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Basis of Presentation and Summary of Critical and Significant Accounting Policies (Policies)

12 Months Ended

Feb. 02, 2019

Basis of Presentation and Summary of Critical and Significant Accounting Policies [Abstract]

We acquired City Gear, LLC (City Gear) on November 5, 2018 with an effective date of November 4, 2018 for approximately $88.0 million, including $86.8 million of cash paid. (See Note 3 – Acquisition)

Principles of Consolidation

The consolidated financial statements of our Company include its accounts and the accounts of all wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Occasionally, certain reclassifications are made to conform previously reported data to the current presentation. Such reclassifications have no impact on total assets, total liabilities, net income or stockholders’ investment in any of the years presented.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and the disclosure of intangible assets and intangible and contingent liabilities at the date of the financial statements. We believe our estimates are reasonable; however, the assumptions used by management could change significantly in future estimates due to changes in circumstances and actual results could differ materially from those estimates.

Reportable Segments

Hibbett Sports, Inc., through its subsidiaries, is a leading athletic-inspired fashion retailer with more than 1,100 stores operating under the Hibbett Sporting Goods and City Gear banners and an omni-channel platform. We identify our operating segments according to how our business activities are managed and evaluated by our chief executive officer who is our chief operating decision maker. Our shopping channels primarily include store locations and websites or apps. Store sales are primarily filled from the store’s inventory but may also be shipped from a different store location or our logistics network if an item is not available at the original store. Direct-to-consumer orders are generally shipped to our customers from a store, our logistics network or some combination thereof depending on the availability of the desired item.

Given the economic similarity of the store formats, the products offered for sale, the type of customers, the methods of distribution and how our Company is managed, our operations constitute only one reportable segment.

Vendor Arrangements

We enter into arrangements with some of our vendors that entitle us to a partial refund of the cost of merchandise purchased during the year or reimbursement of certain costs we incur to advertise or otherwise promote their product. Volume-based rebates, supported by vendor agreements, are estimated throughout the year and reduce the cost of inventories and cost of goods sold during the year. This estimate is regularly monitored and adjusted for current or anticipated changes in purchase levels and for sales activity.

We also receive consideration from vendors through a variety of other programs, including markdown reimbursements, vendor compliance charges and defective merchandise credits. If the payment is a reimbursement for costs incurred, it is recognized as an offset against those related costs; otherwise, it is treated as a reduction to the cost of merchandise. Markdown reimbursements related to merchandise that has been sold are negotiated by our merchandising teams and are credited directly to cost of goods sold in the period received. If vendor funds are received prior to merchandise being sold, they are recorded as a reduction of merchandise cost. Vendor compliance charges and defective merchandise credits reduce the cost of inventories.

Marketing

We expense marketing costs when incurred. We participate in various marketing cooperative programs with our vendors, who, under these programs, reimburse us for certain costs incurred. A receivable for cooperative marketing to be reimbursed is recorded as a decrease to expense as advertisements are run.

The following table presents the components of our marketing expense (in thousands):

	Fiscal Year Ended
	February 2, 2019 (52 weeks)			February 3, 2018 (53 weeks)			January 28, 2017 (52 weeks)
Gross marketing costs	$	17,608		$	13,356		$	10,382
Marketing reimbursements		(2,850	)		(3,010	)		(3,319	)
Net marketing costs	$	14,758		$	10,346		$	7,063

Cost of Goods Sold

We include merchandise costs, store occupancy costs, logistics-related occupancy and operating costs and ship-to-home freight in cost of goods sold.

Stock Repurchase Program

In November 2018, our Board authorized the continuation of our existing Stock Repurchase Program (2018 Program) established in November 2015 (2015 Program) until January 29, 2022. The Program authorizes repurchases of our common stock in open market or negotiated transactions, with the amount and timing of repurchases dependent on market conditions and at the discretion of our management. In addition to the 2018 Program, we also acquire shares of our common stock from holders of restricted stock unit awards to satisfy tax withholding requirements due at vesting.

Under the 2015 Program, the Board of Directors authorized up to $300.0 million to repurchase our common stock through February 2, 2019. The 2015 Program replaced an existing plan that was adopted in November 2012 (2012 Program).

Under the 2018 Program and 2015 Program, we repurchased 0.8 million shares of our common stock during Fiscal 2019 at a cost of $16.5 million, including 18,765 shares acquired from holders of restricted stock to satisfy tax withholding requirements of $0.4 million. Under the 2015 Program, we repurchased 2.8 million shares of our common stock during Fiscal 2018 at a cost of $54.5 million, including 24,432 shares acquired from holders of restricted stock to satisfy tax withholding requirements of $0.7 million.

