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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 30, 2011

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    .

Commission File No. 001-31463

DICK’S SPORTING GOODS, INC.

(Exact name of registrant as specified in its charter)

345 Court Street, Coraopolis, Pennsylvania 15108

(Address of Principal Executive Offices)

(724) 273-3400

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   Yes o No  x

The number of shares of common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, outstanding as of August 17, 2011 was 95,414,038 and 24,960,870, respectively.

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INDEX TO FORM 10-Q

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(Amounts in thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements.

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(Dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

(Dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  Company

Dick’s Sporting Goods, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer selling sporting goods equipment, apparel and footwear through its 536 stores, the majority of which are located throughout the eastern half of the United States.  Additionally, the Company maintains e-commerce operations for both Dick’s and Golf Galaxy.  Unless otherwise specified, any reference to “year” is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s”, “we”, “us”, “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its wholly-owned subsidiaries.

2.  Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by us in accordance with the requirements for Form 10-Q and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  The interim consolidated financial statements are unaudited and have been prepared on the same basis as the annual audited consolidated financial statements.  In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information.  This unaudited interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 29, 2011 as filed with the Securities and Exchange Commission on March 18, 2011.  Operating results for the 13 and 26 weeks ended July 30, 2011 are not necessarily indicative of the results that may be expected for the year ending January 28, 2012 or any other period.

Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Presentation of Comprehensive Income.”  This update amended the presentation options in Accounting Standards Codification (“ASC”) 220, “Comprehensive Income,” to provide an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with retrospective application required.  The adoption of this guidance will not have a significant impact on the presentation of the Company’s consolidated financial statements.

Fair Value Measurement

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  This update amended explanations of how to measure fair value to result in common fair value measurement and disclosure requirements in U.S GAAP and IFRSs.  ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with prospective application required.  The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.

3.  Store and Corporate Office Closings

The calculation of accrued store closing and relocation reserves 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 store closing and relocation reserves are evaluated each quarter.

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The following table summarizes the activity in 2011 and 2010 (in thousands):

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 unaudited consolidated balance sheets.

4.  Earnings per Common Share

Basic earnings per common share is computed based on the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per common share is computed based on the weighted average number of shares of common stock, plus the effect of dilutive potential common shares outstanding during the period, using the treasury stock method.  Dilutive potential common shares include outstanding stock options, restricted stock and warrants.

The computations for basic and diluted earnings per common share are as follows (in thousands, except per share data):

For the 13 weeks ended July 30, 2011 and July 31, 2010, 0.6 million and 4.6 million shares, respectively, were attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.  For the 26 weeks ended July 30, 2011 and July 31, 2010, 0.5 million and 4.4 million shares, respectively, were attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.

5.  Investments

During the 13 and 26 weeks ended July 30, 2011, the Company realized a pre-tax gain of $13.9 million resulting from the sale of available-for-sale securities held in GSI Commerce, Inc. (“GSI”), in connection with GSI’s acquisition by eBay Inc.  There were no sales of the Company’s investment in GSI during the 13 and 26 weeks ended July 31, 2010.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.  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”, “goal”, “will”, “will be”, “will continue”, “will result”, “could”, “may”, “might” or any variations of such words or other words with similar meanings.  Forward-looking statements address, among other things, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase profit margins and return on invested capital, plans to grow our private brand business, projections of our future profitability, results of operations, capital expenditures, our financial condition or other “forward-looking” information and include statements about revenues, earnings, spending, margins, costs, liquidity, store openings and operations, inventory, private brand products or our actions, plans or strategies.

