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Hibbett Sports, Inc.

“Game Tested. Athlete Approved.”. Hibbett Sports, Inc. Kevin A. Pribil. Module 6. Cost of Capital and Valuation. Company overview Cost of Capital & Assumptions Risk Elements Cost of Debt Capital Cost of Equity Capital CAPM Effect on Enterprise Value. Agenda.

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Hibbett Sports, Inc.

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  1. “Game Tested. Athlete Approved.” Hibbett Sports, Inc. Kevin A. Pribil Module 6 Cost of Capital and Valuation

  2. Company overview • Cost of Capital & Assumptions • Risk Elements • Cost of Debt Capital • Cost of Equity Capital • CAPM • Effect on Enterprise Value Agenda

  3. Est. 1945 as Dixie Supply Co. in Alabama • Began in the marine and small aircraft markets but moved into sporting goods by the ‘60s • IPO in October 1996; operated 79 stores at the time • Incorporated in Delaware in 2007 • Immense growth into a now 873 store company • CEO- Jeffry Rosenthal, 55, former executive at Champs • Chairman- Michael Newsome, 74, began at Hibbett over 45 years ago and worked his way up from cashier Company Overview

  4. As a retailer Hibbettoperates typically in 5,000 sq. ft. stores usually influenced by the location of a WalMart • 4 different types of stores • Hibbett Sports: full retail format • Sports Additions: 90% footwear and headgear • Sports & Co.: a 25,000 sq. ft. superstore (1 in operation) • Team: leading customized apparel supplier • CEO and CFO conduct annual evaluation of efficiency of internal controls procedures based on COSO standards • KPMG released audit report on Hibbett’s internal controls Company Operations

  5. Increased competition not only between sporting goods stores but also with departments stores and online merchandisers • Increased store overhead (ex: rock-climbing walls, putting greens) • The fight for exclusive contracts with vendors • Analysts expect a slight decline in revenue of .1% per year through 2018. Industry Drivers Source: www.ibisworld.com

  6. Moving away from ad hoc 10% assumption… • Cost of Enterprise Capital = [Cost of Debt Capital + Cost of Equity Capital] • Estimate cost of debt and equity capital based on financial information • Generally, greater risk requires greater return (higher cost of capital) Cost of Enterprise Capital

  7. 1) current interest rates are a good approximation of future interest rates • 2) current risk of enterprise operations is a good approximation of future risk Assumptions

  8. Debt & Equity risk compute the enterprise risk as a whole • Enterprise & Debt risk are sources of risk for equity holders (owners) • Quirky because calculating enterprise risk is a function of debt and equity risk; equity risk in turn is a function including enterprise risk itself. Risk Elements

  9. As in the basic accounting equation; • Enterprise (assets) = Debt (Liab.) + Equity (S/H Equity) • Cost of enterprise capital equal to weighted portion of debt & equity according to percentages of capital structure • r(Ent)= [ rD * (vD/vEnt)] + [ rEq * (vEq/vEnt)] Weighted-Average Cost of Capital

  10. RNFL = FEAT / avg(NFL) • RNFL is the rD used in WACC calculation • Assume the average of .2068% as rD Cost of Debt Capital

  11. NFL is negative but although it represents such a small piece of Hibbett’s Market Value it is immaterial…included in calculations to illustrate effects on cost of enterprise capital Weighted Cost of Debt Capital

  12. Diversifiable Risk: risk that can be minimized by holding various stocks in a portfolio • Non-Diversifiable Risk: cannot be minimized by varying the investment portfolio makeup • Capital Asset Pricing Model uses historical data to estimate the non-diversifiable risk for a particular investment, thereby generating rEq Cost of Equity Capital

  13. rEq = rRF + [Beta * (rMKT – rRF)] • rEq is Hibbett’s expected return on equity • rRFis the risk-free market rate. Estimated using 30-year treasury bond returns • rMKT is the expected market return • Beta is risk that cannot be diversified away. Market beta is 1 CAPM

  14. rMKT historically fluctuates between 9-13% rRF is found historically on www.treasury.gov using the 30-year treasury bill. 3.67% Market Risk Premium= (rMKT – rRF) … the market risk premium has generally fluctuated between 4-8%  6.85% assumed based on rRF and rMKT percentages CAPM Assumptions

  15. Y = mX + b When calculating the linear regression line we use historical beta calculations over the past 60 months. Finding the slope of this line estimates future beta or the m value in the equation above. Excel’s SLOPE function can also be used to calculate beta estimate. Beta = 1.01496 Beta

  16. Bloomberg Beta According to Bloomberg, Hibbett’s Adjusted Beta is 1.071…a difference of .05 compared to regression analysis

  17. Calculation of rEq

  18. Equity weighting is slightly above 100% because negative NFL creates a negative debt weighting Cost of Equity capital takes into account rEq that was calculated using CAPM and also market weighting Weighted Cost of Equity Capital

  19. Bloomberg WACC Equity accounts for 100% of the WACC

  20. Cost of Enterprise Capital = Cost of Debt Capital + Cost of Equity Capital • Cost of Enterprise Capital = (-.00001%) + (10.62278%) • Cost of Enterprise Capital = 10.62277% Cost of Enterprise Capital

  21. Enterprise Value under original assumption (10% required rate of return) is ~$800,000 greater Effect on Enterprise Value

  22. Questions…

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