# DICK'S SPORTING GOODS, INC. (DKS) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DICK'S SPORTING GOODS, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1089063/000108906324000037/dks-20240203.htm
Accession: 0001089063-24-000037
Filing date: 2024-03-28
Report date: 2024-02-03
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DKS/
All MD&A years: /company/DKS/mda/
Previous year: /company/DKS/mda/fy2023/ (FY 2023)
Next year: /company/DKS/mda/fy2025/ (FY 2025)

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to “Forward-Looking Statements” and Part I, Item 1A. “Risk Factors”.

Business Overview

We are a leading omni-channel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories. In addition to DICK’S Sporting Goods stores, we own and operate Golf Galaxy, Public Lands, Moosejaw and Going Going Gone! specialty concept stores, and also offer our products online and through our mobile apps. We also own and operate DICK’S House of Sport and Golf Galaxy Performance Center, as well as GameChanger, a youth sports mobile app for scheduling, communications, live scorekeeping and video streaming. When used in this Annual Report on Form 10-K, unless the context otherwise requires or specifies, any reference to “year” is to our fiscal year, which ends on the Saturday closest to the end of January each year.

Through our strategic pillars of athlete experience, teammate experience, differentiated product and brand engagement, we have transformed our business to drive sustained profitable growth. As part of our strategy, we have meaningfully improved our merchandise assortment through strong relationships with our key brand partners, which provides access to highly differentiated product, and our vertical brands. We have also enhanced our store selling culture and service model and incorporated additional experiential elements and technology into our stores to engage our athletes. Lastly, we continue to innovate in our omni-channel athlete experience through our DICK’S House of Sport stores, Golf Galaxy Performance Centers and our next generation 50,000 square foot DICK’S store. Consumers have also made what we believe will be lasting lifestyle changes in recent years, prioritizing sport and maintaining healthy, active lifestyles, which has increased demand for our products.

As a result of our core strategies, foundational improvements and these strong secular consumer trends, net sales increased 48.4% in fiscal 2023 compared to fiscal 2019, while our pre-tax income as a percentage of net sales grew from 4.7% in fiscal 2019 to 10.2% in fiscal 2023. A key driver of our future omni-channel growth will include repositioning our portfolio to grow our DICK’S House of Sport stores, Golf Galaxy Performance Centers and next generation 50,000 square foot DICK’s stores.

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Business Optimization

During 2023, we completed a business optimization to better align our talent, organizational design and spending in support of our most critical strategies while also streamlining our overall cost structure (the “Business Optimization”). As part of our Business Optimization, we eliminated certain positions primarily at our customer support center and optimized our outdoor business, which included the integration of our Moosejaw and Public Lands operations, decisions about their go-forward inventory assortment and a comprehensive review of their store portfolios and closure of ten Moosejaw stores. We incurred pre-tax charges of $84.8 million from our Business Optimization, including $46.1 million of non-cash impairments of store and intangible assets, $26.7 million of severance-related costs and a $12.0 million write-down of inventory.

Field & Stream Exit

During the fourth quarter of 2022, we decided to exit the Field & Stream brand (the “Field & Stream Exit”). We converted the remaining 17 Field & Stream stores, the majority of which were part of a DICK’S and Field & Stream combo store, to DICK’S House of Sport stores, expanded DICK’S Sporting Goods stores, or other specialty concept stores. We closed twelve of these stores for conversion during the fourth quarter of 2022 and incurred pre-tax charges totaling $30.1 million, which included $28.5 million of non-cash impairment of store assets, $0.8 million of severance and a $0.7 million write-down of inventory. Additionally, we sold the Field & Stream trademark in fiscal 2023 for proceeds near its carrying value.