The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results, and could cause actual results for fiscal 2011 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:

·                        Continuation of the ongoing economic and financial downturn may cause a continued decline in consumer spending, and other changes in macroeconomic factors or market conditions, including the housing market and fuel costs, may adversely impact the level of consumer spending for the types of merchandise we sell;

·                        Changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular;

·                        Our quarterly operating results and same store sales may fluctuate substantially;

·                        Potential volatility in our stock price;

·                        Our ability to access adequate capital, which may be affected by a tightening of availability or higher borrowing costs resulting from uncertainty in financial markets or by restrictions imposed under our senior secured revolving credit agreement;

·                        The intense competition in the sporting goods industry;

·                        The ongoing financial and economic crisis may adversely affect our landlords and real estate developers of retail space, which may limit the availability of attractive store locations and affect our ability to grow our number of stores; further, a lack of available retail store sites on terms acceptable to us, an increase in the cost of real estate and other items related to our stores or our inability to manage our growth, open new stores on a timely basis or expand successfully in new and existing markets could negatively impact our business;

·                        Changes in consumer demand;

·                        Unauthorized disclosure of sensitive, personal or confidential information;

·                        Disruptions in our or our vendors’ supply chain, including as a result of political instability, foreign trade issues, the impact of the ongoing economic or financial downturn on distributors or other reasons;

·                        Our relationships with our vendors, including potential increases in the costs of their products and our ability to pass those cost increases on to our customers, their ability to maintain their inventory and production levels and their ability or willingness to provide us with sufficient quantities of products at acceptable prices;

·                        Factors that could negatively affect our private brand offerings, including fluctuations in the cost of products resulting from increases in raw material prices and other factors, reliance on foreign sources of production, compliance with government and industry safety standards, and intellectual property risks;

·                        Risks and costs relating to the products we sell, including: product liability claims and the availability of recourse to third parties, including under our insurance policies; product recalls; and the regulation of and other hazards associated with certain products we sell, such as hunting rifles and ammunition;

·                        The loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive Officer;

·                        Costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to labor, employment, privacy and the sale of consumer products;

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·                        Our ability to secure and protect our trademarks, patents and other intellectual property;

·                        Risks relating to operating as a multi-channel retailer, including the impact of rapid technological change, internet security and privacy issues, the threat of systems failure or inadequacy, increased or changing governmental regulation and increased competition;

·                        Disruption of or other problems with our current management information systems or software;

·                        Any serious disruption at our distribution 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 other legal actions against us;

·                        Our pursuit of strategic acquisitions, including costs and uncertainties associated with combining businesses and/or assimilating acquired companies;

·                        Our ability to meet our labor needs;

·                        Currency exchange rate fluctuations;

·                        We are controlled by our Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders;

·                        The impact on the U.S. retail environment of foreign instability and conflict;

·                        Our current anti-takeover provisions, which could prevent or delay a change in control of the Company;

·                        Impairment in the carrying value of goodwill or other acquired intangibles; and

·                        Other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 29, 2011.

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 risk 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.

Investors should also be aware that while the Company does communicate with securities analysts, from time to time, such communications are conducted in accordance with applicable securities laws and investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

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.  The Company also owns and operates Golf Galaxy, LLC, a golf specialty retailer (“Golf Galaxy”).  Unless otherwise specified, any reference to “year” is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s”, “we”, “us”, “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its wholly-owned subsidiaries.

As of July 30, 2011, we operated 455 Dick’s stores in 42 states and 81 Golf Galaxy stores in 30 states, with approximately 26.4 million square feet in 43 states on a consolidated basis, the majority of which are located throughout the eastern half of the United States.  Additionally, the Company maintains e-commerce operations for both Dick’s and Golf Galaxy.

Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year.  Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.

The primary factors that historically influenced the Company’s profitability and success have been its growth in the number of stores and selling square footage, positive same store sales and its strong gross profit margins.  In the last five years, the Company has grown from 268 stores as of July 29, 2006 to 536 stores as of July 30, 2011, reflecting both organic growth and acquisitions.  The Company continues to expand its presence through the opening of new stores, although the rate of growth has decreased from the rate of growth experienced in earlier years, reflecting ongoing economic conditions.

