UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: January 30, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(For the transition period from: __________________________ to __________________________
Commission file number: 000-20969
HIBBETT SPORTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
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20-8159608
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2700 Milan Court, Birmingham, Alabama 35211
(Address of principal executive offices, including zip code)
205-942-4292
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value Per Share
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NASDAQ Global Select Market
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Title of Class
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Name of each exchange on which registered
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Securities registered pursuant to section 12(g) of the Act: |
NONE |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming for purposes of this calculation that all executive officers and directors are "affiliates") was $1,092,096,870 on August 1, 2015, based on the closing sale price of $45.55 at July 31, 2015 for the common stock on such date on the NASDAQ Global Select Market.
The number of shares outstanding of the Registrant's common stock, as of March 14, 2016, was 22,827,872.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year ended January 30, 2016 are incorporated by reference into Part II and portions of the Registrant's Proxy Statement for the 2016 Annual Meeting of Stockholders to be held on May 19, 2016 are incorporated by reference into Part III of this Annual Report on Form 10-K. Registrant's definitive Proxy Statement will be filed with the Securities and Exchange Commission on or before April 21, 2016.
HIBBETT SPORTS, INC.
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A Warning About Forward-Looking Statements
This document contains "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments and results. They include statements preceded by, followed by or including words such as "believe," "anticipate," "expect," "intend," "plan," "target" or "estimate." For example, our forward-looking statements include statements regarding:
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our anticipated net sales, including comparable store net sales changes, net sales growth, gross margins, expenses and earnings; |
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our business strategy, target market presence and its expected impact on our net sales growth; |
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our growth, including our plans to add, expand, relocate or close stores, our square footage growth, our markets' ability to support such growth, our ability to secure suitable locations for new stores and the suitability of our wholesale and logistics facility; |
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our expectations regarding our investment in and development of our technology initiatives, including cyber-security, our omni-channel platform and other methods for engaging our customers; |
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our expectations regarding the timing of completion of our omni-channel initiatives; |
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our policy of leasing rather than owning stores and our ability to renew or replace store leases satisfactorily; |
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the cost of regulatory compliance, including the costs and possible outcomes of pending legal actions and other contingencies; |
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our cash needs, including our ability to fund our future capital expenditures, working capital requirements and repurchases of Company common stock under our repurchase program; |
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our analysis of our risk factors and their possible effect on financial results; |
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our ability and plans to renew our revolving credit facilities; |
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our expectations regarding our capital expenditures and dividend policy; |
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our seasonal sales patterns and assumptions concerning customer buying behavior; |
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our expectations regarding competition; |
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our estimates and assumptions as they relate to preferable tax and financial accounting methods, accruals, inventory valuations, long-lived assets, store closures, carrying amount and liquidity of financial instruments, fair value of options and other stock-based compensation, economic and useful lives of depreciable assets and leases, income tax liabilities, deferred taxes and uncertain tax positions; |
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our expectations concerning future stock-based award types and the exercise of outstanding stock options; |
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the possible effect of inflation, market decline and other economic changes on our costs and profitability; |
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our assessment of the materiality and impact on our business of recent accounting pronouncements adopted by the Financial Accounting Standards Board; |
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the possible effects of uncertainty within the capital markets, on the commercial credit environment and on levels of consumer confidence; |
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our analyses of trends as related to advertising, sales and earnings performance; |
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our expectations concerning vendor level purchases and related discounts; |
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the future reliability of, and cost associated with, our sources of supply, particularly imported goods; |
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the loss of key vendor support; and |
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our ability to mitigate the risk of possible business interruptions. |
You should assume that the information appearing in this report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date. For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the "Risk Factors" as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Our forward-looking statements could be wrong in light of these risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this Annual Report and you should not expect us to do so. Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material non-public information with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Introductory Note
References to "we", "our", "us" and the "Company" used throughout this document refer to Hibbett Sports, Inc. and its subsidiaries. Unless specifically indicated otherwise, any reference to the following years or fiscal years relates to:
Year
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Related Fiscal Year End
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Weeks in Fiscal Period
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2017 or Fiscal 2017
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January 28, 2017
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52
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2016 or Fiscal 2016
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January 30, 2016
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52
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2015 or Fiscal 2015
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January 31, 2015
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52
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2014 or Fiscal 2014
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February 1, 2014
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52
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PART 1
Item 1. Business.
Our Company
Our Company began in 1945 under the name Dixie Supply Company in Florence, Alabama. Although we initially specialized primarily in the marine and small aircraft business, by 1960, we were solely in the sporting goods business. In 1965, we opened our second store, Dyess & Hibbett Sporting Goods, in Huntsville, Alabama, and hired Mickey Newsome, who is now Chairman of our Board. The following year, we opened another sporting goods store in Birmingham and by the end of 1980, we had 12 stores in central and northwest Alabama with a distribution center located in Birmingham and our central accounting office in Florence. We became a public company in October 1996.
Today, we operate athletic specialty stores in small and mid-sized markets predominantly in the South, Southwest, Mid-Atlantic and the Midwest regions of the United States. As of January 30, 2016, we operated 1,044 stores consisting of 1,024 Hibbett Sports stores and 20 smaller-format Sports Additions athletic shoe stores in 33 states. Our primary retail format and growth vehicle is Hibbett Sports, an approximately 5,000 square foot store located primarily in strip centers which are frequently influenced by a Wal-Mart store. Approximately 81% of our Hibbett Sports store base is located in strip centers, which includes free-standing stores, while approximately 19% of our Hibbett Sports store base is located in enclosed malls. We expect to continue our store base growth in strip centers versus enclosed malls.
We offer convenient locations and a broad assortment of quality brand name footwear, apparel, accessories and athletic equipment at competitive prices in a full service environment. We believe that the breadth and depth of our brand name merchandise consistently exceeds the product selection carried by most of our competitors, particularly in our smaller markets. Many of these brand name products are highly technical and require knowledgeable sales assistance. We educate our sales staff on new products and trends through coordinated efforts with our vendors.
Available Information
Hibbett Sports, Inc.'s website address is www.hibbett.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports on beneficial ownership of our securities on Forms 3, 4 and 5 and all amendments to those reports are available free of charge through our website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). The website is the primary source of publicly disclosed news about Hibbett Sports, Inc. In addition to accessing copies of our reports online, you may request a copy of our Annual Report on Form 10-K for the fiscal year ended January 30, 2016, at no charge, by writing to: Investor Relations, Hibbett Sports, Inc., 2700 Milan Court, Birmingham, Alabama 35211.
The SEC also maintains a website at www.sec.gov where reports, proxy and information statements, and other information regarding issuers that file electronically can be accessed. In addition, we make available, through our website, the Company's Code of Business Conduct and Ethics, Corporate Governance Guidelines and the written charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Information contained on our website is not included as part of, or incorporated by reference into, this annual report.
Our Business Strategy
We target small, isolated communities with branded products and provide a high level of customer service. Our strong focus on small communities enables us to achieve significant cost benefits including lower corporate expenses, reduced logistics costs and increased economies of scale from marketing activities. We use information systems to maintain tight controls over inventory and operating costs and continually search for ways to improve efficiencies and the customer experience through information system upgrades. In addition, we establish greater customer, vendor and landlord recognition as a leading athletic specialty retailer in these communities. We believe our ability to align our merchandising mix to local preferences and trends differentiates us from our national competitors.
We strive to hire enthusiastic sales people with an interest in sports. Our extensive training program focuses on product knowledge and selling skills and is conducted through the use of in-store clinics, DVDs, self-study courses, interactive group discussions and Hibbett University designed specifically for store management.
Our Store Concepts
Hibbett Sports
Our primary retail format is Hibbett Sports, an approximately 5,000 square foot store located primarily in strip centers, which are usually near a Wal-Mart store. In considering locations for our Hibbett Sports stores, we take into account the size, demographics, quality of real estate and competitive conditions in each market. Of these stores, 840 Hibbett Sports stores are located in strip centers, which include free-standing stores, with the remaining 184 stores located in enclosed malls, the majority of which are the only enclosed malls in their county.
Hibbett Sports stores offer a core merchandising mix of localized apparel, footwear, equipment and accessories designed to appeal to a wide range of customers within each market. We strive to respond quickly to major sporting events such as Bowl or National Championship games and similar sporting events in college or major league baseball, football and basketball involving teams of local interest within our markets.
Sports Additions
Our 20 Sports Additions stores are small, primarily enclosed mall-based stores, averaging 2,500 square feet with approximately 90% of merchandise consisting of athletic footwear and the remainder consisting of caps and a limited assortment of apparel. Sports Additions stores offer a more fashion-based merchandise assortment compared to our Hibbett Sports stores. All but six Sports Additions stores are currently located in enclosed malls or strip centers where a Hibbett Sports store is also present.
Team
Hibbett Team Sales, Inc. (Team), a wholly-owned subsidiary of the Company, is a supplier of customized athletic apparel, equipment and footwear primarily to school athletic programs in Alabama and parts of Georgia, Florida and Mississippi. Team sells its merchandise directly to educational institutions and youth associations. The operations of Team are independent of the operations of our retail stores.
None of our store concepts meets the quantitative or qualitative requirements of the Accounting Standards Codification (ASC) Topic 280, Segment Reporting.
Our Growth Strategy
We identify markets for our Hibbett Sports stores under a clustered expansion program. This approach primarily focuses on opening new stores within two-hour driving distance of an existing Hibbett location, allowing us to take advantage of efficiencies in logistics, marketing and regional management. It also aids us in building a better understanding of appropriate merchandise selection for the local market. In addition to proximity to existing Hibbett stores, we also consider population, economic conditions, local competitive dynamics, availability of suitable real estate and potential for return on investment when evaluating potential markets.
In Fiscal 2017, we expect continued growth of our net store openings year over year. In addition to new stores, we will also continue our successful strategy of expanding high performing existing stores. See "Risk Factors."
Omni-channel strategy. Store growth will continue to be the cornerstone of our growth strategy. However, we recognize that our customer is evolving and looking to engage with us in multiple ways. We continue to invest in infrastructure that will enable us to engage our customer specifically in the digital commerce channel. The foundational components for our future e-commerce platform began in Fiscal 2015 with the completion of our wholesale and logistics facility. The second foundational component began in Fiscal 2016 with an upgrade to our point-of-sale (POS) system.
Phase I of our POS upgrade will provide inventory visibility across all stores and will facilitate Store-to-Store transfers to complete a customer sale. This functionality is expected to be operational in the third quarter of Fiscal 2017. This phase will also include a new Customer Relationship Management (CRM) capability, which will allow us to more effectively communicate and market to our database of over 5 million loyalty members. Phase II will enable a Store-to-Home capability, and is expected to be in pilot by the end of Fiscal 2017. This phase will allow us to use our chain-wide inventory to satisfy a customer sale by shipping directly to the customer's home. Phase III will enable digital commerce and is expected to launch in the back half of Fiscal 2018. Once implemented, digital commerce will be fully integrated with our brick and mortar stores, and will provide a seamless omni-channel experience for our customers.
Our Logistics
We maintain a single wholesale and logistics facility in Alabaster, Alabama (a suburb of Birmingham) where we receive and ship substantially all of our merchandise. For key products, we maintain backstock at the facility that is allocated and shipped to stores through an automatic replenishment system based on inventory levels and sales. Merchandise is typically delivered to stores weekly via Company-operated vehicles or third-party logistics providers.
We believe strong logistics support for our stores is a critical element of our expansion strategy and is central to our ability to maintain a low cost operating structure. We use third-party logistics providers to gain efficiencies to approximately 25% of our outlying stores. Our wholesale and logistics facility is designed with significant automation and operational efficiencies. We expect the facility will support our growth over the next several years.
Our Merchandise
Our merchandising strategy is to provide a broad assortment of quality brand name footwear, apparel, accessories and athletic equipment at competitive prices in a full service environment.
The following table indicates the approximate percentage of net sales represented by each of our major product categories:
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Fiscal 2016
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Fiscal 2015
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Fiscal 2014
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Footwear
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49%
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47%
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45%
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Apparel
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29%
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31%
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32%
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Equipment
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22%
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22%
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23%
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100%
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100%
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100%
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We believe that the breadth and the depth of brand name merchandise that we offer consistently exceed the merchandise selection carried by most of our competitors, particularly in our smaller markets. Many of these brand name products are highly technical and require considerable sales assistance. We coordinate with our vendors to educate the sales staff at the store level on new products and trends.