Historically, under all stock repurchase authorizations, we have repurchased a total of 20.7 million shares of our common stock at an approximate cost of $609.8 million as of February 2, 2019 and had approximately $188.0 million remaining under the 2018 Program for stock repurchases. Shares acquired from holders of restricted stock unit awards to satisfy tax withholding requirements do not reduce the authorization.

Cash and Cash Equivalents

We consider all short-term, highly liquid investments with original maturities of 90 days or less, including commercial paper and money market funds, to be cash equivalents. Amounts due from third-party credit card processors for the settlement of debit and credit card transactions are included as cash equivalents as they are generally collected within three business days. Cash equivalents related to credit and debit card transactions at February 2, 2019 and February 3, 2018 were $5.5 million and $3.9 million, respectively.

Investments

We hold certain trading securities as investments in trust for the Hibbett Sports, Inc. Supplemental 401(k) Plan (Supplemental Plan) and the Hibbett Sports, Inc. Executive Voluntary Deferral Plan (Deferral Plan). At February 2, 2019, we had $2.5 million of investments of which $0.1 million was included in prepaid expenses and other and $2.4 million was included in other assets, net. At February 3, 2018, we had $2.9 million of investments of which $0.5 million was included in prepaid expenses and other and $2.4 million was included in other assets, net. Net unrealized holding losses for Fiscal 2019 were $0.3 million and net unrealized holding gains for Fiscal 2018 were $0.3 million.

Purchase Price Allocation

For the City Gear acquisition, we allocated the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values, which are preliminary as of February 2, 2019. Determining the fair value of certain assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. We engaged third party experts to assist in the determination of fair value for complex assets and liabilities. Many of these estimates and assumptions used to determine fair value, such as those used for intangible assets are made based on forecasted information and discount rates. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

The final purchase price allocation will be completed after asset and liability valuations are finalized. This final valuation will be based on the actual assets and liabilities of City Gear that exist as of the acquisition date and goodwill may be different than the balance reflected in the consolidated balance sheet. Any final adjustments may change the allocation of the purchase price, which could affect the fair value assigned to the assets and liabilities and could result in significant changes to the consolidated financial data.

Goodwill represents the excess of the actual purchase price of City Gear over the estimated fair value of City Gear’s net assets as of the date of acquisition. The computations require management to make estimates and assumptions.

Intangible assets consist of trademarks and below-market leases resulting from the acquisition of City Gear. The fair value of trademarks was determined using the “income approach”, which requires a forecast of all expected future cash flows. The fair value of the below-market lease intangible was measured based on the present value of the difference between the contractual amounts to be paid pursuant to the lease and an estimate of current fair market lease rates measured over the non-cancelable remaining term of the lease. Amortization of the acquired below-market lease intangible is recognized as amortization expense within the consolidated statement of operations.

Intangible liabilities consist of above-market leases resulting from the acquisition of City Gear. The fair value of the above-market lease intangible was measured based on the present value of the difference between the contractual amounts to be paid pursuant to the lease and an estimate of current fair market lease rates measured over the non-cancelable remaining term of the lease. Amortization of the acquired above-market lease intangible is recognized as amortization expense within the consolidated statement of operations.

The below-market and above-market lease intangibles consist of short-term and long-term portions. Their presentation on the consolidated balance sheet and balance (in thousands) as of February 2, 2019 are as follows:

Account	Balance Sheet Presentation			Balance 2/2/2019
Short-term below-market lease intangible	Current asset	Prepaid expenses and other	$	320
Long-term below-market lease intangible	Non-current asset	Other assets, net	$	1,201
Short-term above-market lease intangible	Current liability	Other accrued expenses	$	605
Long-term above-market lease intangible	Non-current liability	Other liabilities	$	1,966

The net amortization recognized in Fiscal 2019 was immaterial.

Receivables

Receivables consist primarily of tenant allowances due from landlords and cooperative marketing and other amounts due from vendors. We analyze receivables for collectability based on aging of individual components, underlying contractual terms and economic conditions. Recorded amounts are deemed to be collectible.

Inventories

Inventories are valued using the lower of weighted average cost or net realizable value method. Items are removed from inventory using the weighted average cost method.

Lower of Cost and Net Realizable Value: We regularly review inventories to determine if the carrying value exceeds net realizable value, and we record an accrual to reduce the carrying value to net realizable value as necessary. We account for obsolescence as part of our lower of cost and net realizable value accrual based on historical trends and specific identification. As of February 2, 2019 and February 3, 2018, the accrual was $4.5 million and $5.2 million, respectively. A determination of net realizable value requires significant judgment.