Business Environment

The macroeconomic environment in which we operate remains dynamic as a result of numerous factors, including inflationary pressures, the expiration of student loan payment deferments, and the potential impact of elevated interest rates, which could impact consumer discretionary spending behavior and the promotional landscape in which we operate. In addition, disruption of supply chains, including factory closures and port congestion, resulted in apparel overages in fiscal 2022 from late arriving inventory and elevated container and transportation costs which began to moderate during the second half of fiscal 2022. We took actions during the third and fourth quarter of fiscal 2022 to address these targeted inventory overages.

Overview of current trends affecting 2023

•Within merchandise margin, we have experienced higher inventory shrink relative to historical levels, which has been noted throughout the retail industry. As a percentage of net sales, inventory shrink was approximately 50 basis points higher than 2022 on a full year basis. We expect inventory shrink in the first quarter of 2024 to remain higher than the comparable 2023 period, until the trend is reflected in the results of the current and prior year periods beginning in the second quarter of 2024.

•Following the moderation in elevated container and transportation costs that began in the second half of 2022, supply chain costs were lower in 2023. We do not expect meaningful year-over-year declines to continue in 2024.

•Following our Business Optimization actions, our selling, general and administrative expenses during the fourth quarter of 2023 have moderated by approximately 78 basis points as a percentage of net sales. In 2024, we expect selling, general and administrative expenses to leverage as a percentage of net sales, driven by the future benefits from our Business Optimization actions and our ongoing focus on improving productivity and reducing discretionary costs.

The Company’s current expectations described above include forward-looking statements. Please see the “Cautionary Statement Concerning Forward-Looking Statements” in this Form 10-K for information regarding important factors that may cause the Company’s actual results to differ from those currently projected and/or otherwise materially affect the Company.

How We Evaluate Our Operations

Senior management focuses on certain key indicators to monitor our performance, including:

•Comparable store sales performance – Our management considers comparable store sales, which includes online sales, to be an important indicator of our current performance. Comparable store sales results are important to leverage our costs, which include occupancy costs, store payroll and other store expenses. Comparable store sales also have a direct impact on our total net sales, net income, cash and working capital. A store is included in the comparable store sales calculation during the fiscal period that it commences its 14th full month of operations. Relocated stores are included in the comparable store sales calculation from the open date of the original location. Stores that were permanently closed during the applicable period have been excluded from comparable store sales results. For further discussion of our comparable store sales refer to the “Results of Operations” section herein.

•Earnings before taxes and the related operating margin – Our management views operating margin and earnings before taxes as key indicators of our performance. The key drivers of earnings before taxes are comparable store sales, gross profit, and our ability to control selling, general and administrative expenses.

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•Cash flows from operating activities – Cash flow generation supports our general liquidity needs and funds capital expenditures for our omni-channel platform, which include investments in new and existing stores and our eCommerce channel, distribution and administrative facilities, continuous improvements to information technology tools, potential strategic acquisitions or investments that may arise from time-to-time and stockholder return initiatives, including cash dividends and share repurchases. We typically experience lower operating cash flows in our third fiscal quarter due to increased inventory purchases in advance of the holiday selling season and anticipated higher cash flows during our fourth fiscal quarter. For further discussion of our cash flows refer to the “Liquidity and Capital Resources” section herein.

•Quality of merchandise offerings – To measure effectiveness of our merchandise offerings, we monitor sell-throughs, inventory turns, gross margins and markdown rates at the department and style level. This analysis helps us manage inventory levels to reduce working capital requirements and deliver optimal gross margins by improving merchandise flow and establishing appropriate price points to minimize markdowns.

•Store productivity – To assess store-level performance, we monitor various indicators, including new store productivity, sales per square foot, store operating contribution margin and store cash flow.

Executive Summary

•Net sales increased 5.0% to $12.98 billion during the 53 weeks ended February 3, 2024 from $12.37 billion during the 52 weeks ended January 28, 2023, which included an increase in comparable store sales of 2.4% on a 52-week to 52-week basis and $170.2 million of net sales during the 53rd week of fiscal 2023.

•We reported net income of $1.05 billion, or $12.18 per diluted share, in fiscal 2023, compared to $1.04 billion, or $10.78 per diluted share, during fiscal 2022.