Although the core merchandise assortment tends to be similar for each Hibbett store, important local or regional differences exist. Accordingly, our stores offer products that reflect preferences for particular sporting activities in each community and local interests in college and professional sports teams. Our knowledge of these interests, combined with access to leading vendors, enables our merchandising staff to react quickly to emerging trends or special events, such as college or professional championships.
Our merchandising staff, operations staff and management analyze current trends primarily through the gathering and analyzing of daily sales activity and utilization of our business intelligence tool. Other strategic measures we utilize to recognize trends or changes in our industry include:
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maintaining close relationships with vendors and other retailers; |
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studying other retailers for best practices in merchandising; |
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attending various trade shows, both in our industry and outside as well as reviewing industry trade publications; |
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actively participating in industry associations such as the National Sporting Goods Association (NSGA); |
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visiting competitor store locations; |
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monitoring industry data sources and periodicals; |
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monitoring product selection at competing stores and online; and |
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communicating with our regional vice presidents, district managers and store managers. |
The merchandising staff works closely with store personnel to meet the requirements of individual stores for appropriate merchandise in sufficient quantities. See "Risk Factors."
Our Vendor Relationships
The athletic specialty retail business is brand name driven. Accordingly, we maintain positive relationships with a number of well-known vendors to satisfy customer demand. We believe that our stores are among the primary retail distribution avenues for brand name vendors that seek to penetrate our target markets. As a result, we are able to attract considerable vendor interest and establish long-term partnerships with vendors. As our vendors expand their product lines and grow in popularity, we expand sales of these products within our stores. In addition, as we continue to increase our store base and enter new markets, our vendors increase their brand presence within these regions. We also work with our vendors to establish favorable pricing and to receive cooperative marketing funds. See "Risk Factors."
Our Information Systems
We use technology as an enabler of our business strategies. We have implemented systems targeted at improving financial control, cost management, inventory control, merchandise planning, logistics, replenishment, and product allocation. In recent years, we have focused on information systems that are designed to be used in all stores, yet are flexible enough to meet the unique needs of each specific store location.
A communications network sends and receives critical business data to and from our stores, providing timely and extensive information on business activity in every location. Our information is processed in a secure environment to protect both the actual data and the physical assets. We attempt to mitigate the risk of cyber-security threats and business interruptions by maintaining strong security protocols and a disaster recovery plan, which includes storing critical business information off-site.
We strive to maintain highly qualified and motivated individuals to support our information systems, which includes security, help desk, development, engineering, system analysts, business analysts and project managers. Our systems are monitored 24 hours a day. Our management believes that our current systems and practice of implementing regular updates position us well to support current needs and future growth. We use a strategic information systems planning process that involves senior management and is integrated into our overall business planning and enterprise risk management. Information systems projects are prioritized based upon strategic, financial, regulatory and other business criteria.
Our Advertising and Promotion
We target advertising opportunities in our markets to increase the effectiveness of our advertising budget. Our advertising and promotional spending is centrally directed. Print advertising, including direct mail pieces and postcards to customers, has historically served as the foundation of our promotional program and accounted for the majority of our total advertising costs in Fiscal 2016. We expect this trend to continue in Fiscal 2017. Other advertising, such as our MVP customer loyalty program, e-mail and mobile marketing, the Hibbett website, social media, Hibbett trucks and outdoor billboards are used to reinforce Hibbett's name recognition and brand awareness. By allowing us to reach and interact with our customers on a consistent basis through e-mail and mobile devices, the MVP program marketing effort has become the most efficient, timely and targeted segment of our marketing program. Digital marketing, including mobile devices, social networks, website and MVP program marketing, is expected to become a more significant portion of our advertising budget over the next several years.
Our Competition
The business in which we are engaged is highly competitive. The marketplace for athletic specialty merchandise is highly fragmented as many different brick and mortar and online retailers compete for market share by utilizing a variety of formats and merchandising strategies. We compete with department and discount stores, traditional shoe stores, specialty sporting goods shops, local sporting goods stores, outlet centers, mass merchandisers, e-commerce retailers and, in some of our large and mid-size markets, national sporting goods superstores. In addition, we face competition from vendors that sell directly to consumers.
Although we face competition from a variety of competitors, we believe that our stores are able to compete effectively by providing a premium assortment of footwear, apparel, accessories and team sports merchandise. Additionally, we differentiate our store experience through extensive product knowledge, customer service and convenient locations. We believe we compete favorably with respect to these factors in the smaller markets predominantly in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. See "Risk Factors."
Our Trademarks
Our Company, by and through subsidiaries, is the owner or licensee of trademarks that are very important to our business. For the most part, trademarks are valid as long as they are in use and/or their registrations are properly maintained. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use.
Following is a list of active trademarks registered and owned by the Company:
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Hibbett Sports, Registration No. 2717584 |
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Sports Additions, Registration No. 1767761 |
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Hibbett, Registration No. 3275037 |
Our Executive Officers
Our current executive officers and their prior business experience are as follows:
Jeffry O. Rosenthal, age 58, has been our Chief Executive Officer and President since March 2010. He also currently serves on our Board of Directors. Formerly, he served as President and Chief Operating Officer from February 2009 through March 2010 and as Vice President of Merchandising from August 1998 through February 2009. Prior to joining us, Mr. Rosenthal was Vice President and Divisional Merchandise Manager for Apparel with Champs Sports, a division of Foot Locker, Inc. from 1981 to 1998.
Scott J. Bowman, age 49, was hired as our Senior Vice President and Chief Financial Officer in July 2012. Prior to joining us, Mr. Bowman was Division Chief Financial Officer – Northern Division of The Home Depot, a large home improvement retailer. Previously, Mr. Bowman served The Home Depot as their Senior Director, Finance – IT for approximately three years. In prior retail experience, he has worked in various controller and accounting management positions.
Jared S. Briskin, age 43, was appointed our Senior Vice President and Chief Merchant in September 2014. Formerly, he served as Vice President/Divisional Merchandise Manager of Footwear and Equipment from March 2010 through September 2014 and Vice President/Divisional Merchandise Manager of Apparel and Equipment from June 2004 through March 2010. Prior to his appointment to Vice President in 2004, Mr. Briskin held various merchandising positions across multiple categories since joining the Company in April 1998.
Cathy E. Pryor, age 52, has been our Senior Vice President of Operations since 2012. Formerly, she served as Vice President of Operations from 1995 to 2012. She joined our Company in 1988 serving in areas of increasing responsibility including district manager and Director of Store Operations.
Our Employees
As of January 30, 2016, we employed approximately 3,300 full-time and approximately 5,600 part-time employees, none of whom are represented by a labor union. The number of part-time employees fluctuates depending on seasonal needs. We consider our relationship with our employees to be good and have not experienced significant interruptions of operations due to labor disagreements. We have implemented programs in our stores and corporate offices to ensure that we hire and promote the most qualified employees in a non-discriminatory way.
Employee Development. We develop our training programs in a continuing effort to service the needs of our customers and employees. These programs include DVD training in all stores for the latest in technical detail of new products and new operational and customer service techniques. Because we primarily promote or relocate current employees to serve as managers for new stores, training and assessment of our employees is essential to our sustained growth.
One of the most significant training programs we have is Hibbett University or "Hibbett U", which is an intensive, five-day session designed specifically for store management.
Seasonality
We experience seasonal fluctuations in our net sales and results of operations. Customer buying patterns around the spring sales period and the winter holiday season historically result in higher first and fourth quarter net sales. Our third quarter experiences higher net sales during the back-to-school shopping period combined with tax-free holidays in many of our markets. In addition, our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the amount and timing of net sales contributed by new stores, merchandise mix and demand for apparel and accessories driven by local interest in sporting events, significant weather events, and the timing of tax-free holidays and tax refunds.
Item 1A. Risk Factors.
You should carefully consider the following risks, as well as the other information contained in this report, before investing in shares of our common stock. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment.
Risks Related to Our Business and Industry.
Disruptions in the economy and in financial markets could adversely affect consumer purchases of discretionary items, which could reduce our net sales.
In general, our sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including general business conditions, interest rates, inflation, household income, consumer debt levels, the availability of consumer credit, tax rates and tax refunds, sales tax holidays, gasoline prices, unemployment trends, home values and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. Disruptions in the U.S. economy, financial markets or other economic conditions affecting disposable consumer income may adversely affect our business. A reduction in customer traffic to our stores or a shift in customer spending to products other than those sold by us or to products sold by us that are less profitable could result in lower net sales, decreases in inventory turnover or a reduction in profitability due to lower margins.
Pressure from our competitors may force us to reduce our prices or increase our spending on advertising and promotion, which would lower our net sales, gross profit and operating income.
The business in which we are engaged is highly competitive. The marketplace for athletic specialty merchandise is highly fragmented as many different brick and mortar and online retailers compete for market share by utilizing a variety of formats and merchandising strategies. We compete with department and discount stores, traditional shoe stores, specialty sporting goods shops, local sporting goods stores, outlet centers, mass merchandisers, e-commerce retailers and, in some of our large and mid-size markets, national sporting goods superstores. In addition, we face competition from vendors that sell directly to consumers. Direct sales by vendors may adversely affect our market share and reduce our revenues.
Many of our competitors have greater financial, marketing and distribution resources than we do. In addition, many of our competitors employ price discounting policies that, if intensified, may make it difficult for us to reach our sales goals without reducing our prices. As a result of this competition, we may also need to spend more on advertising and promotion than we anticipate.
We cannot guarantee that we will continue to be able to compete successfully against existing or future competitors. Expansion into markets served by our competitors, entry of new competitors or expansion of existing competitors into our markets could be detrimental to our business, financial condition and results of operations.
If we are unable to successfully develop and implement an omni-channel platform, we may not be able to compete effectively and our sales and profitability may be adversely affected.
Digital commerce has been a rapidly growing sales channel, particularly with younger consumers, and an increasing source of competition in the retail industry. We plan to develop a full omni-channel platform, which will integrate digital commerce with our stores to provide a seamless experience for our customers. We began the development of an omni-channel platform in Fiscal 2015, and expect to complete all phases by the end of Fiscal 2018. We cannot give any assurances that our omni-channel platform, when implemented, will perform in a manner that will give us the ability to attract and retain customers, increase sales and successfully compete with other online retailers. If we are unable to attract online buyers through our omni-channel, our sales and profitability could be adversely affected.
A slower pace of new store openings may negatively impact our net sales growth and operating income, and we may be unable to achieve our expansion plans for future growth.
The opening of new stores has contributed significantly to our growth in net sales. Our continued growth depends largely upon our ability to open new stores in a timely manner, to operate them profitably and to manage them effectively. Additionally, successful expansion is subject to various contingencies, many of which are beyond our control. Economic and other challenges faced by real estate developers can also impact our ability to open new stores at the pace we prefer. In order to open and operate new stores successfully, we must secure leases on suitable sites with acceptable terms, build-out and equip the stores with furnishings and appropriate merchandise, hire and train personnel and integrate the stores into our operations.
We cannot give any assurances that we will decide to or be able to continue our expansion plans successfully; that we will be able to achieve results similar to those achieved with prior locations; or that we will be able to continue to manage our growth effectively. Our failure to achieve our expansion plans could materially and adversely affect our business, financial condition and results of operations. Furthermore, our operating margins may be adversely impacted in periods in which incremental expenses are incurred as a result of new store openings.
We rely heavily on information systems to conduct our business. Problems with our information systems could disrupt our operations and negatively impact our financial results and materially adversely affect our business operations.
The operation of our business is dependent on the successful integration and operation of our information systems. We rely on our information systems to effectively manage our sales, logistics, merchandise planning and replenishment, to process financial information and sales transactions and to optimize our overall inventory levels. We attempt to mitigate the risk of possible business interruptions through change control protocols and a disaster recovery plan, which includes storing critical business information off-site.
Most of our information system infrastructure is centrally located, and we rely on third-party service providers for certain system applications that are hosted remotely or in cloud-based applications. There is a risk that we may not have adequately addressed risks associated with using third-party providers or cloud-based applications. Such risks include security issues such as adequate encryption and intrusion detection; user access control; data separation; the impact of technical problems such as server outages; their disaster recovery capabilities; and exit strategies. A service provider disruption or failure in any of these areas could have an adverse effect on our business.
