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Hibbett Sports, Inc.

“Game Tested. Athlete Approved.”. Hibbett Sports, Inc. Kevin A. Pribil. Module 8. Abnormal Enterprise Income Growth Valuation Model. Company overview Introduction to AEIG Model AEIG Derivation Calculation Equation Format Tabular Format Change in Growth Rate 3-Model Comparison.

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Hibbett Sports, Inc.

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  1. “Game Tested. Athlete Approved.” Hibbett Sports, Inc. Kevin A. Pribil Module 8 Abnormal Enterprise Income Growth Valuation Model

  2. Company overview • Introduction to AEIG Model • AEIG Derivation • Calculation • Equation Format • Tabular Format • Change in Growth Rate • 3-Model Comparison 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. This model anchors calculation of future income on the capitalized forecast of next year’s EPAT • Comparison Residual Enterprise Income model anchors on current year’s NEA • Utilize free cash flows to derive the AEIG equation • Broken into two pieces: • Value estimated within the forecast horizon (1-5 years) • Value estimated beyond the forecast horizon (5+ years) Introduction to AEIG Model

  7. Use Parsimonious Assumptions (Module 4) • Essentially, calculate FCF each year and anchor on EPAT one year in the future • Calculate agr and discount to find the within-horizon value • Employ continuing value growth rate (6% vs. assumed 8% growth) to calculate and discount infinite agr • Multiply by 1/(1+rEnt) to determine enterprise value How to arrive at AEIG Valuation

  8. Within Horizon term V0 = Continuing Value term Anchor= Next year’s capitalized earnings Equation Format

  9. Additional 2-year forecasting required to stabilize parsimonious assumptions for use in AEIG Hibbett Abnormal Income

  10. Assumed 8% growth prior to this module • Reasons to limit 8% growth to the 5-year forecast and use 6% into continuum: • Hibbett experienced rapid growth in the past few years by expanding into new states and building new stores • New strategy is to shut down underperforming stores / vamp up higher performing stores  growth limiting • With high industry competition, 8% growth into infinity will drastically overstate the current enterprise value • Inflation expected to be ~2% (implies 4% actual firm growth) Why Change Growth Rate?

  11. Based on expected future cash flows via forecasting DéjàVu to Discounted Cash Flow Model

  12. Anchor valuation on Net Enterprise Assets at time, t=0 Déjà Vu to Residual Enterprise Income Model

  13. Each model returns the same enterprise value; $2,193,048 • The foundation for each is NEA and EPAT…different mathematical techniques leading to the same conclusions Model Comparison

  14. Evaluate models side-by-side focusing on the risk of inaccurate estimation • There is greater risk of inaccurate forecasting as estimates go further into the future • Therefore, models based on known informationor short-term forecasting should be used as the basis for calculating enterprise value. • Abnormal Enterprise Income Growth Model estimates 54.3% of enterprise value using a lower risk basis; values within the 5-year horizon • REI and FCF models estimate enterprise value with more risky forecasts beyond the 5-year horizon (to infinity and beyond) Model Comparison

  15. Hibbett data is from F/S released on 4/1/2013 HIBB closed at $56.00 on 4/1/2013 Based on this valuation, Hibbett is undervalued in the market by $3.47/share BUY! Investment Recommendation

  16. Questions…

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