◦Fiscal 2023 net income includes Business Optimization charges of $62.8 million, net of tax, or $0.73 per diluted share. Additionally, fiscal 2023 earnings per diluted share includes approximately $0.19 from the 53rd week.

◦Fiscal 2022 net income included charges of $22.3 million, net of tax, or $0.25 per diluted share, related to the Field & Stream Exit. Additionally, earnings per diluted share for fiscal 2022 excluded $27.1 million of interest expense, net of tax, and included 10.8 million diluted shares related to the convertible senior notes due 2025 (the “Convertible Senior Notes”), which together decreased earnings per diluted share by $1.01. Although we were required to assume that our Convertible Senior Notes would be settled in shares of our common stock in accordance with the “if-converted method” under generally accepted accounting principles, we fully settled our Convertible Senior Notes without dilutive effect, due to cash payments for principal, shares received from our convertible bond hedge and share repurchases to offset the share settlement of the remaining $59.1 million principal during the first quarter of fiscal 2023.

•In addition, during fiscal 2023, we:

◦Retired the remaining $59.1 million of our aggregate principal amount outstanding of the Convertible Senior Notes and terminated the remaining convertible bond hedge and warrants for a collective issuance of 1.7 million shares of our common stock;

◦Declared and paid aggregate cash dividends on a quarterly basis for a total amount of $4.00 per share on our common stock and Class B common stock; and

◦Repurchased 5.4 million shares of common stock under our share repurchase program for a total cost of $648.6 million.

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•The following table summarizes store openings and closings in fiscal 2023 and fiscal 2022:

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[["","Fiscal 2023","","Fiscal 2022"],["","DICK\u2019S Sporting Goods","","Specialty Concept Stores (1)","","Total (2)","","DICK\u2019S Sporting Goods","","Specialty Concept Stores (1)","","Total (2)"],["Beginning stores","728","","","125","","","853","","","730","","","131","","","861"],["New stores","1","","","10","","","11","","","4","","","9","","","13"],["Acquired stores (3)","\u2014","","","12","","","12","","","\u2014","","","\u2014","","","\u2014"],["Closed stores","5","","","16","","","21","","","6","","","15","","","21"],["Ending stores","724","","(4)","131","","","855","","","728","","","125","","","853"],["Relocated stores","18","","","2","","","20","","","3","","","1","","","4"]]
[[/GREPCENT_TABLE]]

(1)Includes our Golf Galaxy, Public Lands, Going Going Gone! and other specialty concept stores. As of February 3, 2024, we operated 104 Golf Galaxy stores, seven Public Lands stores, 17 Going Going Gone! stores and other specialty concept stores. As of January 28, 2023, we operated 98 Golf Galaxy stores, seven Public Lands stores, 15 Going Going Gone! stores and five Field & Stream stores. In some markets, we operate DICK’S Sporting Goods stores adjacent to our specialty concept stores on the same property with a pass-through for our athletes. We refer to this format as a “combo store” and include combo store openings within both the DICK’S Sporting Goods and specialty concept store reconciliations, as applicable. As of February 3, 2024, the Company operated 18 combo stores.

(2)Excludes Warehouse Sale store locations that are temporary in nature, of which the Company operated 36 and 43 as of February 3, 2024 and January 28, 2023, respectively.

(3)Represents Moosejaw store locations acquired by the Company during the first quarter of fiscal 2023, which average approximately 4,000 square feet per store. The Company closed ten of the previously acquired Moosejaw store locations during fiscal 2023.

(4)As of February 3, 2024, includes twelve DICK'S House of Sport stores, including nine new openings during fiscal 2023, which were either converted or relocated from prior store locations.