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In order to monitor the Company’s success, the Company’s senior management monitors certain key performance indicators, including:

·                        Consolidated same store sales performance — For the 26 weeks ended July 30, 2011, the Company’s consolidated same store sales increased 2.3% compared to a 6.8% increase during the same period in fiscal 2010.  The Company believes that its ability to consistently deliver increases in consolidated same store sales will 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 900 Dick’s locations across the United States.

·                        Operating cash flow — Net cash provided by operating activities totaled $126.0 million in the 26 weeks ended July 30, 2011, while the Company generated $66.7 million during the same period in fiscal 2010.  We typically generate significant positive operating cash flows in our fiscal fourth quarter in connection with the holiday selling season and proportionately higher net income levels.  See further discussion of the Company’s cash flows in the “Liquidity and Capital Resources and Changes in Financial Condition” section herein. The Company believes that a key strength of its business has been the ability to consistently generate positive cash flow from operations.  Strong cash flow 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 continued improvement of information technology tools and costs associated with potential strategic acquisitions or investments that may arise from time to time.

·                        Quality of merchandise offerings — To monitor and maintain acceptance of its merchandise offerings, the Company monitors sell-throughs, inventory turns, gross margins and markdown rates at a department and style level.  This analysis helps the Company manage inventory receipts and markdowns to reduce cash flow 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, the Company monitors various indicators, including new store productivity, sales per square foot, store operating contribution margin and store cash flow.  New store productivity compares the sales increase for all stores not included in the same store sales calculation with the increase in square footage.

CRITICAL ACCOUNTING POLICIES

As discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011, the Company considers its policies on inventory valuation, vendor allowances, goodwill and intangible assets, impairment of long-lived assets and closed store reserves, business combinations, self-insurance reserves, stock-based compensation and uncertain tax positions to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.  There have been no changes in the Company’s critical accounting policies during the period ended July 30, 2011.

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary

The Company reported net income of $73.8 million for the current quarter, or $0.59 per diluted share, compared to net income of $51.5 million, or $0.43 per diluted share, for the 13 weeks ended July 31, 2010.  Net income for the current quarter includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share.

Net sales for the current quarter increased 6.6% to $1.3 billion, due primarily to a 2.5% increase in consolidated same store sales and the opening of new stores.

As a percentage of net sales, gross profit increased 132 basis points to 30.69% for the quarter, due primarily to higher merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels compared to last year’s second quarter.

We ended the second quarter with no outstanding borrowings under our Second Amended and Restated Credit Agreement, as amended (the “Credit Agreement”).

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The following represents a reconciliation of beginning and ending stores for the periods indicated:

The following tables present for the periods indicated selected items in the unaudited consolidated statements of income as a percentage of the Company’s net sales, as well as the basis point change in the percentage of net sales from the prior year’s period.  In addition, other selected data are provided to facilitate a further understanding of our business.  These tables should be read in conjunction with the following management’s discussion and analysis and the unaudited consolidated financial statements and related notes thereto.

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13 Weeks Ended July 30, 2011 Compared to the 13 Weeks Ended July 31, 2010

Net Income

The Company reported net income of $73.8 million for the current quarter, or $0.59 per diluted share, compared to net income of $51.5 million, or $0.43 per diluted share, for the 13 weeks ended July 31, 2010.  Net income for the current quarter includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share.

Net Sales

Net sales for the current quarter increased 6.6% to $1.3 billion, due primarily to a 2.5% increase in consolidated same store sales and the opening of new stores.  The 2.5% consolidated same store sales increase consisted of a 1.7% increase in Dick’s Sporting Goods stores, a 4.0% increase in Golf Galaxy stores and a 31.9% increase in the Company’s e-commerce business.  The inclusion of the e-commerce business resulted in an increase of approximately 58 basis points to the Company’s consolidated same store sales calculation for the 13 weeks ended July 30, 2011, compared to 38 basis points for the 13 weeks ended July 31, 2010.

