Note 3.

Acquisition

On November 5, 2018, through our wholly-owned subsidiary, Hibbett Sporting Goods, Inc., we acquired City Gear, a Tennessee limited liability company. Under the Purchase Agreement, which was unanimously approved by our Board of Directors, we agreed to acquire all the outstanding warrants and equity interests, other than certain preferred membership interests, of City Gear, a privately held city specialty retailer.

The purchase price was $88.0 million (Purchase Price) in cash payable at the closing of the transaction (Closing), subject to customary adjustments for City Gear’s cash on hand and net working capital as of the Closing date. The Purchase Agreement provided that a portion of the Purchase Price be used at Closing to pay off and redeem the outstanding preferred membership interests in City Gear as well as certain other outstanding indebtedness. In addition, the aggregate consideration payable to the Sellers in connection with the transaction includes two contingent payments (Earnout) based on City Gear’s achievement of certain EBITDA thresholds (as defined in the Purchase Agreement) for the 52-week periods ended February 1, 2020 and January 30, 2021, respectively. The aggregate amount of the Earnout, if any, will not exceed $25.0 million. The preliminary fair value of the Earnout is recorded in other liabilities on our consolidated balance sheet.

With over 130 stores, the acquisition provides us with substantially greater scale in the athletic specialty market and is an extension of our strategy to provide high demand, branded products to underserved markets. We incurred $4.3 million in acquisition-related expenses through Fiscal 2019, excluding acquisition-related interest expense, recorded in store operating, selling and administrative expenses.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date of November 4, 2018. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are based on estimates and assumptions and are subject to revisions, which may result in adjustments to the preliminary values presented below, when management’s estimates are finalized (in thousands):

Assets Acquired:
Current assets:
Receivables		3,168
Inventories		44,807
Prepaid expense, other current and intangible assets		2,716
Total current assets		50,691
Goodwill		23,133
Property and equipment		16,530
Long-term intangible assets		33,601
Deposits and other assets		567
Deferred tax asset		24
Total assets	$	124,546

Liabilities Assumed:
Current liabilities:
Accounts payable	$	23,615
Other accrued expenses and intangible liabilities		3,366
Total current liabilities		26,981
Other long-term liabilities and intangible liabilities		2,613
Total liabilities		29,594
Total purchase price	$	94,952

Cash paid at closing	$	86,837
Fair value of contingent earnout		9,200
Net working capital and debt-like items adjustment		(1,085	)

	$	94,952

We are still in the process of completing our fair market valuations and the purchase price allocation. As such, the amounts above are preliminary, pending the completion of procedures related to intangible assets and liabilities, inventory, property and equipment, contingent earnout payments, lease-related matters and the tax effect of any identified changes.

Goodwill is calculated as the excess of the purchase price over the net assets acquired and represents the value of City Gear’s brand, our expansion in the city specialty market and expected synergies resulting from the acquisition. Goodwill is amortized for tax purposes.

Intangible assets and liabilities represent two separately identified assets and one liability. First, we identified the City Gear tradename as an indefinite-lived intangible asset with a fair value of $32.4 million. The tradename is not subject to amortization but will be evaluated at least annually for impairment. Second, we recognized an intangible asset of $1.5 million for favorable City Gear leases and a liability of $2.6 million for unfavorable City Gear leases (as compared to prevailing markets). Under ASU Topic 842, these intangible assets and liabilities will become a component of the ROU asset (See Note 2, Recent Accounting Pronouncements). Net amortization of $0.1 million was recognized in Fiscal 2019.

The results of operations of City Gear are included in our results of operations beginning on November 5, 2018. From November 5, 2018 through February 2, 2019, City Gear generated net sales of $49.1 million and net loss of $0.4 million. These results included $1.9 million related to the amortization of the step-up of the inventory value related to purchase accounting.

The following unaudited consolidated pro forma summary has been prepared by adjusting the Company’s historical data to give effect to the City Gear acquisition as if it had occurred on January 29, 2017 (the beginning of Hibbett’s fiscal year ended February 3, 2018). Both Hibbett and City Gear’s fiscal year statements of operations for the fiscal years ended February 2, 2019 and February 3, 2018 contained 52 weeks and 53 weeks of operations, respectively.

	Pro Forma - Unaudited Fiscal Year Ended
(in thousands, except per share data)	February 2, 2019		February 3, 2018
Net sales	$	1,152,628	$	1,158,701
Net income	$	27,265	$	31,673
Basic earnings per share	$	1.46	$	1.56
Diluted earnings per share	$	1.45	$	1.55

The results for Fiscal 2019 and Fiscal 2018 have been primarily adjusted to include;

·	the pro forma impact of amortization of intangible assets;

·	the depreciation of property and equipment, based on purchase price allocations;

·	the pro forma impact of additional interest expense relating to the acquisition;

·	the pro forma impact of acquisition-related costs incurred by the Company directly attributable to the transaction; and

·	the pro forma tax effect of income taxes on the above adjustments.

For Fiscal 2019, results have been adjusted to exclude the impact of acquisition-related expenses and purchase accounting adjustments incurred by the Company that are directly attributable to the transaction.

The pro forma financial information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are based on estimates based on currently available information and actual amounts may differ materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the City Gear acquisition.