Results of Operations

The following table presents, for the fiscal years indicated, selected items in the Consolidated Statements of Income as a percentage of our net sales, as well as the basis point change in percentage of net sales from fiscal 2023 to fiscal 2022:

[[GREPCENT_TABLE]]
[["","Fiscal Year","","Basis Point Change in Percentage of Net Sales from Prior Year 2022 - 2023(A)"],["","2023","","2022 (A)"],["Net sales (1)","100.00","%","","100.00","%","","","","","","N/A"],["Cost of goods sold, including occupancy and distribution costs (2)","65.08","","","65.36","","","","","","","(28)"],["Gross profit","34.92","","","34.64","","","","","","","28"],["Selling, general and administrative expenses (3)","24.68","","","22.68","","","","","","","200"],["Pre-opening expenses (4)","0.36","","","0.13","","","","","","","23"],["Income from operations","9.88","","","11.83","","","","","","","(195)"],["Interest expense","0.45","","","0.77","","","","","","","(32)"],["Other income","(0.72)","","","(0.13)","","","","","","","(59)"],["Income before income taxes","10.15","","","11.19","","","","","","","(104)"],["Provision for income taxes","2.09","","","2.75","","","","","","","(66)"],["Net income","8.06","%","","8.43","%","","","","","","(37)"],["Other Data:"],["Comparable store sales increase (decrease)","2.4","%","","(0.5)","%"],["Number of stores at end of period (5)","855","","853"],["Total square feet at end of period (in millions) (5)","42.7","","42.6"]]
[[/GREPCENT_TABLE]]

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(A)Column does not add due to rounding.

(1)Revenue from retail sales is recognized at the point of sale, net of sales tax. Revenue from eCommerce sales, including vendor-direct sales arrangements, is recognized upon shipment of merchandise. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. Revenue from gift cards and returned merchandise credits (collectively the “cards”) is deferred and recognized upon the redemption of the cards. The cards have no expiration date.

(2)Cost of goods sold includes: the cost of merchandise (inclusive of vendor allowances, inventory shrinkage and inventory write-downs for the lower of cost or net realizable value); freight; distribution; shipping; and store occupancy costs. We define merchandise margin as net sales less the cost of merchandise sold. Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation and certain insurance expenses.

(3)Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, operating costs associated with our internal eCommerce platform, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating our CSC.

(4)Pre-opening expenses, which consist primarily of rent, marketing, payroll, recruiting and other store preparation costs are expensed as incurred. Rent is recognized within pre-opening expense from the date the Company takes possession of a site through the date of store opening and during periods when stores are closed for remodeling.

(5)Excludes temporary Warehouse Sale store locations. Fiscal 2022 store count reflected the closure of twelve Field & Stream stores for which the associated square footage of each closed store was retained as we converted them into DICK’S House of Sport stores, expanded DICK’S Sporting Goods stores, or other specialty concept stores in 2023.

Note - As retailers vary in how they record costs of operating their stores and supply chain between cost of goods sold and selling, general and administrative expenses, our gross profit rate and selling, general and administrative expenses rate may not be comparable to other retailers. For additional information regarding the types of costs classified within cost of goods sold, selling, general and administrative expenses or any other financial statement line items presented herein, refer to Note 1 – Basis of Presentation and Summary of Significant Accounting Policies included in Part IV. Item 15. Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K.

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A discussion regarding our financial condition and results of operations for the year ended February 3, 2024 (Fiscal 2023) compared to the year ended January 28, 2023 (Fiscal 2022) is presented below. A discussion regarding our financial condition and results of operations for Fiscal 2022 compared to the year ended January 29, 2022 (Fiscal 2021) can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the SEC on March 23, 2023.

Fiscal 2023 (53 weeks) Compared to Fiscal 2022 (52 weeks)

Net Sales

Net sales increased 5.0% to $12.98 billion in 2023 from $12.37 billion in 2022 due to a $290.6 million, or 2.4% increase in comparable store sales on a 52-week to 52-week basis, as well as the inclusion of $170.2 million of net sales from the 53rd week during fiscal 2023. The remaining $155.4 million increase in net sales was primarily attributable to Moosejaw and temporary Warehouse Sale stores. The increase in comparable store sales included a 1.6% increase in transactions and a 0.8% increase in sales per transaction, and reflects growth in footwear, hydration and licensed apparel, offset by declines in fitness and outdoor-related categories including outerwear, equipment and hunt.