We may not have the technology infrastructure to support our current and future information needs. Insufficient investment in technology, inadequate prevention maintenance, investment in the wrong technology, delayed replacement of obsolete equipment, shifts in technology, the failure to attract and retain highly-qualified IT personnel and inadequate policies to identify our technology needs could have an adverse effect on our business.
Security threats, including physical and cyber-security threats, and unauthorized disclosure of sensitive or confidential information could harm our business and reputation with our consumers.
The protection of Company, customer and employee data is critical to us. Our business involves the receipt, storage and transmission of customers' personal information, consumer preferences and payment card information, as well as confidential information about our employees, our suppliers and our Company. Our ability to effectively manage our business depends on the security, reliability and capacity of our IT systems. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of all such data, including confidential information. Information technology system failures, network disruptions or breaches of security could disrupt our operations, impacting timely order or receipt of inventory, payment to vendors and employees, processing of transactions or reporting of financial results. An attack or other problem with our systems could also result in the disclosure of proprietary information about our business or confidential information concerning our customers or employees, which could result in significant damage to our business and our reputation.
We have security measures designed to protect against the misappropriation or corruption of our systems, intentional or unintentional disclosure of confidential information or disruption of our operations. Our risk remediation procedures include an annual IT risk assessment based on the SANS Institute Critical Security Controls framework which prioritizes security functions that are effective against the latest Advanced Targeted Threats while emphasizing security controls that have demonstrated real world effectiveness. Even so, advanced cyber-security threats are persistent and continue to evolve making them increasingly difficult to identify and prevent. They include, but are not limited to, distributed denial of service attacks, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Protecting against these threats may require significant resources, and we may not be able to implement measures that will protect against all of the significant risks to our information technology systems.
In addition, we rely on a number of third-party service providers to execute certain business processes and maintain certain IT systems and infrastructure. Any breach of security on their part could impair our ability to effectively operate. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, intentional or unintentional, whether by us or our providers, could damage our reputation, expose us to risk of litigation and liability and could have a material adverse effect on our business.
Our inability to identify and anticipate changes in consumer demands and preferences and our inability to respond to such consumer demands in a timely manner could reduce our net sales.
Our products appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Our success depends on our ability to identify product trends as well as to anticipate and respond to changing merchandise trends and consumer demand in a timely manner. We cannot assure you that we will be able to continue to offer assortments of products that appeal to our customers or that we will satisfy changing consumer demands in the future. Accordingly, our business, financial condition and results of operations could be materially and adversely affected if:
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we are unable to identify and respond to emerging trends, including shifts in the popularity of certain products; |
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we miscalculate either the market for the merchandise in our stores or our customers' purchasing habits; or |
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consumer demand unexpectedly shifts away from athletic footwear or our more profitable apparel lines. |
In addition, we may be faced with significant excess inventory of some products and missed opportunities for other products, which could decrease our profitability.
If we lose any of our key vendors or any of our key vendors fail to supply us with quality brand name merchandise at competitive prices, we may not be able to meet the demand of our customers and our net sales and profitability could decline.
We are a retailer of manufacturers' branded items and are thereby dependent on the availability of key products and brands. Our top three vendors accounted for over 70% of our total inventory purchases during Fiscal 2016. Our business is dependent upon close relationships with vendors and our ability to purchase brand name merchandise at competitive prices. As a retailer, we cannot control the supply, design, function or cost of many of the products we offer for sale. Moreover, certain merchandise that is in high demand may be allocated by vendors based upon the vendors' internal criteria, which is beyond our control.
As a result, our sales could decline if we are not provided with a sufficient allocation of high demand merchandise from one or more of our key vendors or if the vendor's merchandise were to decline in quantity, quality or desirability to our customers. Our profits could decline if we are unable to pass along any increases in the cost of brand merchandise from our key vendors. In addition, many of our vendors provide us with return privileges, volume purchasing allowances and cooperative advertising such that any changes to such benefits could have an adverse effect on our business.
We believe that we have long-standing and strong relationships with our vendors and that we have adequate sources of brand name merchandise on competitive terms. However, the loss or decline of key vendor support could have a material adverse effect on our business, financial condition and results of operations. There can be no assurances that we will be able to acquire such merchandise at competitive prices or on competitive terms in the future.
We also rely on services and products from non-merchandise vendors. A disruption in these services or products due to the financial condition or inefficient operations of these vendors could adversely affect our business operations.
We would be materially and adversely affected if all or a significant portion of our single wholesale and logistics facility were shut down.
We currently operate a single wholesale and logistics facility in Alabaster, Alabama, a suburb of Birmingham, where we receive and ship substantially all of our merchandise. Any natural disaster or other serious disruption to this facility would damage a portion of our inventory and could impair our ability to adequately stock our stores and process returns of products to vendors and could adversely affect our net sales and profitability. In addition, we could incur significantly higher costs and longer lead times associated with shipping our products to our stores during the time it takes for us to reopen or replace the facility.
Further, because we rely on a single wholesale and logistics facility, our growth could be limited if our facility reaches full capacity. Such restraint could result in a loss of market share and our inability to execute our business strategy and could have a material adverse effect on our business, financial condition and operating results.
Our success depends substantially on the value and perception of the brand name merchandise we sell.
Our success is largely dependent on our consumers' perception and connection to the brand names we carry, such as Nike, Under Armour, Reebok, adidas, Easton, The North Face, Yeti, etc. Brand value is based in part on our consumer's perception on a variety of subjective qualities so that even an isolated incident could erode brand value and consumer trust, particularly if there is considerable publicity or litigation. Consumer demand for our products or brands could diminish significantly in the event of erosion of consumer confidence or trust, resulting in lower sales which could have a material adverse effect on our business, financial condition and results of operations.
A disruption in the flow of imported merchandise or an increase in the cost of those goods could significantly decrease our net sales and operating income.
Many of our largest vendors source a majority of their products from foreign countries. Imported goods are generally less expensive than domestic goods and contribute significantly to our favorable profit margins. We may experience a disruption or increase in the cost of imported vendor products at any time for reasons beyond our control. If imported merchandise becomes more expensive or unavailable, the transition to alternative sources by our vendors may not occur in time to meet our demands or the demands of our customers. Products from alternative sources may also be more expensive or may be of lesser quality than those our vendors currently import. Risks associated with reliance on imported goods include:
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disruptions in the flow of imported goods because of factors such as: |
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raw material shortages, work stoppages, labor availability and political unrest; |
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problems with oceanic shipping, including blockages or labor union strikes at U.S. or foreign ports; and |
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economic crises and international disputes. |
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increases in the cost of purchasing or shipping foreign merchandise resulting from, for example: |
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foreign government regulations; |
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rising commodity prices; |
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changes in currency exchange rates or policies and local economic conditions, including the United States imposing antidumping or countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices; and |
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trade restrictions, including import duties, import quotas or loss of "most favored nation" status with the United States. |
In addition, to the extent that any foreign manufacturer from whom our vendors are associated may directly or indirectly utilize labor practices that are not commonly accepted in the United States, we could be affected by any resulting negative publicity.
Our operating results are subject to seasonal and quarterly fluctuations. Furthermore, our quarterly operating results, including comparable store net sales, will fluctuate and may not be a meaningful indicator of future performance.
We have historically experienced and expect to continue to experience seasonal fluctuations in our net sales, operating income and net income. Our net sales, operating income and net income are typically higher in the spring, back-to-school and holiday shopping seasons. An economic downturn during these periods could adversely affect us to a greater extent than if a downturn occurred at other times of the year.
Customer buying patterns around the spring sales period and the winter holiday season historically result in higher first and fourth quarter net sales. In the past few years, we have also experienced higher than historical third quarter net sales resulting from the late summer back-to-school period complimented by sales tax holidays in many of our markets. In addition, our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the amount and timing of net sales contributed by new stores, merchandise mix, demand for apparel and accessories driven by local interest in sporting events, adverse weather events that disrupt expected consumer purchasing patterns, the disgrace of sports superstars key to certain product promotions or strikes or lockouts involving professional sports teams. Any of these events, particularly in the fourth quarter, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year.
Comparable store net sales vary from quarter to quarter, and an unanticipated decline in comparable store net sales may cause the price of our common stock to fluctuate significantly. Factors which could affect our comparable store net sales results include:
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shifts in consumer tastes and fashion trends; |
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calendar shifts of holiday or seasonal periods; |
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the timing of income tax refunds to customers; |
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increases in personal income taxes paid by our customers; |
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calendar shifts or cancellations of sales tax-free holidays in certain states; |
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the success or failure of college and professional sports teams within our core regions; |
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changes in the other tenants in the shopping centers in which we are located; |
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pricing, promotions or other actions taken by us or our existing or possible new competitors; and |
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unseasonable weather conditions or natural disasters. |
We cannot assure you that comparable store net sales will increase at the rates achieved in prior periods or that rates will not decline.
We depend on key personnel, the loss of which may adversely affect our ability to run our business effectively and our results of operations.
We benefit from the leadership and performance of our senior management team and other key employees. If we lose the services of any of our principal executive officers or other skilled and experienced personnel, we may not be able to fully implement our business strategy or run our business effectively and operating results could suffer. The Compensation Committee of our Board of Directors reviews a succession plan prepared by senior management in consideration of the loss of key personnel positions on a regular basis. The goal of the succession plan is to have a contingency plan that minimizes disruptions in the workplace until a suitable replacement can be found, but no assurance can be given that we will be able to retain existing or attract additional qualified personnel when needed.
Further, as our business grows, we will need to attract and retain additional qualified personnel in a timely manner and develop, train and manage an increasing number of management-level sales associates and other employees. Competition for qualified employees could require us to pay higher wages and benefits to attract a sufficient number of qualified employees, and increases in the minimum wage or other employee benefit costs could increase our operating expense. An inability to attract and retain personnel as needed in the future could negatively impact our net sales growth and operating results.
Increases in transportation costs, climate change regulation and other factors may negatively impact our results of operations.
We rely upon various means of transportation, including ship and truck, to deliver products from vendors to our wholesale and logistics facility and from our wholesale and logistics facility to our stores. Consequently, our results can vary depending upon the price of fuel. The price of oil has fluctuated drastically over the last few years. In addition, efforts to combat climate change through reduction of greenhouse gases may result in higher fuel costs through taxation or other means. Any increases in fuel costs would increase our transportation costs for delivery of product to our wholesale and logistics facility and shipment to our stores, as well as our vendors' transportation costs.
In addition, labor shortages in the transportation industry could negatively affect transportation costs and our ability to supply our stores in a timely manner. We also rely on efficient and effective operations within our wholesale and logistics facility to ensure accurate product delivery to our stores. Failure to maintain such operations could adversely affect net sales.
Our stores are concentrated within the South, Southwest, Mid-Atlantic and Midwest regions of the United States, which could subject us to regional risks.
Our stores are heavily concentrated in certain regions of the United States. We are subject to regional risks, such as the regional economy, weather conditions and natural disasters, increasing costs of electricity, oil and natural gas, as well as government regulations specific in the states and localities within which we operate. In addition, recent falling oil prices may adversely affect employment and consumer spending in those states that are within our regions that rely on oil revenues as a significant part of the economies of those states. We sell a significant amount of team sports merchandise that can be adversely affected by significant weather events that postpone the start of or shorten sports seasons or that limit participation of fans and sports enthusiasts.
Unforeseen events, including public health issues and natural disasters such as earthquakes, hurricanes, tornados, snow or ice storms, floods and heavy rains could; disrupt our operations or the operations of our suppliers; significantly damage or destroy our retail locations; prohibit consumers from traveling to our retail locations; or prevent us from resupplying our stores or wholesale and logistics facility. We believe that we take reasonable precautions to prepare for such events; however, our precautions may not be adequate to deal with such events in the future. If such events occur in areas in which we have our wholesale and logistics facility or a concentration of retail stores, or if they occur during peak shopping seasons, it could have a material adverse effect on our business, financial condition and results of operations.
We sell a significant amount of licensed team sports merchandise, the sale of which may be subject to fluctuations based on the success or failure of such teams. The poor performance by college and professional sports teams within our core regions of operations, as well as professional team lockouts, could cause our financial results to fluctuate year over year.
Risks Related to Our Capital Structure
We manage cash and cash equivalents beyond federally insured limits per financial institution and purchase investments not fully guaranteed by the Federal Deposit Insurance Corporation (FDIC), subjecting us to investment and credit availability risks.