Shrink Reserves: We accrue for inventory shrinkage based on the actual historical results of our physical inventory counts. These estimates are compared to actual results as physical inventory counts are performed and reconciled to the general ledger. Physical inventory counts are performed on a cyclical basis. As of February 2, 2019 and February 3, 2018, the accrual was $1.6 million and $1.4 million, respectively.

Inventory Purchase Concentration: Our business is dependent to a significant degree upon close relationships with our vendors. Our largest vendor, Nike, represented 65.4%, 57.9% and 57.0% of our purchases for Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively. Our second largest vendor, adidas, represented 10.0%, 11.0% and 5.5% of our purchases for Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively. Our third largest vendor, Under Armour, represented 5.7%, 10.8% and 16.4% of our purchases for Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively.

Property and Equipment

Property and equipment are recorded at cost and include assets acquired through capital leases. Property and equipment as of February 2, 2019 and February 3, 2018 consists of the following (in thousands):

	February 2, 2019		February 3, 2018
Land	$	7,277	$	7,277
Buildings		21,311		21,311
Buildings under capital lease		3,363		3,652
Equipment		96,402		93,163
Equipment under capital lease		678		-
Automobiles under capital lease		1,829		1,702
Furniture and fixtures		36,980		34,892
Leasehold improvements		101,572		91,218
Construction in progress		2,080		4,795
Total property and equipment		271,492		258,010
Less: accumulated depreciation and amortization		156,098		148,312
Total property and equipment, net	$	115,394	$	109,698

Depreciation on property and equipment is principally provided using the straight-line method over the following estimated service lives:

Buildings	39 years
Leasehold improvements	3 – 10 years
Furniture and fixtures	7 years
Equipment	3 – 7 years

In the case of leasehold improvements, we calculate depreciation using the shorter of the term of the underlying leases or the estimated economic lives of the improvements. The term of the lease includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. We continually reassess the remaining useful life of leasehold improvements in light of store closing plans.

Construction in progress has historically been comprised primarily of property and equipment related to unopened stores and amounts associated with technology upgrades at period-end. At February 2, 2019, approximately 69% of the construction in progress balance was comprised of costs associated with stores. The remaining balance consisted of costs associated with our technology initiatives.

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from property and equipment and the related gain or loss is credited or charged to net income, net of proceeds received.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and the City Gear tradename are indefinite-lived assets which are not amortized but rather tested for impairment at least annually, or on an interim basis if events and circumstances have occurred that indicate that is more likely than not that an asset is impaired. Such events or circumstances could include, but are not limited to, significant negative industry or economic trends, unanticipated changes in the competitive environment and a significant sustained decline in the market price of our stock. If it is more likely than not that an asset is impaired, the amount that the carrying value exceeds the fair value is recorded as an impairment charge to current income. No impairment of these assets existed as of February 2, 2019.

Long-Lived Assets

We continually evaluate whether events and circumstances have occurred that indicate the carrying amount of long-lived assets may be may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, our policy is to first compare undiscounted cash flows expected to be generated by that asset or asset group over its remaining life to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized as a charge to current income to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Assets or asset groups to be disposed of are reported at the lower of their carrying value or fair value less any costs of disposition. Evaluation of asset impairment requires significant judgment.

Capitalized Interest

We capitalize interest on borrowed funds during the construction of certain property and equipment. No interest costs were capitalized in Fiscal 2019, Fiscal 2018 or Fiscal 2017.

Deferred Rent

Deferred rent primarily consists of step rent and allowances from landlords related to our leased properties. Step rent represents the difference between actual operating lease payments due and straight-line rent expense, which we record over the term of the lease, including the build-out period. This amount is recorded as deferred rent in the early years of the lease, when cash payments are generally lower than straight-line rent expense, and reduced in the later years of the lease when payments begin to exceed the straight-line rent expense. Landlord allowances are generally comprised of amounts received and/or promised to us by landlords and may be received in the form of cash or free rent. For the cash component, we record a receivable from the landlord in accordance with the terms of the lease and a deferred rent liability. This deferred rent is amortized into net income (through lower rent expense) over the term (including the pre-opening build-out period) of the applicable lease, and the receivable is reduced as amounts are realized from the landlord.

In our consolidated statements of cash flows, the current and long-term portions of landlord allowances are included as changes in cash flows from operations. The liability for the current portion of unamortized landlord allowances was $4.9 million and $5.1 million at February 2, 2019 and February 3, 2018, respectively. The liability for the long-term portion of unamortized landlord allowances was $14.8 million and $15.1 million at February 2, 2019 and February 3, 2018, respectively. We estimate the non-cash portion of landlord allowances was $0.1 million and $1.2 million at February 2, 2019 and February 3, 2018, respectively.

Revenue Recognition

In Fiscal 2019, we recognize revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers when control of the merchandise is transferred to our customer. Sales are recorded net of expected returns at the time the customer takes possession of the merchandise. Net sales exclude sales taxes because we are a pass-through conduit for collecting and remitting these taxes.

