Chief Financial Offi cer Gwendolyn K. Manto Executive Vice President & Chief Merchandising Offi cer Joseph H. Schmidt Executive Vice President of Operations & Chief Operating Offi cer Diane E. Lazzaris Senior Vice President – Legal, General Counsel & Corporate Secretary Matthew J. Lynch Senior Vice President & Chief Information Offi cer Kathryn L. Sutter Senior Vice President – Human Resources Design: Mizrahi, Inc. www.mizrahionline.com 2008 ANNUAL REPORT DICK’S SPORTING GOODS, INC. 300 Industry Drive RIDC Park West Pittsburgh, PA 15275 724-273-3400 www.dickssportinggoods.com