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Hibbett Sports, Inc.

“Game Tested. Athlete Approved.”. Hibbett Sports, Inc. Kevin A. Pribil. Module 11. Adjusting Enterprise Operations. Company overview Inventory Method Operating & Capital Leases. Agenda. Est. 1945 as Dixie Supply Co. in Alabama

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Hibbett Sports, Inc.

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  1. “Game Tested. Athlete Approved.” Hibbett Sports, Inc. Kevin A. Pribil Module 11 Adjusting Enterprise Operations

  2. Company overview • Inventory Method • Operating & Capital Leases 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. Inventory Method

  7. Hibbettholds more operating than capital leases • Mostretail stores are reported as operating leases • Note 6 contains detailed financial information • Goal: reclassify operating as capital leases Operating & Capital Leases

  8. Use numbers provided in Note 6: Leases to calculate implicit discount rate. Use IRR formula to compute. Years thereafter totaling $1,206. Assume continued $385 per year until we reach $1,206. Step 1: Compute Discount Rate

  9. Step 2: Compute PV of Minimum Lease PMT’s

  10. Balance Sheet Adjustments • Adjust NEA & NFL • Lease and accompanying obligation is now part of Hibbett’s assets/liabilities • Income Statement Adjustments • Remove rent expense from operating expense • Add depreciation expense to operating expense • Add interest expense as a non-operating expense (assumed 3% interest rate) Step 3: Adjust F/S

  11. Step 3: Adjust F/S

  12. Non-existent for Hibbett Special-Purpose Entities

  13. Co’s use Employee Stock Options (ESO’s) to compensate employees and better align employee interests with S/H • Adjustment is needed to account for subsequent changes in fair value of ESO’s during the vesting period • This additional expense is created over time and realizing this change in value is our goal Share-Based Compensation

  14. This table compiles information from Note 3: Stock-Based Compensation into a single table. • It simplifies the 7-step process of adjusting for ESO’s • *“Number of Options Exercisable: Beginning of Year” was found in the 2012 Annual report Share-Based Compensation

  15. Step 1: compute value of options exercisable at begin. Of year using beginning of year share price ($44.04) • = $7,990 • Step 2: compute value of options exercisable at begin. Of year using end of year share price ($53.22) • = $11,596 • Step 3: estimate value of ESO’s exercised using avg. share price (avg. share price = $48.63) • = $3,194 ESO Adjustment: Steps 1-3

  16. Step 4: estimate value of ESO’s cancelled using avg. share price (avg. share price = $48.63) • = N/A because none were cancelled, forfeited, or expired • Step 5: compute value of options exercisable at year end using end of year share price ($53.22) • $8,444 • Step 6: estimate additional share-based compensation • $42 ESO Adjustment: Steps 4-6

  17. Step 7: adjust NFL, CSE, EPAT, and FEAT • A) Increase NFL by (5) = $8,444 • B) Decrease CSE by (5) = $8,444 • C) Decrease EPAT by (6) = $42 • D) Increase FEAT by (2)-(1)-(3)-(4) = $412 ESO Adjustment: Step 7

  18. Questions…

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