The increase in consolidated same store sales was primarily driven by increases in apparel, footwear and golf, which were partially offset by decreases in outdoor categories.  Higher precipitation levels as well as cooler temperatures in March and April 2011 contributed to unfavorable conditions for outdoor activities that continued to affect sales at the beginning of the second quarter.  The consolidated same store sales increase was attributable to an increase of approximately 2.5% in sales per transaction, partially offset by a decrease in transactions of approximately 0.8% at Dick’s stores.  Every 1% change in same store sales would have impacted earnings before income taxes for the current quarter by approximately $4 million.

Income from Operations

Income from operations increased to $111.7 million for the current quarter from $88.1 million for the 13 weeks ended July 31, 2010.  The increase was primarily due to a $41.0 million increase in gross profit, partially offset by an increase in selling, general and administrative expenses totaling $14.3 million.

Gross profit increased approximately 11% to $401.1 million for the current quarter from $360.1 million for the 13 weeks ended July 31, 2010.  The 132 basis point increase is due primarily to a 121 basis point increase in merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels due to our continued inventory management efforts. Every 10 basis point change in merchandise margin would have impacted the current quarter earnings before income taxes by approximately $1 million.

Selling, general and administrative expenses increased approximately 5% to $285.7 million for the current quarter from $271.4 million for the 13 weeks ended July 31, 2010, but decreased as a percentage of net sales by 26 basis points.  Store payroll expenses decreased as a percentage of net sales by 43 basis points due to leverage on the increase in net sales in this year’s quarter.  Additionally, advertising expenses decreased as a percentage of net sales by 28 basis points from last year’s quarter, as last year included advertising expenses related to the Company’s collaborative marketing initiative with adidas for the adiZero shoe launch, as well as investments geared toward pursuing other market share gains that included the promotion of our customer loyalty program.  These basis point decreases were partially offset by a 44 basis point increase in administrative expenses due to higher corporate costs to support our business strategies and a 5 basis point increase in bankcard charges resulting from higher debit interchange rates compared to last year’s quarter.

Pre-opening expenses increased to $3.7 million for the quarter from $0.7 million for the 13 weeks ended July 31, 2010.  Pre-opening expenses were for the opening of eight new Dick’s stores during the quarter as compared to one new Dick’s store during last year’s quarter.  Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

Gain on Sale of Investment

Gain on sale of investment was $13.9 million in the current quarter resulting from the sale of the Company’s investment in GSI Commerce, Inc., the Company’s e-commerce service provider.

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Interest Expense

Interest expense was $3.5 million for both the current quarter and for the 13 weeks ended July 31, 2010. Interest expense for the 13 weeks ended July 30, 2011 and July 31, 2010 includes $2.7 million related to rent payments under the Company’s financing lease for its corporate headquarters building.

Income Taxes

The Company’s effective tax rate was 39.27% for the 13 weeks ended July 30, 2011 as compared to 38.61% for the same period last year.

26 Weeks Ended July 30, 2011 Compared to the 26 Weeks Ended July 31, 2010

Net Income

The Company reported net income of $111.3 million for the 26 weeks ended July 30, 2011, or $0.89 per diluted share, compared to net income of $77.7 million, or $0.64 per diluted share, for the 26 weeks ended July 31, 2010. Net income for the 26 weeks ended July 30, 2011 includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share.

Net Sales

Net sales for the period increased 6.5% to $2.4 billion, due primarily to a 2.3% increase in consolidated same store sales and the opening of new stores.  The 2.3% consolidated same store sales increase consisted of a 1.6% increase in Dick’s Sporting Goods stores, a 3.7% increase in Golf Galaxy stores and a 28.6% increase in the Company’s e-commerce business.  The inclusion of the e-commerce business resulted in an increase of approximately 56 basis points to the Company’s consolidated same store sales calculation for the 26 weeks ended July 30, 2011, compared to 29 basis points for the 26 weeks ended July 31, 2010.