We manage cash and cash equivalents in various institutions at levels beyond federally insured limits per institution, and we purchase investments not guaranteed by the FDIC. Accordingly, there is a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. In an attempt to mitigate this risk, our investment policy emphasizes preservation of principal and liquidity. We cannot be assured that we will not experience losses on our deposits or investments.
We face risk that financial institutions may fail to fulfill commitments under our committed credit facilities.
We have financial institutions that are committed to providing loans under our revolving credit facilities. There is a risk that these institutions cannot deliver against these obligations in a timely matter, or at all. If the financial institutions that provide these credit facilities were to default on their obligation to fund the commitments, these facilities would not be available to us, which could adversely affect our liquidity and financial condition. For discussion of our credit facilities, see "Liquidity and Capital Resources" in Item 7 and Note 5 to our consolidated financial statements.
Risks Related to Ownership of Our Common Stock.
The market price of our common stock, like the stock market in general, is likely to be highly volatile. Factors that could cause fluctuation in our common stock price may include, among other things:
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actual or anticipated variations in quarterly operating results; |
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changes in financial estimates by investment analysts and our inability to meet or exceed those estimates; |
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additions or departures of key personnel; |
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market rumors or announcements by us or by our competitors of significant acquisitions, divestitures or joint ventures, strategic partnerships, large capital commitments or other strategic initiatives; |
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changes in retail sales data that indicate consumers may spend less on discretionary purchases; and |
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sales of our common stock by key personnel or large institutional holders. |
Many of these factors are beyond our control and may cause the market price of our common stock to decline, regardless of our operating performance.
Significant stockholders or potential stockholders may attempt to effect changes or acquire control over our company, which could adversely affect our results of operations and financial condition.
Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the daily operations of our business or pursuing our business strategies. As a result, activist stockholder campaigns could adversely affect our results of operations and financial condition.
Risks Related to Governance, Regulatory, Legislative and Legal Matters.
Provisions in our charter documents and Delaware law might deter acquisition bids for us.
Certain provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects and may discourage, delay or prevent a takeover attempt that a stockholder might consider in its best interest. These provisions, among other things:
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classify our Board of Directors into three classes, each of which serves for different three-year periods; |
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provide that a director may be removed by stockholders only for cause by a vote of the holders of not less than two-thirds of our shares entitled to vote; |
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provide that all vacancies on our Board of Directors, including any vacancies resulting from an increase in the number of directors, may be filled by a majority of the remaining directors, even if the number is less than a quorum; |
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provide that special meetings of the common stockholders may only be called by the Board of Directors, the Chairman of the Board of Directors or upon the demand of the holders of a majority of the total voting power of all outstanding securities of the Company entitled to vote at any such special meeting; and |
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call for a vote of the holders of not less than two-thirds of the shares entitled to vote in order to amend the foregoing provisions and certain other provisions of our certificate of incorporation and bylaws. |
In addition, our Board of Directors, without further action of the stockholders, is permitted to issue and fix the terms of preferred stock, which may have rights senior to those of common stock. We are also subject to the Delaware business combination statute, which may render a change in control of us more difficult. Section 203 of the Delaware General Corporation Laws would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
We operate in a number of jurisdictions. It can be cumbersome to fill needed positions and comply with labor laws and regulations, many of which vary from jurisdiction to jurisdiction.
We are heavily dependent upon our labor force. Our compensation packages are designed to provide benefits commensurate with our level of expected service. However, within our retail and logistics operations, we face the challenge of filling many positions at wage scales that are appropriate to the industry and competitive factors. We operate in a number of jurisdictions which can make it cumbersome to comply with labor laws and regulations, many of which vary from jurisdiction to jurisdiction. As a result of these and other factors, we face many external risks and internal factors in meeting our labor needs, including competition for qualified personnel, overall unemployment levels, prevailing wage rates, as well as rising employee benefit costs. Changes in any of these factors, including a shortage of available workforce in areas in which we operate, could interfere with our ability to adequately service our customers or to open suitable locations and could result in increasing labor costs.
We cannot be assured that we will not experience pressure from labor unions or become the target of labor union campaigns.
While we believe we maintain good relations with our employees, we cannot provide any assurances that we will not experience pressure from labor unions or become the target of labor union campaigns. The potential for unionization could increase in the United States if federal legislation or regulatory changes are adopted that would facilitate labor organization. Significant union representation would require us to negotiate wages, salaries, benefits and other terms with many of our employees collectively and could adversely affect our results of operations by increasing our labor costs or otherwise restricting our ability to maximize the efficiency of our operations.
Changes in federal, state or local laws, or our failure to comply with such laws, could increase our expenses and expose us to legal risks.
Our Company is subject to numerous laws and regulatory matters relating to the conduct of our business. In addition, certain jurisdictions have taken a particularly aggressive stance with respect to certain matters and have stepped up enforcement, including fines and other sanctions. Such laws and regulatory matters include:
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The Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas; |
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The Patient Protection and Affordable Care Act provisions; |
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The Telephone Consumer Protection Act (TCPA) provisions that regulate telemarketing, auto-dialed and pre-recorded calls as well as text messages and unsolicited faxes; |
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Labor and employment laws that govern employment matters such as minimum wage, overtime, family leave mandates and workplace safety regulations; |
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Securities and exchange laws and regulations; |
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New or changing laws relating to state and local taxation and licensing, including sales and use tax laws, withholding taxes and property taxes; |
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New or changing laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud; |
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New or changing environmental regulations, including measures related to climate change and greenhouse gas emissions; |
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New or changing laws and regulations concerning product safety or truth in advertising; and |
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New or changing federal and state immigration laws and regulations. |
Increasing regulations could expose us to a challenging enforcement environment or to third-party liability (such as monetary recoveries and recoveries of attorney's fees) and could have a material adverse effect on our business and results of operations.
Our corporate legal department monitors regulatory activity and is active in notifying and updating applicable departments and personnel on pertinent matters and legislation. Our Human Resources (HR) Department leads HR compliance training programs to ensure our field managers are kept abreast of HR-related regulatory activity that affects their areas of responsibility. We believe that we are in substantial compliance with applicable environment and other laws and regulations, and although no assurance can be given, we do not foresee the need for any significant expenditure in this area in the near future.
Changes in rules related to accounting for income taxes, changes in tax laws in any of the jurisdictions in which we operate or adverse outcomes from audits by taxing authorities could result in an unfavorable change in our effective tax rate.
We operate our business in numerous tax jurisdictions. As a result, our effective tax rate is derived from a combination of the federal rate and applicable tax rates in the various states in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income and the tax filing positions we take. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our Company and on estimates of the amount of business likely to be done in any given jurisdiction. Changes in rules related to accounting for income taxes, changes in tax laws in any of the jurisdictions in which we operate, expiration of tax credits formerly available, failure to manage and utilize available tax credits, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate could result in an unfavorable change in our effective tax rate.
Product liability claims or product recalls can adversely affect our business reputation, expose us to lawsuits or increased scrutiny by federal and state regulators and may not be fully covered by insurance.
We sell products, particularly equipment, which entail an inherent risk of product liability and product recall and the resultant adverse publicity. We may be subject to significant claims if the purchase of a defective product from any of our stores causes injury or death. Our merchandise could be subject to a product recall which could reflect negatively on our business reputation. We cannot be assured that product liability claims will not be asserted against us in the future. Any claims made may create adverse publicity that would have a material adverse effect on our business, reputation, financial condition and results of operations.
We and our vendors maintain insurance with respect to certain of these risks, including product liability insurance and general liability insurance, but in many cases such insurance is expensive, difficult to obtain and no assurance can be given that such insurance can be maintained in the future on acceptable terms, or in sufficient amounts to protect us against losses due to any such events, or at all. Moreover, even though our insurance coverage may be designed to protect us from losses attributable to certain events, it may not adequately protect us from liability and expenses we incur in connection with such events.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation by employees, consumers, suppliers, competitors, stockholders, government agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. We may incur losses relating to these claims, and in addition, these proceedings could cause us to incur costs and may require us to devote resources to defend against these claims that could adversely affect our results of operations. For a description of current legal proceedings, see "Part I, Item 3, Legal Proceedings."
Item 1B. Unresolved Staff Comments.
None.
We currently lease all of our existing 1,044 store locations and expect that our policy of leasing rather than owning will continue as we continue to expand. Our leases typically provide for terms of five to ten years with options on our part to extend. Most leases also contain a kick-out clause if projected sales levels are not met and an early termination/remedy option if co-tenancy and exclusivity provisions are violated. We believe this leasing strategy enhances our flexibility to pursue various expansion opportunities resulting from changing market conditions and to periodically re-evaluate store locations. See "Risk Factors."
As current leases expire, we believe we will either be able to obtain lease renewals for present store locations or to obtain leases for equivalent or better locations in the same general area. Historically, we have not experienced any significant difficulty in either renewing leases for existing locations or securing leases for suitable locations for new stores. We do not anticipate any such difficulties into Fiscal 2017. Based primarily on our belief that we maintain good relations with our landlords, that most of our leases are at approximate market rents and that generally we have been able to secure leases for suitable locations, we believe our lease strategy will not be detrimental to our business, financial condition or results of operations.
We own our corporate office building, our wholesale and logistics facility and our Team facility, the latter of which is located in Birmingham, Alabama and warehouses inventory for educational institutions and youth associations. We believe our wholesale and logistics facility is suitable and adequate to support our operations for many years. See "Risk Factors."
Store Locations
As of January 30, 2016, we operated 1,044 stores in 33 contiguous states. Of these stores, 200 are located in enclosed malls, 23 are free-standing and 821 are located in strip-shopping centers, which are frequently near a Wal-Mart store. The following shows the number of locations by state as of January 30, 2016:
Alabama
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95
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Kentucky
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60
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Ohio
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28
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Arizona
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9
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|
Louisiana
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56
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|
Oklahoma
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45
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Arkansas
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43
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Maryland
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5
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Pennsylvania
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9
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Colorado
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6
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Minnesota
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2
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|
South Carolina
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37
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Delaware
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1
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|
Mississippi
|
64
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|
South Dakota
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4
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Florida
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59
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|
Missouri
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38
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|
Tennessee
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67
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Georgia
|
102
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|
Nebraska
|
10
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|
Texas
|
104
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Iowa
|
11
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|
New Jersey
|
1
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Utah
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3
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Illinois
|
30
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|
New Mexico
|
12
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|
Virginia
|
19
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Indiana
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23
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|
New York
|
1
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|
West Virginia
|
10
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Kansas
|
23
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|
North Carolina
|
58
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|
Wisconsin
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9
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|
|
|
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TOTAL
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1,044
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As of March 14, 2016, we operated 1,046 stores in 33 states.
Item 3. Legal Proceedings.
We are a party to various legal proceedings incidental to our business. Where we are able to reasonably estimate an amount of probable loss in these matters based on known facts, we have accrued that amount as a current liability on our balance sheet. We are not able to reasonably estimate the possible loss or range of loss in excess of the amount accrued for these proceedings based on the information currently available to us, including, among others, (i) uncertainties as to the outcome of pending proceedings (including motions and appeals) and (ii) uncertainties as to the likelihood of settlement and the outcome of any negotiations with respect thereto. We do not believe that any of these matters will, individually or in the aggregate, have a material effect on our business or financial condition. We cannot give assurance, however, that one or more of these proceedings will not have a material effect on our results of operations for the period in which they are resolved. At January 30, 2016 and January 31, 2015, we estimated that the liability related to these matters was approximately $0.2 million and $0.4 million, respectively, and accordingly, we accrued $0.2 million and $0.4 million, respectively, as a current liability in our consolidated balance sheets.
The estimates of our liability for pending and unasserted potential claims do not include litigation costs. It is our policy to accrue legal fees when it is probable that we will have to defend against known claims or allegations and we can reasonably estimate the amount of the anticipated expense.
From time to time, we enter into certain types of agreements that require us to indemnify parties against third-party claims under certain circumstances. Generally, these agreements relate to: (a) agreements with vendors and suppliers under which we may provide customary indemnification to our vendors and suppliers in respect to actions they take at our request or otherwise on our behalf; (b) agreements to indemnify vendors against trademark and copyright infringement claims concerning merchandise manufactured specifically for or on behalf of the Company; (c) real estate leases, under which we may agree to indemnify the lessors from claims arising from our use of the property; and (d) agreements with our directors, officers and employees, under which we may agree to indemnify such persons for liabilities arising out of their relationship with us. We have director and officer liability insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by us with respect to our directors and officers up to specified limits and subject to certain deductibles.