Income from Operations

Income from operations decreased to $1,282.4 million in 2023 from $1,463.0 million in 2022.

Gross profit increased to $4,533.7 million in 2023 from $4,284.6 million in 2022 and increased as a percentage of net sales by 28 basis points due primarily to lower supply chain costs, partially offset by lower merchandise margins. Supply chain costs decreased 80 basis points from last year, which included elevated costs as a result of global disruptions following the start of the COVID-19 pandemic. Merchandise margins decreased 61 basis points due to a 53 basis point increase in inventory shrink from increased theft and a $12.0 million write-down of inventory related to our Business Optimization. This year also included higher markdowns from our decisive actions on excess product, which was offset by last year’s actions to reduce targeted apparel inventory overages from late-arriving inventory. Occupancy costs, which after the cost of merchandise represents the largest item within our cost of goods sold, are generally fixed on a per store basis and fluctuate based on the number of stores that we operate. Our occupancy costs increased $46.5 million compared to 2022 and leveraged by five basis points as a percent of net sales primarily due to sales from the 53rd week in 2023.

Selling, general and administrative expenses increased to $3,204.1 million in the current year from $2,805.5 million in 2022, and increased as a percentage of net sales by 200 basis points. The current year includes Business Optimization charges of $72.8 million as well as a $28.6 million expense increase related to changes in the investment values of our deferred compensation plans, which is fully offset in Other Income. Fiscal 2022 included Field & Stream Exit charges of $29.3 million. The remaining 145 basis point increase was primarily due to $191.7 million of investments in hourly wage rates, talent and technology to support our growth strategies and a $66.0 million increase in marketing expenses due to higher brand-building marketing and marketing to support DICK’S House of Sport store grand openings.

Pre-opening expenses increased to $47.3 million in the current year from $16.1 million in 2022. Pre-opening expenses in any period fluctuate depending on the timing and number of new store openings and relocations. The current year period includes pre-opening expenses to support the opening of nine DICK’S House of Sport stores.

Interest Expense

Interest expense decreased to $58.0 million in 2023 compared to $95.2 million in 2022, primarily due to $23.3 million of inducement charges related to the exchange of $515.9 million aggregate principal amount of the Convertible Senior Notes in 2022 and lower interest expense following their retirement in April 2023.

Other Income

Other income increased to $93.8 million in 2023 compared to $15.9 million in 2022. This $77.9 million increase in income was primarily driven by a $52.3 million increase in interest income as a result of higher average interest rates on cash and cash equivalents and a $28.6 million expense reduction from changes in our deferred compensation plan investment values primarily driven by performance in equity markets. The Company recognizes investment income or investment expense to reflect changes in deferred compensation plan investment values with an offsetting charge or reduction to selling, general and administrative costs for the same amount.

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Income Taxes

Our effective tax rate decreased to 20.6% in the current year from 24.6% in 2022. The current year effective tax rate was favorably impacted by a $37.9 million increase in excess tax benefits, resulting from a higher number of employee equity awards vesting and exercised in the current year at a higher share price than the prior year. Additionally, the prior year effective tax rate was unfavorably impacted by eliminated tax deductions from our bond hedge following our Convertible Senior Notes exchange transactions, which increased income tax expense by $21.5 million.

Liquidity and Capital Resources

Our cash on hand as of February 3, 2024 was $1.8 billion. We believe that we have sufficient cash flows from operations and cash on hand to operate our business for at least the next twelve months, supplemented by funds available under our unsecured $1.6 billion Credit Facility, if necessary. We may require additional funding should we pursue strategic acquisitions, undertake share repurchases, pursue other investments or engage in store expansion rates in excess of historical levels. We had no revolving credit facility borrowings at any point during 2023.