The increase in consolidated same store sales was primarily driven by increases in apparel, footwear and golf, which were partially offset by decreases in outdoor categories.

Income from Operations

Income from operations increased to $176.1 million for the current period from $135.1 million for the 26 weeks ended July 31, 2010.  The increase was primarily due to a $69.1 million increase in gross profit, partially offset by an increase in selling, general and administrative expenses totaling $25 million.

Gross profit increased approximately 10% to $731.5 million for the period, from $662.4 million for the 26 weeks ended July 31, 2010.  The 109 basis point increase is due primarily to a 105 basis point increase in merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels due to our continued inventory management efforts.

Selling, general and administrative expenses increased approximately 5% to $549.5 million for the period from $524.5 million for the 26 weeks ended July 31, 2010, but decreased as a percentage of net sales by 37 basis points.  Advertising expenses decreased 58 basis points as a percentage of net sales due primarily to a reduction in national media and direct mail advertising, as well as last year’s inclusion of advertising expenses related to the Company’s collaborative marketing initiative with adidas for the adiZero shoe launch, as well as investments geared toward pursuing other market share gains that included the promotion of our customer loyalty program.  Additionally, store payroll expenses decreased as a percentage of net sales by 22 basis points due to leverage on the increase in net sales this year. These basis point decreases were partially offset by a 39 basis point increase in administrative expenses due to higher corporate costs to support our business strategies and a 7 basis point increase in bankcard charges resulting from higher debit interchange rates compared to the 26 weeks ended July 31, 2010.

Pre-opening expenses increased to $5.9 million for the period from $2.8 million for the 26 weeks ended July 31, 2010.  Pre-opening expenses were for the opening of 11 new Dick’s stores during the period as compared to six new Dick’s stores during last year’s period.  Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

Gain on Sale of Investment

Gain on sale of investment was $13.9 million in the current year resulting from the sale of the Company’s investment in GSI Commerce, Inc., the Company’s e-commerce service provider.

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Interest Expense

Interest expense was $7.0 million for both the current quarter and for the 26 weeks ended July 31, 2010. Interest expense for the 26 weeks ended July 30, 2011 and July 31, 2010 includes rent payments under the Company’s financing lease for its corporate headquarters building of $5.3 million and $5.4 million, respectively.

Income Taxes

The Company’s effective tax rate was 39.37% for the 26 weeks ended July 30, 2011 as compared to 39.32% for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

Our primary capital requirements are for working capital, capital improvements, and to support expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing infrastructure improvements.

The change in cash and cash equivalents is as follows (in thousands):

Operating Activities

Cash flow from operations is seasonal in our business.  Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, with the pre-holiday inventory increase being the largest.  In the fourth quarter, inventory levels are reduced in connection with holiday sales and this inventory reduction, combined with proportionately higher net income, typically produces significant positive cash flow.

Cash provided by operating activities increased $59.3 million for the 26 weeks ended July 30, 2011 compared to the same period last year.  Higher net income for the 26 weeks ended July 30, 2011 impacted operating cash flows by $33.6 million.  Changes in income taxes payable for the 26 weeks ended July 30, 2011 improved operating cash flows by $38.4 million compared to the same period in fiscal 2010.  Legislation that provides for a bonus depreciation deduction for qualified capital expenditures and stock option exercises contributed to a $38.9 million decrease in income tax payments.

Investing Activities

Cash used in investing activities for the 26 weeks ended July 30, 2011 increased by $20.7 million to $76.4 million. The Company’s gross capital expenditures were $85.6 million during the current period, compared to $61.6 million during the 26 weeks ended July 31, 2010, which related primarily to the opening of new stores, ongoing remodeling of existing locations, information systems and administrative facilities.

The Company opened 11 stores during the 26 weeks ended July 30, 2011, as compared to opening six stores during the 26 weeks ended July 31, 2010.