If we believe that a loss is both probable and estimable for a particular matter, the loss is accrued in accordance with the requirements of ASC Topic 450, Contingencies. With respect to any matter, we could change our belief as to whether a loss is probable or estimable, or its estimate of loss, at any time.
Item 4. Mine Safety Disclosures.
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NASDAQ Global Select Market (NASDAQ/GS) under the symbol HIBB. The following table sets forth, for the periods indicated, the high and low sales prices of shares of our Common Stock as reported by NASDAQ.
Fiscal 2015:
|
|
High
|
|
|
Low
|
|
First Quarter ended May 3, 2014
|
|
$
|
59.64
|
|
|
$
|
52.32
|
|
Second Quarter ended August 2, 2014
|
|
$
|
57.47
|
|
|
$
|
49.55
|
|
Third Quarter ended November 1, 2014
|
|
$
|
50.69
|
|
|
$
|
41.57
|
|
Fourth Quarter ended January 31, 2015
|
|
$
|
50.54
|
|
|
$
|
43.95
|
|
Fiscal 2016:
|
|
High
|
|
|
Low
|
|
First Quarter ended May 2, 2015
|
|
$
|
52.33
|
|
|
$
|
46.78
|
|
Second Quarter ended August 1, 2015
|
|
$
|
48.33
|
|
|
$
|
43.00
|
|
Third Quarter ended October 31, 2015
|
|
$
|
46.13
|
|
|
$
|
33.11
|
|
Fourth Quarter ended January 30, 2016
|
|
$
|
34.68
|
|
|
$
|
28.65
|
|
On March 14, 2016, the last reported sale price for our common stock as quoted by NASDAQ was $35.72 per share. As of March 14, 2016, we had 21 stockholders of record.
The Stock Price Performance Graph below compares the percentage change in our cumulative total stockholder return on our common stock against a cumulative total return of the NASDAQ Composite Index and the NASDAQ Retail Trade Index. The graph below outlines returns for the period beginning on January 31, 2011 to January 31, 2016. We have not paid any dividends. Total stockholder return for prior periods is not necessarily an indication of future performance.
|
1/11
|
1/12
|
1/13
|
1/14
|
1/15
|
1/16
|
Hibbett Sports, Inc.
|
100.00
|
149.69
|
164.46
|
187.41
|
146.91
|
100.44
|
NASDAQ Composite
|
100.00
|
105.66
|
119.44
|
159.71
|
181.15
|
180.76
|
NASDAQ Retail Trade
|
100.00
|
109.43
|
134.51
|
169.09
|
189.62
|
223.63
|
Dividend Policy. We have never declared or paid any dividends on our common stock. We currently intend to retain our future earnings to finance the growth and development of our business and for our stock repurchase program, and therefore do not anticipate declaring or paying cash dividends on our common stock for the foreseeable future. Any future decision to declare or pay dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our Board of Directors deems relevant.
Equity Compensation Plans. For information on securities authorized for issuance under our equity compensation plans, see "Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
Issuer Repurchases of Equity Securities
The following table presents our share repurchase activity for the thirteen weeks ended January 30, 2016 (1):
Period
|
|
Total Number of Shares Purchased
|
|
|
Average Price per Share
|
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs
|
|
|
Approximate Dollar Value of Shares that may yet be Purchased Under the Programs (in thousands)
|
|
November 1, 2015 to November 28, 2015
|
|
|
99,000
|
|
|
$
|
34.23
|
|
|
|
99,000
|
|
|
$
|
300,000
|
|
November 29, 2015 to January 2, 2016
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
January 3, 2016 to January 30, 2016
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total
|
|
|
99,000
|
|
|
$
|
34.23
|
|
|
|
99,000
|
|
|
$
|
300,000
|
|
(1) In November 2015, the Board of Directors authorized a Stock Repurchase Program of $300.0 million to repurchase our common stock through February 2, 2019 that replaced the existing authorization that was due to expire on January 30, 2016. See Note 1, "Stock Repurchase Program."
Item 6. Selected Consolidated Financial Data.
(In thousands, except per share amounts, Selected Store Data or where noted otherwise)
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
|
February 1, 2014
|
|
|
February 2, 2013
|
|
|
January 28, 2012
|
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
943,104
|
|
|
$
|
913,486
|
|
|
$
|
851,965
|
|
|
$
|
818,700
|
|
|
$
|
732,645
|
|
Cost of goods sold, including wholesale and logistics facility and store occupancy costs
|
|
|
610,389
|
|
|
|
586,702
|
|
|
|
542,700
|
|
|
|
519,818
|
|
|
|
470,237
|
|
Gross profit
|
|
|
332,715
|
|
|
|
326,784
|
|
|
|
309,265
|
|
|
|
298,882
|
|
|
|
262,408
|
|
Store operating, selling and administrative expenses
|
|
|
203,673
|
|
|
|
192,648
|
|
|
|
181,527
|
|
|
|
169,872
|
|
|
|
155,672
|
|
Depreciation and amortization
|
|
|
17,038
|
|
|
|
15,990
|
|
|
|
13,847
|
|
|
|
13,029
|
|
|
|
13,205
|
|
Operating income
|
|
|
112,004
|
|
|
|
118,146
|
|
|
|
113,891
|
|
|
|
115,981
|
|
|
|
93,531
|
|
Interest expense, net
|
|
|
292
|
|
|
|
293
|
|
|
|
188
|
|
|
|
168
|
|
|
|
217
|
|
Income before provision for income taxes
|
|
|
111,712
|
|
|
|
117,853
|
|
|
|
113,703
|
|
|
|
115,813
|
|
|
|
93,314
|
|
Provision for income taxes
|
|
|
41,184
|
|
|
|
44,269
|
|
|
|
42,826
|
|
|
|
43,231
|
|
|
|
34,254
|
|
Net income
|
|
$
|
70,528
|
|
|
$
|
73,584
|
|
|
$
|
70,877
|
|
|
$
|
72,582
|
|
|
$
|
59,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.95
|
|
|
$
|
2.90
|
|
|
$
|
2.74
|
|
|
$
|
2.78
|
|
|
$
|
2.19
|
|
Diluted earnings per share
|
|
$
|
2.92
|
|
|
$
|
2.87
|
|
|
$
|
2.70
|
|
|
$
|
2.72
|
|
|
$
|
2.15
|
|
Basic weighted shares outstanding
|
|
|
23,947
|
|
|
|
25,369
|
|
|
|
25,870
|
|
|
|
26,132
|
|
|
|
26,978
|
|
Diluted weighted average shares outstanding
|
|
|
24,129
|
|
|
|
25,620
|
|
|
|
26,266
|
|
|
|
26,638
|
|
|
|
27,506
|
|
Note: No dividends have been declared or paid.
(In thousands, except per share amounts, Selected Store Data or where noted otherwise)
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
|
February 1, 2014
|
|
|
February 2, 2013
|
|
|
January 28, 2012
|
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increase
|
|
|
3.2
|
%
|
|
|
7.2
|
%
|
|
|
4.1
|
%
|
|
|
11.8
|
%
|
|
|
10.2
|
%
|
Comparable store sales
|
|
|
-0.4
|
%
|
|
|
2.9
|
%
|
|
|
1.8
|
%
|
|
|
6.9
|
%
|
|
|
6.8
|
%
|
Gross profit (as a % to net sales)
|
|
|
35.3
|
%
|
|
|
35.8
|
%
|
|
|
36.3
|
%
|
|
|
36.5
|
%
|
|
|
35.8
|
%
|
Store operating, selling and administrative expenses (as a % to net sales)
|
|
|
21.6
|
%
|
|
|
21.1
|
%
|
|
|
21.3
|
%
|
|
|
20.8
|
%
|
|
|
21.2
|
%
|
Depreciation and amortization (as a % to net sales)
|
|
|
1.8
|
%
|
|
|
1.8
|
%
|
|
|
1.6
|
%
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
Provision for income taxes (as a % to net sales)
|
|
|
4.4
|
%
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
|
|
4.7
|
%
|
Net income (as a % to net sales)
|
|
|
7.5
|
%
|
|
|
8.1
|
%
|
|
|
8.3
|
%
|
|
|
8.9
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,274
|
|
|
$
|
88,397
|
|
|
$
|
66,227
|
|
|
$
|
76,911
|
|
|
$
|
55,138
|
|
Average inventory per store
|
|
$
|
271
|
|
|
$
|
243
|
|
|
$
|
244
|
|
|
$
|
254
|
|
|
$
|
234
|
|
Working capital
|
|
$
|
225,178
|
|
|
$
|
253,373
|
|
|
$
|
232,235
|
|
|
$
|
202,899
|
|
|
$
|
177,115
|
|
Total assets
|
|
$
|
442,372
|
|
|
$
|
452,397
|
|
|
$
|
416,345
|
|
|
$
|
377,331
|
|
|
$
|
313,696
|
|
Long-term capital lease obligations
|
|
$
|
3,149
|
|
|
$
|
3,029
|
|
|
$
|
2,889
|
|
|
$
|
2,138
|
|
|
$
|
2,072
|
|
Stockholders' investment
|
|
$
|
310,846
|
|
|
$
|
324,781
|
|
|
$
|
304,023
|
|
|
$
|
239,127
|
|
|
$
|
203,750
|
|
Treasury shares repurchased
|
|
|
2,236
|
|
|
|
1,206
|
|
|
|
366
|
|
|
|
904
|
|
|
|
1,897
|
|
Cost of treasury shares purchased
|
|
$
|
91,332
|
|
|
$
|
60,971
|
|
|
$
|
20,095
|
|
|
$
|
49,852
|
|
|
$
|
68,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Store Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at beginning of period
|
|
|
988
|
|
|
|
927
|
|
|
|
873
|
|
|
|
832
|
|
|
|
798
|
|
New stores opened
|
|
|
71
|
|
|
|
80
|
|
|
|
72
|
|
|
|
54
|
|
|
|
52
|
|
Stores closed
|
|
|
(15
|
)
|
|
|
(19
|
)
|
|
|
(18
|
)
|
|
|
(13
|
)
|
|
|
(18
|
)
|
Stores open at end of period
|
|
|
1,044
|
|
|
|
988
|
|
|
|
927
|
|
|
|
873
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores expanded during the period
|
|
|
16
|
|
|
|
9
|
|
|
|
14
|
|
|
|
13
|
|
|
|
15
|
|
Estimated square footage at end of period
|
|
|
5,974
|
|
|
|
5,649
|
|
|
|
5,331
|
|
|
|
5,003
|
|
|
|
4,755
|
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
|
The following discussion and analysis should be read in conjunction with Item 6, "Selected Consolidated Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this report. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements" and Part I, Item 1A. "Risk Factors."
Overview
Hibbett Sports, Inc. is an athletic specialty retailer operating in small to mid-sized markets, predominantly in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. Hibbett Sports stores provide an extensive selection of premium brand footwear, apparel and team sports equipment, emphasizing convenient locations and a high level of customer service. As of January 30, 2016, we operated a total of 1,044 stores in 33 states composed of 1,024 Hibbett Sports stores and 20 Sports Additions athletic shoe stores.
The Hibbett Sports store is our primary retail format and growth vehicle and is an approximately 5,000 square foot store located primarily in strip centers which are frequently influenced by a Wal-Mart store. Our Hibbett Sports store base consisted of 821 stores located in strip centers, 23 free-standing stores and 200 enclosed mall locations. We expect to continue to grow our store base in strip centers versus enclosed malls. We do not expect that the average size of our stores opening in Fiscal 2017 will vary significantly from the average size of stores opened in Fiscal 2016.
Hibbett operates on a 52- or 53-week fiscal year ending on the Saturday nearest to January 31 of each year. The consolidated statements of operations for Fiscal 2016, Fiscal 2015 and Fiscal 2014 included 52 weeks of operations. Fiscal 2017 will include 52 weeks of operations. We became a public company in October 1996.
Fiscal 2016 experienced a total company-wide square footage increase of 5.7%. Our plan for Fiscal 2017 is to increase total company-wide square footage by 5% to 6%. To supplement new store openings, we continue to expand high performing stores, increasing the square footage in 16 existing stores in Fiscal 2016 for an average increase in square footage of 37%.