Retail Store Sales: For merchandise sold in our stores, revenue is recognized at the point of sale when tender is accepted and the customer takes possession of the merchandise.

Retail Store Orders: Retail store customers may order merchandise available in other retail store locations for pickup in the selling store at a later date. Customers make a deposit with the remaining balance due at pickup. These deposits are recorded as deferred revenue until the transaction is completed and the customer takes possession of the merchandise. Retail store customers may also order merchandise to be shipped to home. Payment is received in full at the time of order and recorded as deferred revenue until delivery.

Layaways: We offer a retail store program giving customers the option of paying a deposit and placing merchandise on layaway. The customer may make further payments in installments, but the full purchase price must be received by us within 30 days. The payments are recorded as deferred revenue until the transaction is completed and the customer takes possession of the merchandise.

Digital Channel Sales: For merchandise shipped to home, customer payment is received when the order ships. Revenue is deferred until control passes to the customer at delivery. Shipping and handling costs billed to customers are included in net sales.

Customer Loyalty Programs: We offer two customer loyalty programs; the Hibbett Rewards program and the City Gear Reward Points program. Upon registration and in accordance with the terms of the programs, customers earn points on certain purchases. Points convert into rewards at defined thresholds. The short-term future performance obligation liability is estimated at each reporting period based on historical conversion and redemption patterns. The liability is included in other accrued expenses on our consolidated balance sheets and was $2.2 million and $0.2 million at February 2, 2019 and February 3, 2018, respectively.

Gift Cards: Proceeds received from the issuance of our non-expiring gift cards are initially recorded as deferred revenue. Revenue is subsequently recognized at the time the customer redeems the gift cards and takes possession of the merchandise. Unredeemed gift cards are recorded in accounts payable on our consolidated balance sheet.

The net deferred revenue liability for gift cards, customer orders and layaways at February 2, 2019 and February 3, 2018 was $7.5 million and $6.2 million, respectively, recognized in accounts payable on our consolidated balance sheets. In Fiscal 2019, gift card breakage income was recognized in net sales in proportion to the redemption pattern of rights exercised by the customer and was $0.6 million. During Fiscal 2018 and Fiscal 2017, income from unredeemed gift cards was recognized on our consolidated statements of operations as a reduction to store operating, selling and administrative expenses when the likelihood of redemption was deemed remote. Gift card breakage was not material in Fiscal 2018 or Fiscal 2017.

During the fiscal year ended February 2, 2019, $2.1 million of gift card deferred revenue from prior periods was realized.

Return Sales: The liability for return sales is estimated at each reporting period based on historical return patterns and is recognized at the transaction price. The liability is included in accounts payable on our consolidated balance sheets. We also recognize a return asset and a corresponding adjustment to cost of goods sold for our right to recover the merchandise returned by the customer. This right to recover the asset is included in net inventory on our consolidated balance sheet at the former carrying value of the merchandise less any expected recovery costs which was $0.8 million at February 2, 2019.

Revenues disaggregated by major product categories are as follows (in thousands):

	Fiscal 2019 (52 weeks)		Fiscal 2018 (53 weeks)		Fiscal 2017 (52 weeks)
Footwear	$	579,766	$	531,552	$	505,939
Apparel		276,731		269,512		282,158
Equipment		152,185		167,155		184,862
	$	1,008,682	$	968,219	$	972,960

Store Opening and Closing Costs

New store opening costs, including pre-opening costs, are charged to expense as incurred. Store opening costs primarily include payroll expenses, training costs and straight-line rent expenses. All pre-opening costs are included in store operating, selling and administrative expenses as a part of operating expenses.

We consider individual store closings to be a normal part of operations and regularly review store performance against expectations. Costs associated with store closings are recognized at the time of closing or when a liability has been incurred. These costs were not significant in Fiscal 2018, Fiscal 2017 or Fiscal 2016.

Insurance Accrual

We are self-insured for a significant portion of our health, workers’ compensation and other business insurance. Liabilities associated with the risks that are retained by us are estimated, in part, by considering our historical claims experience. The estimated accruals for these liabilities could be affected if future occurrences and claims differ from our assumptions. To minimize our potential exposure, we carry stop-loss insurance that reimburses us for losses over prescribed amounts per covered person per year. As of February 2, 2019 and February 3, 2018, the accrual for these liabilities was not material.

Sales Returns

Net sales returns were $47.7 million for Fiscal 2019, $43.8 million for Fiscal 2018 and $37.8 million for Fiscal 2017 and. The accrual for the effect of estimated returns was not material as of February 2, 2019 and February 3, 2018.