The following sections describe the potential short and long-term impacts to our liquidity and capital requirements.

Leases

We lease substantially all of our stores, three of our distribution centers, and certain equipment under non-cancellable operating leases that expire at various dates through 2040. Approximately three-quarters of our DICK’S Sporting Goods stores will be up for lease renewal at our option over the next five years, and we plan to leverage the significant flexibility within our existing real estate portfolio to capitalize on future real estate opportunities. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 7 – Leases for further information.

Revolving Credit Facility

We have a $1.6 billion Credit Facility, which includes a maximum amount of $75 million to be issued in the form of letters of credit. Loans under the Credit Facility bear interest at an alternate base rate or an adjusted secured overnight financing rate plus, in each case, an applicable margin percentage. As of February 3, 2024, there were no borrowings outstanding under the Credit Facility, and we have total remaining borrowing capacity, after adjusting for $16.1 million of standby letters of credit, of $1.58 billion. We were in compliance with all covenants under the Credit Facility agreement at February 3, 2024. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 8 – Revolving Credit Facility for further information.

Senior Notes

As of February 3, 2024, we have $750 million principal amount of senior notes due 2032 (the “2032 Notes”) and $750 million principal amount of senior notes due 2052 outstanding (the “2052 Notes” and together with the 2032 Notes, the “Senior Notes”). Cash interest accrues at a rate of 3.15% per year on the 2032 Notes and 4.10% per year on the 2052 Notes, each of which are payable semi-annually in arrears on January 15 and July 15. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 9 – Senior Notes for further information.

As of February 3, 2024, our Senior Notes have long-term credit ratings by Moody’s and Standard & Poor’s rating agencies of Baa3 and BBB, respectively.

Convertible Senior Notes

Following our exchanges during 2022, we had an aggregate remaining principal amount of $59.1 million of Convertible Senior Notes outstanding as of January 28, 2023. During the first quarter of 2023, we retired the remaining principal and accrued interest under the Convertible Senior Notes. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 10 – Convertible Senior Notes for further information.

Capital Expenditures

Our capital expenditures are primarily allocated toward the development of our omni-channel platform, including investments in new and existing stores and eCommerce technology, while we have also invested in our supply chain and corporate technology capabilities. In 2023, capital expenditures totaled $587.4 million on a gross basis and $520.4 million on a net basis, inclusive of construction allowances provided by landlords, which included the opening of nine DICK’S House of Sport stores and eleven Golf Galaxy Performance Centers.

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We anticipate 2024 capital expenditures of approximately $800 million, net of construction allowances provided by landlords. As we continue to reposition our store portfolio, these investments will be concentrated in new store development, relocations and remodels that will include eight DICK’S House of Sport stores, ten Golf Galaxy Performance Centers and 16 next generation 50,000 square foot DICK’S stores that will open in 2024 as well as, improvements within our existing stores including converting approximately 50 stores to premium full-service footwear decks. Additionally, we will begin construction on 15 DICK’S House of Sport stores that will open throughout 2025 and a new regional distribution center that we plan to open in 2026, while continuing to invest in technology to enhance our store fulfillment, in-store pickup and other foundational capabilities. Our 2024 capital expenditures plan also includes the purchase of certain real estate assets related to DICK’S House of Sport stores, for which we are evaluating potential sale-leaseback opportunities.

Share Repurchases 

From time-to-time, we may opportunistically repurchase shares of our common stock under our $2.0 billion share repurchase program authorized by our Board of Directors on December 16, 2021. In 2023, we repurchased 5.4 million shares of our common stock for $648.6 million, a portion of which was repurchased to offset the dilution from our settlement of the remaining $59.1 million principal outstanding of the Convertible Senior Notes in shares. As of February 3, 2024, the available amount remaining under the December 2021 authorization is $779.6 million.

We currently anticipate 2024 share repurchases of approximately $300 million. Any future share repurchase programs are subject to authorization by our Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.