In Fiscal 2016, comparable store sales were approximately flat, although footwear experienced a mid-single digit comparable store gain. For Fiscal 2017, comparable store sales are expected to increase in the low-single digit range. We expect merchandise margin to be approximately flat, and expect overall gross profit rate to decline slightly as we incur logistics expenses related to our omni-channel initiative. Store occupancy expenses are expected to be relatively flat as a percentage of net sales.
We expect operating, selling and administrative rates to increase as a percentage of net sales in Fiscal 2017, primarily due to expenses associated with our omni-channel initiative, overall improvements in our information technology capability and increased health care costs. We also expect to continue to generate sufficient cash to enable us to expand and remodel our store base, to enable capital expenditures including technology upgrade projects and to repurchase our common stock under our stock repurchase program.
Comparable store net sales data for the periods presented reflects sales for our traditional format Hibbett Sports and Sports Additions stores open throughout the period and the corresponding period of the prior fiscal year. If a store remodel, relocation or expansion results in the store being closed for a significant period of time, its sales are removed from the comparable store base until it has been open a full 12 months.
Executive Summary
Following is a highlight of our financial results over the last three fiscal years:
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
Fiscal 2014
|
|
Net sales (in millions)
|
|
$
|
943.1
|
|
|
$
|
913.5
|
|
|
$
|
852.0
|
|
Operating income, percentage to net sales
|
|
|
11.9
|
%
|
|
|
12.9
|
%
|
|
|
13.4
|
%
|
Comparable store sales
|
|
|
-0.4
|
%
|
|
|
2.9
|
%
|
|
|
1.8
|
%
|
Net income (in millions)
|
|
$
|
70.5
|
|
|
$
|
73.6
|
|
|
$
|
70.9
|
|
Net income, percentage (decrease) increase
|
|
|
(4.2
|
)%
|
|
|
3.8
|
%
|
|
|
(2.4
|
)%
|
Diluted earnings per share
|
|
$
|
2.92
|
|
|
$
|
2.87
|
|
|
$
|
2.70
|
|
During Fiscal 2016, Hibbett opened 71 new stores and closed 15 underperforming stores, bringing the store base to 1,044 in 33 states as of January 30, 2016. Inventory on a per store basis at January 30, 2016, increased by 11.4% compared to the prior fiscal year. Hibbett ended Fiscal 2016 with $32.3 million of available cash and cash equivalents on the consolidated balance sheet and full availability under its $80.0 million unsecured credit facilities.
Recent Accounting Pronouncements
See Note 2 of Item 8 of this Annual Report on Form 10-K for the fiscal year ended January 30, 2016, for information regarding recent accounting pronouncements.
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items included in our consolidated statements of operations for the periods indicated.
|
|
Fiscal Year Ended
|
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Net sales
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Costs of goods sold, including wholesale and logistics facility and store occupancy costs
|
|
64.7
|
|
64.2
|
|
63.7
|
Gross profit
|
|
35.3
|
|
35.8
|
|
36.3
|
|
|
|
|
|
|
|
Store operating, selling and administrative expenses
|
|
21.6
|
|
21.1
|
|
21.3
|
Depreciation and amortization
|
|
1.8
|
|
1.8
|
|
1.6
|
Operating income
|
|
11.9
|
|
12.9
|
|
13.4
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
-
|
|
-
|
|
-
|
Income before provision for income taxes
|
|
11.9
|
|
12.9
|
|
13.4
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
4.4
|
|
4.8
|
|
5.0
|
Net income
|
|
7.5%
|
|
8.1%
|
|
8.3%
|
Note: Columns may not sum due to rounding.
Fiscal 2016 Compared to Fiscal 2015
Net sales. Net sales increased $29.6 million, or 3.2%, to $943.1 million for Fiscal 2016 from $913.5 million for Fiscal 2015. Furthermore:
|
· |
We opened 71 Hibbett Sports stores while closing 15 underperforming Hibbett Sports stores for net stores opened of 56 stores in Fiscal 2016. Stores not in the comparable store net sales calculation accounted for $33.7 million of the increase in net sales. We expanded, remodeled or relocated 16 high performing stores. Store openings and closings are reported net of relocations. |
|
· |
Comparable store net sales for Fiscal 2016 declined 0.4% compared to Fiscal 2015. |
During Fiscal 2016, 893 stores were included in the comparable store sales comparison. Comparable store net sales were driven by gains across footwear, offset by declines in apparel and equipment. Significant increases were achieved in basketball and lifestyle footwear, while branded apparel, baseball equipment and fitness equipment experienced declines. Additionally, we eliminated the sale of beverages in our stores, which contributed to the decline in equipment. We continue to see an increase in sales per transaction, primarily due to the on-going trend towards premium product.
Gross profit. Cost of goods sold includes the cost of inventory, occupancy costs for stores and occupancy and operating costs for our wholesale and logistics facility. Gross profit was $332.7 million, or 35.3% of net sales, in Fiscal 2016, compared with $326.8 million, or 35.8% of net sales, in Fiscal 2015.
|
· |
Merchandise gross margin decreased as a percentage of net sales due to increased markdowns to liquidate seasonal and aged inventory. |
|
· |
Wholesale and logistics expenses remained flat as a percentage of net sales for Fiscal 2016. Increased labor costs associated with our quick replenishment capability were offset by a decrease in occupancy costs due to the lease expiration of our old facility. |
|
· |
Store occupancy expense increased 26 basis points as a percentage of net sales mainly due to lower comparable sales. |
Store operating, selling and administrative expenses. Store operating, selling and administrative expenses were $203.7 million, or 21.6% of net sales, for Fiscal 2016, compared with $192.6 million, or 21.1% of net sales, for Fiscal 2015. Expense trends we experienced included:
|
· |
Total salary and benefit costs increased by 53 basis points as a percentage of net sales due to lower comparable store sales and higher health care costs. |
|
· |
Data processing costs increased 9 basis points as a percentage of net sales due to the implementation of new systems and upgrade of existing systems, as well as significant improvements in our infrastructure and disaster recovery capabilities. |
|
· |
Advertising expense increased 6 basis points as a percentage of net sales due to increased costs related to mobile marketing initiatives and communicating to our growing base of loyalty members. |
|
· |
We expect overall store operating, selling and administrative expenses as a percentage of net sales to increase in Fiscal 2017 due to expenses related to our omni-channel initiative, and anticipated increases in health care and information technology costs. |
Depreciation and amortization. Depreciation and amortization as a percentage of net sales was 1.8% in Fiscal 2016 and in Fiscal 2015. In Fiscal 2016, depreciation expense increased due to the full year effect of our new wholesale and logistics facility placed in service in April 2014, the addition of new stores and the capitalization of IT investments. We expect depreciation expense to increase at a higher rate in Fiscal 2017 as we capitalize initial phases of our omni-channel initiative.
Provision for income taxes. The combined federal, state and local effective income tax rate as a percentage of pre-tax income was 36.9% for Fiscal 2016 and 37.6% for Fiscal 2015. The decrease in rate resulted primarily from additional utilization of state tax credits associated with our wholesale and logistics facility.
Fiscal 2015 Compared to Fiscal 2014
Net sales. Net sales increased $61.5 million, or 7.2%, to $913.5 million for Fiscal 2015 from $852.0 million for Fiscal 2014. Furthermore:
|
· |
We opened 80 Hibbett Sports stores while closing 19 underperforming Hibbett Sports stores for net stores opened of 61 stores in Fiscal 2015. Stores not in the comparable store net sales calculation accounted for $38.3 million of the increase in net sales. We expanded, remodeled or relocated 10 high performing stores. Store openings and closings are reported net of relocations. |
|
· |
We achieved a 2.9% increase in comparable store net sales for Fiscal 2015 compared to Fiscal 2014. Comparable store net sales contributed $23.2 million to the increase in net sales. |
During Fiscal 2015, 836 stores were included in the comparable store sales comparison. The increase in comparable store net sales was broad-based with gains across footwear, activewear and cleats. Significant increases were achieved in basketball and lifestyle footwear, branded apparel, and wrestling, volleyball and soccer cleats. The majority of our comparable store sales increase was from increased sales per transaction primarily due to a continued trend towards premium product.
Gross profit. Cost of goods sold includes the cost of inventory, occupancy costs for stores and occupancy and operating costs for our wholesale and logistics facility. Gross profit was $326.8 million, or 35.8% of net sales, in Fiscal 2015, compared with $309.3 million, or 36.3% of net sales, in Fiscal 2014.
|
· |
Gross profit rate decreased as a percentage of net sales due to increased markdowns to liquidate aged inventory. |
|
· |
Wholesale and logistics expenses as a percentage of net sales remained relatively flat, decreasing 1 basis point. Decreased labor costs as a percentage of net sales due to improvements in labor efficiency as well as a decrease in occupancy costs offset other volume-related cost increases. |
|
· |
Store occupancy expense as a percentage of net sales increased 12 basis points due to increases in rent, utility and real estate taxes. However, as comparable sales improved in the fourth quarter, these expenses decreased 4 basis points as a percentage of net sales. |
Store operating, selling and administrative expenses. Store operating, selling and administrative expenses were $192.6 million, or 21.1% of net sales, for Fiscal 2015, compared with $181.5 million, or 21.3% of net sales, for Fiscal 2014. Expense trends we experienced included:
|
· |
Total salary and benefit costs increased in dollars, but decreased as a percentage of net sales by 16 basis points due to higher comparable store sales and lower health care costs. |
|
· |
Stock-based compensation decreased by 19 basis points as a percentage of net sales due to a larger number of equity award forfeitures in the current year compared to the previous year. |
|
· |
Expenses associated with costs of our old distribution center not included in cost of goods sold increased 5 basis points as a percentage of net sales. The lease on our old center expired in December 2014. A complete year of expense related to our new corporate headquarters added 5 basis points as a percentage of net sales. |
|
· |
Professional fees increased 7 basis points as a percentage of net sales due to an increase in consulting fees for the planning of our omni-channel initiative and other elements of our strategic plan. |
Depreciation and amortization. Depreciation and amortization as a percentage of net sales was 1.8% in Fiscal 2015 and 1.6% in Fiscal 2014. In Fiscal 2015, the addition of our new wholesale and logistics facility placed in service in April 2014, the addition of new stores and the capitalization of IT investments, resulted in an elevated depreciation expense in both dollars and in percentage of net sales.
Provision for income taxes. The combined federal, state and local effective income tax rate as a percentage of pre-tax income was 37.6% for Fiscal 2015 and 37.7% for Fiscal 2014. The decrease in rate resulted primarily from a settlement with a state taxing authority during Fiscal 2015.
Liquidity and Capital Resources
Our capital requirements relate primarily to new store openings, stock repurchases, facilities and systems to support company growth and working capital requirements. Our working capital requirements are somewhat seasonal in nature and typically reach their peak near the end of the third and the beginning of the fourth quarters of our fiscal year. Historically, we have funded our cash requirements primarily through our cash flow from operations and occasionally from borrowings under our revolving credit facilities. Due to the low interest rates currently available, we are using excess cash on deposit to offset bank fees versus investing such funds in an equity market or in interest-bearing deposits.
Our consolidated statements of cash flows are summarized as follows (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
|
February 1, 2014
|
|
Net cash provided by operating activities
|
|
$
|
58,479
|
|
|
$
|
102,392
|
|
|
$
|
53,301
|
|
Net cash used in investing activities
|
|
|
(24,677
|
)
|
|
|
(22,559
|
)
|
|
|
(50,990
|
)
|
Net cash used in financing activities
|
|
|
(89,925
|
)
|
|
|
(57,663
|
)
|
|
|
(12,995
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(56,123
|
)
|
|
$
|
22,170
|
|
|
$
|
(10,684
|
)
|
Operating Activities.
Cash flow from operations is seasonal in our business. Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, such as winter holidays, the spring sales period and late summer back-to-school shopping. Inventory levels are reduced in connection with higher sales during the peak selling seasons and this inventory reduction, combined with proportionately higher net income, typically produces a positive cash flow.
