2. Recent Accounting Pronouncements

Standards that were adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard related to revenue recognition. Under ASU 2014-09, Revenue from Contracts with Customers (Topic 606), revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive for those goods or services. The standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On February 4, 2018, we adopted ASU 2014-09 using the modified retrospective transition method. Results for reporting periods beginning after February 3, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

In preparation for implementation of the standard, we identified the revenue streams that would be affected. We then designed and implemented processes and internal controls to appropriately recognize and present the associated financial information. Based on these efforts, we determined that the adoption of ASU 2014-09 changed the recognition and presentation of:

·	The stand-alone benefit received by customers through the Hibbett Rewards customer loyalty program recorded as a separate performance obligation,

·	Gift card breakage income recognized in net sales in proportion to the customer redemption pattern, and

·	The liability for net sales returns recognized on a gross basis including a right to recover asset measured at the former carrying value of the inventory less any expected recovery costs.

We applied ASU 2014-09 only to contracts that were not completed prior to Fiscal 2019. The cumulative effect of initially applying ASU 2014-09 was a $0.6 million decrease to the opening balance of retained earnings as of February 4, 2018. We expect the adoption to be immaterial to our financial position, results of operations and cash flows on an ongoing basis.

The effect of the adoption of ASU 2014-09 on our unaudited condensed consolidated balance sheet as of November 3, 2018 was (in thousands):

	As Reported		ASU 2014-09 Effect (1)			Excluding ASU 2014-09 Effect
Inventories, net	$	256,854	$	(278	)	$	257,132
Other current assets	$	23,395	$	201		$	23,194
Accounts payable	$	109,445	$	1,116		$	108,329
Other accrued expenses	$	9,155	$	837		$	8,318

(1) Does not include the cumulative effect of initially adopting ASU 2014-09 to our consolidated balance sheet as adjusted as of February 4, 2018.

The effect of the adoption of ASU 2014-09 on our unaudited condensed consolidated statement of operations for the thirteen weeks ended November 3, 2018 was (in thousands, except per share amounts):

	As Reported		ASU 2014-09 Effect		Excluding ASU 2014-09 Effect
Net sales	$	216,888	$	508	$	216,380
Cost of goods sold	$	146,376	$	364	$	146,012
Gross margin	$	70,512	$	144	$	70,368
Store operating, selling and administrative expenses	$	62,342	$	51	$	62,291
Income before provision for income taxes	$	2,119	$	92	$	2,027
Provision for income taxes	$	620	$	27	$	593
Net income	$	1,499	$	65	$	1,434
Diluted earnings per share	$	0.08	$	-	$	0.08

The effect of the adoption of ASU 2014-09 on our unaudited condensed consolidated statement of operations for the thirty-nine weeks ended November 3, 2018 was (in thousands, except per share amounts):

	As Reported		ASU 2014-09 Effect			Excluding ASU 2014-09 Effect
Net sales	$	702,718	$	(17	)	$	702,735
Cost of goods sold	$	469,082	$	42		$	469,040
Gross margin	$	233,636	$	(59	)	$	233,695
Store operating, selling and administrative expenses	$	186,211	$	(12	)	$	186,223
Income before provision for income taxes	$	28,965	$	(47	)	$	29,012
Provision for income taxes	$	7,179	$	(12	)	$	7,191
Net income	$	21,786	$	(35	)	$	21,821
Diluted earnings per share	$	1.15	$	-		$	1.15

Standards that are not yet adopted

In February 2016, the FASB established Topic 842, Leases, by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for us on February 3, 2019, with early adoption permitted. We expect to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on February 3, 2019, and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before February 3, 2019.

The new standard provided a number of optional practical expedients in transition. We expect to elect the “package of practical expedients”, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.

We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.

On adoption, we currently expect to recognize additional operating liabilities ranging from $160.0 million to $190.0 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing Hibbett operating leases. This expectation does not include the impact of leases acquired in connection with the acquisition of City Gear, LLC, which we are currently evaluating. See Note 3, Pending Acquisition and Note 11, Subsequent Events. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for certain classes of underlying assets. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient so as to not separate lease and non-lease components for certain classes of underlying assets.

We continuously monitor and review all current accounting pronouncements and standards from the FASB of U.S. GAAP for applicability to our operations. As of November 3, 2018, there were no other new pronouncements or interpretations that had or were expected to have a significant impact on our operations.