Dividends 

In 2023, we paid $351.2 million of dividends to our stockholders. On March 13, 2024, our Board of Directors declared a 10% increase in our quarterly cash dividend compared to the previous quarterly per share amount. The dividend of $1.10 per share of common stock and Class B common stock is payable on April 12, 2024 to stockholders of record as of the close of business on March 29, 2024.

The declaration of future dividends and the establishment of the per share amount, record dates and payment dates for any such future dividends are subject to authorization by our Board of Directors and are dependent upon multiple factors including future earnings, cash flows, financial requirements and other considerations.

Supply Chain Financing

We have entered into supply chain financing arrangements with third-party financial institutions, whereby suppliers have the opportunity to settle outstanding payment obligations early at a discount. We do not have an economic interest in suppliers’ voluntary participation and we do not provide any guarantees or pledge assets under these arrangements. Supplier invoices are settled with the third-party financial institutions in accordance with the original supplier payment terms and our rights and obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by these arrangements. Liabilities associated with the funded participation in these arrangements, which is presented within accounts payable on the Consolidated Balance Sheet, were $45.9 million and $40.1 million as of February 3, 2024 and January 28, 2023, respectively.

Cash Flows

Changes in cash and cash equivalents for the last three fiscal years are as follows (in thousands):

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[[/GREPCENT_TABLE]]

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Operating Activities

Cash flows provided by operating activities increased $605.5 million in 2023 compared to 2022. The increase was primarily due to working capital changes resulting from last year’s inventory replenishment following supply chain disruptions caused by the COVID-19 pandemic, year-over-year changes in incentive compensation accruals and corresponding payments, higher construction allowances received from landlords due to our investments to enhance and grow our stores, and the timing of payments for marketing, payroll, deferred compensation plans and rent.

Investing Activities

Cash used in investing activities increased $221.8 million to $614.7 million in 2023 compared to 2022. Gross capital expenditures increased $223.4 million primarily driven by investments in current and future stores, including nine DICK’S House of Sport stores and eleven Golf Galaxy Performance Centers that opened in 2023 as well as higher investments in store enhancements, including converting over 100 stores to premium full-service footwear decks, and technology. Cash used in investing activities in 2023 also includes our acquisition of Moosejaw, offset by proceeds received from the sale of our Field & Stream trademark and other intellectual property.

Financing Activities

Financing activities have historically consisted of capital return initiatives, including share repurchases and cash dividend payments, cash flows generated from stock option exercises and cash activity associated with our Credit Facility, or other financing sources. Cash used in financing activities decreased $211.9 million during 2023 compared to 2022, primarily driven by the exchange of $515.9 million aggregate principal amount of our Convertible Senior Notes in the prior year and changes in bank overdraft balances between periods, partially offset by higher cash payments for share repurchases, dividends and minimum tax withholding requirements in 2023 as a result of the vesting of employee equity awards.

Contractual Obligations and Commercial Commitments

We are party to contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. Our future contractual obligations primarily consist of payments for operating leases, long-term debt and related interest payments, and other purchase obligations. Refer to Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 7 – Leases and Note 9 – Senior Notes for amounts outstanding as of February 3, 2024 related to operating leases and long-term debt.

Other purchase obligations are for marketing commitments to promote our brand and products, including media and naming rights, technology-related commitments, licenses for trademarks and other ordinary course commitments. In the ordinary course of business, we enter into many contractual commitments, including purchase orders and commitments for products or services, but generally, such commitments represent annual or cancellable commitments. The amount of non-cancellable purchase commitments as of February 3, 2024 were approximately $215 million.

Critical Accounting Policies and Use of Estimates

Our significant accounting policies are described in Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 1 – Basis of Presentation and Summary of Significant Accounting Policies. Critical accounting policies and estimates are those that we believe are both (1) most important to the portrayal of our financial condition and results of operations and (2) require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of such policies may result in materially different amounts being reported under different conditions or using different assumptions.