Net cash provided by operating activities was $58.5 million for Fiscal 2016 compared with net cash provided by operating activities of $102.4 million and $53.3 million in Fiscal 2015 and Fiscal 2014, respectively. The decrease in net cash provided by operating activities for Fiscal 2016 compared to Fiscal 2015 and Fiscal 2014 was impacted by the following:
|
· |
Ending inventory increased 11.4% and declined 0.4% on a per store level basis at January 30, 2016 and January 31, 2015, respectively, compared to the prior year. Fiscal 2016 was affected by slower sales in the fourth quarter, as well as initiatives to improve our in-stock position and quick replenishment capability. Fiscal 2015 was affected by later receipts resulting from the port labor disputes ongoing on the West coast. The increase in inventory used cash of $42.7 million, $13.9 million and $5.2 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. |
|
· |
The change in accounts payable provided cash of $4.0 and $9.9 million in Fiscal 2016 and Fiscal 2015, respectively and used cash of $27.5 million in Fiscal 2014. The increases in Fiscal 2016 and Fiscal 2015 resulted from an earlier receipt of inventory in advance of the spring season and planned additional inventory in footwear in Fiscal 2016. The decrease in Fiscal 2014 resulted from a later receipt of inventory in advance of the spring season. |
|
· |
Net income provided cash of $70.5 million, $73.6 million and $70.9 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. |
|
· |
Non-cash charges included depreciation and amortization expense of $17.0 million, $16.0 million and $13.8 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively, and stock-based compensation expense of $5.2 million, $4.5 million and $5.8 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. Stock-based compensation in Fiscal 2015 was affected by a higher than historical forfeiture of restricted stock and performance-based awards. Fluctuations in stock-based compensation generally result from the achievement of performance-based equity awards at greater or lesser than their granted level, fluctuations in the price of our common stock and levels of forfeitures in any given period. Depreciation expense increased in Fiscal 2016 and Fiscal 2015 due to investments in facilities and information technology systems and is expected to increase as additional systems are placed into service. |
Investing Activities.
Cash used in investing activities in the fiscal periods ended January 30, 2016, January 31, 2015 and February 1, 2014 totaled $24.7 million, $22.6 million and $51.0 million, respectively. Gross capital expenditures used $25.1 million, $22.9 million and $50.5 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. Capital expenditures in Fiscal 2014 included our new corporate headquarters, our inventory markdown optimization system and construction costs on our wholesale and logistics facility.
We use cash in investing activities to build new stores and remodel, expand or relocate existing stores. We opened 71 new stores and relocated, expanded and/or remodeled 19 existing stores during Fiscal 2016. We opened 80 new stores and relocated, expanded and /or remodeled 10 existing stores during Fiscal 2015. We opened 72 new stores and relocated, expanded and/or remodeled 17 existing stores during Fiscal 2014.
We estimate the cash outlay for capital expenditures in the fiscal year ending January 28, 2017 will be approximately $39.2 million, which relates to expenditures for information system infrastructure and upgrades (including our omni-channel initiative), the opening of new stores; the remodeling, relocation or expansion of selected existing stores and other departmental needs. We expect to expand our store base by a net 40 to 50 stores.
Of the total budgeted dollars for capital expenditures for Fiscal 2017, we anticipate that approximately 56% will be related to information technology, consisting primarily of expenditures on our omni-channel initiative, and various system enhancements and upgrades. Approximately 26% will be related to the opening new stores, store expansions and relocations and store remodels. The remaining 18% relates primarily to specific department expenditures and includes facility upgrades, transportation equipment, automobiles, fixtures and security equipment for our stores.
The lease for our old distribution center expired in December 2014. We relocated to our new wholesale and logistics facility in April 2014 at a total capitalized cost of $38.7 million.
Financing Activities.
Net cash used in financing activities was $89.9 million, $57.7 million and $13.0 million in Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. The financing activity cash fluctuation between years is primarily the result of repurchases of our common stock. We expended $89.2 million, $56.3 million and $15.8 million on repurchases of our common stock during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. In addition, cash used to settle net share equity awards expended $2.1 million, $4.7 million and $4.3 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.
Financing activities also consisted of proceeds from stock option exercises and employee stock plan purchases and the excess tax benefit from the exercise of incentive stock options. As stock options are exercised and shares are purchased through our employee stock purchase plan, we will continue to receive proceeds and expect a tax deduction; however, the amounts and timing cannot be predicted.
At January 30, 2016, we had two unsecured revolving credit facilities that allow borrowings up to $30.0 million and $50.0 million, and which renew in August 2016 and November 2016, respectively. The facilities do not require a commitment or agency fee nor are there any covenant restrictions. We plan to renew these facilities as they expire and do not anticipate any problems in doing so; however, no assurance can be given that we will be granted a renewal or terms which are acceptable to us. As of January 30, 2016, we did not have any debt outstanding under either of these facilities.
The following table lists the aggregate maturities of various classes of obligations and expiration amounts of various classes of commitments related to Hibbett Sports, Inc. at January 30, 2016 (in thousands):
|
|
Payment due by period
|
|
Contractual Obligations
|
|
Less than 1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More than 5 years
|
|
|
Total
|
|
Long-term debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Capital lease obligations (1)
|
|
|
478
|
|
|
|
1,132
|
|
|
|
1,046
|
|
|
|
971
|
|
|
|
3,627
|
|
Interest on capital lease obligations (1)
|
|
|
269
|
|
|
|
449
|
|
|
|
298
|
|
|
|
196
|
|
|
|
1,212
|
|
Operating lease obligations (1)
|
|
|
57,177
|
|
|
|
90,056
|
|
|
|
53,650
|
|
|
|
39,526
|
|
|
|
240,409
|
|
Purchase obligations (2)
|
|
|
7,499
|
|
|
|
3,021
|
|
|
|
138
|
|
|
|
-
|
|
|
|
10,658
|
|
Other liabilities (3)
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,712
|
|
|
|
2,791
|
|
Total
|
|
$
|
65,502
|
|
|
$
|
94,658
|
|
|
$
|
55,132
|
|
|
$
|
43,405
|
|
|
$
|
258,697
|
|
|
(1) |
See "Part II, Item 8, Consolidated Financial Statements Note 6 – Leases." |
|
(2) |
Purchase obligations include all material legally binding contracts such as software license commitments and service contracts. The table above also includes a stand-by letter of credit in conjunction with our self-insured workers' compensation and general liability insurance coverage. Contractual obligations that are not binding agreements, including purchase orders for inventory, are excluded from the table above. Store utility contracts, including waste disposal agreements, are also excluded. |
|
(3) |
Other liabilities include amounts accrued for various deferred compensation arrangements. See "Part II, Item 8, Consolidated Financial Statements Note 7 – Defined Contribution Benefit Plans" for a discussion regarding our employee benefit plans. |
Non-current liabilities have been excluded from the above table to the extent that the timing and/or amount of any cash payment are uncertain. Excluded from this table are approximately $1.2 million of unrecognized tax benefits, which have been recorded as liabilities in accordance with ASC Topic 740, Income Taxes, as the timing of such payments cannot be reasonably determined. See "Part II, Item 8, Consolidated Financial Statements Note 1 – Deferred Rent" for a discussion on our deferred rent liabilities. See "Part II, Item 8, Consolidated Financial Statements Note 9 – Income Taxes" for a discussion of our unrecognized tax benefits.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees through January 30, 2016. We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into the financial statements.
Inflation and Other Economic Factors
Our ability to provide quality merchandise on a profitable basis may be subject to economic factors and influences that we cannot control. National or international events, including uncertainties in the global financial markets, U.S. government policies, the Middle East and Asia, could lead to disruptions in economies in the United States or in foreign countries where a significant portion of our merchandise is manufactured. These and other factors could increase our merchandise costs and other costs that are critical to our operations. Consumer spending could also decline because of economic pressures. See "Risk Factors."
We do not believe that inflation has had a material impact on our financial position or results of operations to date. A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net sales if the selling prices of our merchandise do not increase with these increased costs.
Our Critical Accounting Policies
Our critical accounting policies reflected in the consolidated financial statements are detailed below.
Revenue Recognition. We recognize revenue, including gift card and layaway sales, in accordance with ASC Topic 605, Revenue Recognition.
Retail merchandise sales occur on-site in our stores. We recognize revenue at the time the customer takes possession of the merchandise. Customers have the option of paying the full purchase price of the merchandise upon sale or paying a down payment and placing the merchandise on layaway. The customer may make further payments in installments, but the entire purchase price for merchandise placed on layaway must be received by us within 30 days. The down payment and any installments are recorded by us as short-term deferred revenue until the customer pays the entire purchase price for the merchandise. Retail sales are recorded net of returns and discounts and exclude sales taxes.
We offer a customer loyalty program, the MVP Rewards program, whereby customers, upon registration, can earn points in a variety of ways, including store purchases, website surveys and other activities on our website. Based on the number of points accumulated, customers receive reward certificates on a monthly basis that can be redeemed in our stores. An estimate of the obligation related to the program, based on historical redemption rates, is recorded as a current liability and a reduction of net retail sales in the period earned by the customer. The current liability is reduced, and a corresponding amount is recognized in net retail sales, in the amount of and at the time of redemption of the reward certificate. At January 30, 2016 and January 31, 2015, the amount recorded in other accrued expenses on our consolidated balance sheet for reward certificates issued was not significant.
The cost of coupon sales incentives is recognized at the time the related revenue is recognized by us. Proceeds received from the issuance of 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 as other accrued expenses on our consolidated balance sheet.
Income from gift card breakage is recognized to the extent not required to be remitted to jurisdictions as unclaimed property and is based upon historical redemption patterns and represents the balance of gift cards for which we believe the likelihood of redemption by the customer is remote. We have determined the likelihood of redemption is remote when redemptions are equal to or less than five percent of the remaining balances of gift cards aged by activation year. For Fiscal 2016, we recaptured $24,000 of breakage revenue as other income which is included in the accompanying consolidated statements of operations within store operating, selling and administrative expenses. For Fiscal 2015 and Fiscal 2014, $0.7 million and $0.2 million of breakage revenue, respectively, was recorded as other income and is included in the accompanying consolidated statements of operations as a reduction to store operating, selling and administrative expenses. The net deferred revenue liability at January 30, 2016 and January 31, 2015 was $5.5 million and $4.7 million, respectively.
Inventories.
Inventories are valued using the lower of weighted average cost or market method. Items are removed from inventory using the weighted average cost method.
Lower of Cost or Market: Market is determined based on estimated net realizable value. We regularly review inventories to determine if the carrying value exceeds 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 or market accrual based on historical trends and specific identification. As of January 30, 2016 and January 31, 2015, the accrual was $3.7 million and $3.5 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 January 30, 2016 and January 31, 2015, the accrual was $1.3 million and $1.2 million, respectively.
Inventory Purchase Concentration: Our business is dependent to a significant degree upon close relationships with our vendors. Our largest vendor, Nike, represented 57.5%, 55.7% and 52.3% of our purchases for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. Our second largest vendor, Under Armour, represented 15.9%, 15.4% and 15.6% of our purchases. Our third largest vendor represented 4.2%, 6.4% and 8.6% of our purchases for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.
Consignment Inventories: Consignment inventories, which are owned by the vendor but located in our stores, are not reported as our inventory until title is transferred to us or our purchase obligation is determined. At January 30, 2016 and January 31, 2015, vendor-owned inventories held at our locations (and not reported as our inventory) were $5.7 million and $3.8 million, respectively.
Accrued Expenses. On a monthly basis, we estimate certain significant expenses in an effort to record those expenses in the period incurred. Our most significant estimates relate to payroll and payroll tax expenses, property taxes, insurance-related expenses and utility expenses. Estimates are primarily based on current activity and historical results and are adjusted as our estimates change. Determination of estimates and assumptions for accrued expenses requires significant judgment.
Income Taxes. We estimate the annual tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the year's taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining our effective tax rate and in evaluating our tax position and changes in estimates could materially impact our results of operations and financial position.
We account for uncertain tax positions in accordance with ASC Subtopic 740-10. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations. See "Part II, Item 8, Consolidated Financial Statements Note 9 – Income Taxes" for additional detail on our uncertain tax positions.
Legal Proceedings and Claims. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated accruals is dependent on new claims as they may arise and the favorable or unfavorable outcome of particular litigation. As additional information becomes available, we assess the potential liability related to pending litigation and revise estimates as appropriate. Such revisions in estimates of the potential liability could materially impact our results of operations and financial position. See "Risk Factors."