We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Inventory Obsolescence

We value inventory using the lower of weighted average cost and net realizable value, which is generally based on the selling price expectations of the merchandise. We regularly review inventories to determine if the carrying value of the inventory exceeds net realizable value and, when determined necessary, record a reserve to reduce the carrying value to net realizable value. Changes in customer merchandise preference, current and anticipated demand, consumer spending, weather patterns, economic conditions, business trends or merchandising strategies could cause our inventory to be exposed to obsolescence or slow-moving merchandise. A 10% change in our obsolete inventory reserves as of February 3, 2024, would have affected income before income taxes by approximately $7.2 million in fiscal 2023.

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Inventory Shrink

Shrink expense is accrued as a percentage of merchandise sales based on historical shrink trends. We perform physical inventories at our stores and distribution centers throughout the year. The shrink reserve represents the cumulative loss estimate for each of our locations since the last physical inventory date through the reporting date. Estimates by location and in the aggregate are impacted by internal and external factors and may vary significantly from actual results. A 10% change in our shrink reserves as of February 3, 2024, would have affected income before income taxes by approximately $3.0 million in fiscal 2023.

Goodwill and Intangible Assets

Goodwill, indefinite-lived and other finite-lived intangible assets are reviewed for impairment on an annual basis, or whenever circumstances indicate that a decline in value may have occurred. Our evaluation for impairment requires accounting judgments and financial estimates in determining the fair value of the reporting unit or asset. If these judgments or estimates change in the future, we may be required to record impairment charges for these assets.

Our goodwill impairment test compares the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using a combination of an income approach and a market approach. Estimates may differ from actual results due to, among other things, economic conditions, changes to our business models, or changes in operating performance. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect our future financial 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. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, an impairment charge is recorded to reduce the carrying value of the reporting unit to its fair value. As of February 3, 2024, we had no reporting units at risk of impairment and a 10% change in the fair value of our reporting units would not indicate a potential impairment of goodwill. The fair value of our reporting units has remained substantially in excess of their carrying value over the last three fiscal years.

Similar to our test for impairment of goodwill, the impairment test for indefinite-lived intangible assets involves comparing their estimated fair values to their carrying values. We estimate the fair value of indefinite-lived intangible assets, which are comprised primarily of trademarks and trade names, based on an income approach using the relief-from-royalty method, which assumes that, in lieu of ownership, a third-party would be willing to pay a royalty in order to derive a benefit from these types of assets. This approach is dependent on a number of factors, including estimates of future sales projections and growth, royalty rates in the category of intellectual property, discount rates and other variables. If actual results are not consistent with our estimates and assumptions used in estimating fair value, we may be exposed to material losses. We recognize an impairment charge when the estimated fair value of the intangible asset is less than its carrying value. See Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 11 – Fair Value Measurements for further information. We recorded no significant impairments in fiscal 2023, 2022 or 2021.

Impairment of Long-Lived Assets

We review long-lived assets whenever events and circumstances indicate that the carrying value of these assets may not be recoverable based on estimated undiscounted future cash flows. Assets are reviewed at the lowest level for which independent cash flows can be identified, which is typically the store level. We use an income approach to determine the fair value of individual store locations, which requires discounting projected future cash flows over each store’s remaining lease term. When determining the stream of projected future cash flows associated with an individual store location, we make assumptions about key store variables that incorporate local market conditions, including sales growth rates, gross margin and controllable expenses, such as store payroll. An impairment loss is recognized when the carrying amount of the store location is not recoverable and exceeds its fair value. During 2023, we recorded non-cash impairment charges from our Business Optimization. During 2022, we recorded non-cash impairment charges for store asset disposals at twelve Field & Stream stores that we closed in the period for conversion into DICK’S House of Sport stores or expanded DICK’S Sporting Goods stores. See Part IV. Item 15. Exhibits and Financial Statement Schedules, Note 11 – Fair Value Measurements for further information. There were no other significant long-lived assets impairment charges recognized during fiscal 2023, 2022 or 2021.

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