Impairment of Long-Lived Assets. We continually evaluate whether events and circumstances have occurred that indicate the remaining balance of long-lived assets may be impaired and not recoverable. Our policy is to adjust the remaining useful life of depreciable assets and to recognize any impairment loss on long-lived assets as a charge to current income when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment is assessed considering the estimated undiscounted cash flows over the asset's remaining life. If estimated cash flows are insufficient to recover the investment, an impairment loss is recognized based on a comparison of the cost of the asset to fair value less any costs of disposition. Evaluation of asset impairment requires significant judgment and estimates. See "Risk Factors."
Stock-Based Compensation. We measure stock-based compensation for all share-based awards granted based on the estimated fair value of those awards at grant date. The cost of restricted stock units and performance-based restricted stock units is determined using the fair value of our common stock on the date of grant. We use the Black-Scholes valuation model to estimate the fair value at the date of grant for options granted under our equity incentive plans and stock purchase rights associated with the Employee Stock Purchase Plan.
Stock-based compensation is expensed over the service period of the awards. Performance-based awards are expensed based on the probability of achievement of the underlying target, which is estimated and adjusted as financial results dictate during the performance period. The Black-Scholes valuation model requires the input of assumptions and estimates which are regularly evaluated and updated when applicable. These include estimating the length of time vested stock options will be retained before being exercised (expected term), the estimated volatility of our common stock price over the expected term and the risk-free interest rate based on the annual continuously compounded risk-free rate with a term equal to the option's expected term. In addition, we estimate the number of awards that will ultimately not complete their vesting requirements (forfeitures).
Changes in these assumptions and estimates can materially affect the estimate of fair value of stock-based compensation and consequently, the related expense recognized on the consolidated statements of operations. Our stock option grants have a life of up to ten years and are not transferable. Therefore, the actual fair value of a stock option grant may be different from our estimates. We believe that our estimates incorporate all relevant information and represent a reasonable approximation in light of the difficulties involved in valuing non-traded stock options.
Insurance Accruals. We use a combination of insurance and self-insurance for a number of risks including workers' compensation, general liability, property liability and employee-related health benefits, a portion of which is paid by our employees. The estimates and accruals for the liabilities associated with these risks are regularly evaluated for adequacy based on the most current available information, including historical claims experience and expected future claims costs.
Leases. We lease all our stores and certain equipment, including transportation and office equipment. We evaluate each lease at inception to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for this evaluation 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. The majority of our stores are operating leases.
Many of our operating lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. We use a time period for our straight-line rent expense calculation that equals or exceeds the time period used for depreciation on leasehold improvements. In addition, the commencement date of the lease term is the earlier of the date when we become legally obligated for the rent payments or the date when we take possession of the building for initial setup of fixtures and merchandise.
We make judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as capital or operating, the escalations in payments that are taken into consideration when calculating straight-line rent and the term over which landlord allowances received are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported in a specific period if different assumed lease terms were used.
Dividend Policy
We have never declared or paid any dividends on our common stock. We currently intend to retain our future earnings to finance the growth and development of our business and for our stock repurchase program, and therefore do not anticipate declaring or paying cash dividends on our common stock for the foreseeable future. Any future decision to declare or pay dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our Board of Directors deems relevant.
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (see "Part II, Item 9A, Controls and Procedures").
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Investment and Credit Availability Risk
We manage cash and cash equivalents in various institutions at levels beyond federally insured limits per institution, and we may purchase investments not guaranteed by the FDIC. Accordingly, there is a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. In an attempt to mitigate this risk, our investment policy emphasizes preservation of principal and liquidity.
We also have financial institutions that are committed to provide loans under our revolving credit facilities. There is a risk that these institutions cannot deliver against these obligations. See "Risk Factors."
Interest Rate Risk
Our net exposure to interest rate risk results primarily from interest rate fluctuations on our credit facilities, which bears interest at a rate which varies with LIBOR, prime or federal funds rates. At the end of Fiscal 2016 and Fiscal 2015, we had no borrowings outstanding under any credit facility.
There were 36 days during the 52 weeks ended January 30, 2016, where we incurred borrowings against our credit facilities for an average borrowing of $12.9 million. During Fiscal 2016, the maximum amount outstanding against these agreements was $28.4 million and the weighted average interest rate was 2.22%. We did not have any borrowings against either of the facilities during Fiscal 2015.
Quarterly and Seasonal Fluctuations
We experience seasonal fluctuations in our net sales and results of operations. Customer buying patterns around the spring sales period and the winter holiday season historically result in higher first and fourth quarter net sales. Over the past few years, our third quarter has experienced higher than historical net sales, resulting from back-to-school shopping combined with tax-free holidays in many of our markets. In addition, our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the amount and timing of net sales contributed by new stores, merchandise mix, demand for apparel and accessories driven by local interest in sporting events and timing of sales tax holidays.
Although our operations are influenced by general economic conditions, we do not believe that, historically, inflation has had a material impact on our results of operations as we are generally able to pass along inflationary increases in costs to our customers.
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data of our Company are included in response to this item:
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hibbett Sports, Inc.:
We have audited the accompanying consolidated balance sheets of Hibbett Sports, Inc. and subsidiaries as of January 30, 2016 and January 31, 2015, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the years in the three-year period ended January 30, 2016. We also have audited Hibbett Sports, Inc.'s internal control over financial reporting as of January 30, 2016, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Hibbett Sports, Inc.'s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Hibbett Sports, Inc.'s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hibbett Sports, Inc. and subsidiaries as of January 30, 2016 and January 31, 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended January 30, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Hibbett Sports, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 30, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Birmingham, Alabama
March 28, 2016
HIBBETT SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
ASSETS
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,274
|
|
|
$
|
88,397
|
|
Trade receivables, net
|
|
|
3,787
|
|
|
|
3,681
|
|
Accounts receivable, other
|
|
|
3,289
|
|
|
|
3,896
|
|
Inventories, net
|
|
|
283,099
|
|
|
|
240,408
|
|
Prepaid expenses and other
|
|
|
7,919
|
|
|
|
9,296
|
|
Deferred income taxes, net
|
|
|
-
|
|
|
|
9,820
|
|
Total current assets
|
|
|
330,368
|
|
|
|
355,498
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
|
28,390
|
|
|
|
27,892
|
|
Buildings under capital lease
|
|
|
3,652
|
|
|
|
3,144
|
|
Equipment
|
|
|
76,513
|
|
|
|
71,280
|
|
Equipment under capital lease
|
|
|
1,121
|
|
|
|
1,121
|
|
Furniture and fixtures
|
|
|
32,863
|
|
|
|
31,303
|
|
Leasehold improvements
|
|
|
80,394
|
|
|
|
74,085
|
|
Construction in progress
|
|
|
8,523
|
|
|
|
3,369
|
|
|
|
|
231,456
|
|
|
|
212,194
|
|
Less accumulated depreciation and amortization
|
|
|
130,067
|
|
|
|
119,213
|
|
Net property and equipment
|
|
|
101,389
|
|
|
|
92,981
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
6,657
|
|
|
|
306
|
|
Other assets, net
|
|
|
3,958
|
|
|
|
3,612
|
|
Total Assets
|
|
$
|
442,372
|
|
|
$
|
452,397
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' INVESTMENT
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
88,456
|
|
|
$
|
84,439
|
|
Capital lease obligations
|
|
|
478
|
|
|
|
436
|
|
Accrued payroll expenses
|
|
|
7,702
|
|
|
|
8,249
|
|
Deferred rent
|
|
|
3,972
|
|
|
|
3,821
|
|
Other accrued expenses
|
|
|
4,582
|
|
|
|
5,180
|
|
Total current liabilities
|
|
|
105,190
|
|
|
|
102,125
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
3,149
|
|
|
|
3,029
|
|
Deferred rent
|
|
|
19,119
|
|
|
|
16,043
|
|
Unrecognized tax benefits
|
|
|
1,355
|
|
|
|
1,457
|
|
Other liabilities, net
|
|
|
2,713
|
|
|
|
4,962
|
|
Total liabilities
|
|
|
131,526
|
|
|
|
127,616
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Investment:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value, 80,000,000 shares authorized,
38,628,385 and 38,465,814 shares issued at January 30, 2016 and
January 31, 2015, respectively
|
|
|
386
|
|
|
|
385
|
|
Paid-in capital
|
|
|
169,543
|
|
|
|
162,675
|
|
Retained earnings
|
|
|
636,583
|
|
|
|
566,055
|
|
Treasury stock, at cost, 15,831,926 and 13,595,537 shares repurchased
at January 30, 2016 and January 31, 2015, respectively
|
|
|
(495,666
|
)
|
|
|
(404,334
|
)
|
Total stockholders' investment
|
|
|
310,846
|
|
|
|
324,781
|
|
Total Liabilities and Stockholders' Investment
|
|
$
|
442,372
|
|
|
$
|
452,397
|
|
See accompanying notes to consolidated financial statements.
HIBBETT SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
|
|
Fiscal Year Ended
|
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
|
February 1, 2014
|
|
Net sales
|
|
$
|
943,104
|
|
|
$
|
913,486
|
|
|
$
|
851,965
|
|
Cost of goods sold, including wholesale and logistics facility and store occupancy costs
|
|
|
610,389
|
|
|
|
586,702
|
|
|
|
542,700
|
|
Gross profit
|
|
|
332,715
|
|
|
|
326,784
|
|
|
|
309,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store operating, selling and administrative expenses
|
|
|
203,673
|
|
|
|
192,648
|
|
|
|
181,527
|
|
Depreciation and amortization
|
|
|
17,038
|
|
|
|
15,990
|
|
|
|
13,847
|
|
Operating income
|
|
|
112,004
|
|
|
|
118,146
|
|
|
|
113,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
31
|
|
|
|
22
|
|
|
|
11
|
|
Interest expense
|
|
|
(323
|
)
|
|
|
(315
|
)
|
|
|
(199
|
)
|
Interest expense, net
|
|
|
(292
|
)
|
|
|
(293
|
)
|
|
|
(188
|
)
|
Income before provision for income taxes
|
|
|
111,712
|
|
|
|
117,853
|
|
|
|
113,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
41,184
|
|
|
|
44,269
|
|
|
|
42,826
|
|
Net income
|
|
$
|
70,528
|
|
|
$
|
73,584
|
|
|
$
|
70,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.95
|
|
|
$
|
2.90
|
|
|
$
|
2.74
|
|
Diluted earnings per share
|
|
$
|
2.92
|
|
|
$
|
2.87
|
|
|
$
|
2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,947
|
|
|
|
25,369
|
|
|
|
25,870
|
|
Diluted
|
|
|
24,129
|
|
|
|
25,620
|
|
|
|
26,266
|
|
See accompanying notes to consolidated financial statements.
HIBBETT SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share information)
|
|
Fiscal Year Ended
|
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
|
February 1, 2014
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
$ 70,528
|
|
|
$
|
$ 73,584
|
|
|
$
|
$ 70,877
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,038
|
|
|
|
15,990
|
|
|
|
13,847
|
|
Deferred income taxes and unrecognized income tax benefit, net
|
|
|
1,285
|
|
|
|
4,220
|
|
|
|
(73
|
)
|
Excess tax benefit from stock option exercises
|
|
|
(900
|
)
|
|
|
(2,911
|
)
|
|
|
(4,357
|
)
|
(Gain) loss on disposal and write-down of assets, net
|
|
|
(156
|
)
|
|
|
181
|
|
|
|
173
|
|
Stock-based compensation
|
|
|
5,198
|
|
|
|
4,468
|
|
|
|
5,838
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
|
(106
|
)
|
|
|
117
|
|
|
|
(452
|
)
|
Accounts receivable, other
|
|
|
607
|
|
|
|
706
|
|
|
|
(1,993
|
)
|
Inventories, net
|
|
|
(42,691
|
)
|
|
|
(13,863
|
)
|
|
|
(5,167
|
)
|
Prepaid expenses and other
|
|
|
2,186
|
|
|
|
6,614
|
|
|
|
36
|
|
Other assets, net
|
|
|
(443
|
)
|
|
|
46
|
|
|
|
(475
|
)
|
Accounts payable
|
|
|
4,017
|
|
|
|
9,907
|
|
|
|
(27,489
|
)
|
Deferred rent, non-current
|
|
|
3,076
|
|
|
|
2,240
|
|
|
|
1,798
|
|
Accrued expenses and other
|
|
|
(1,160
|
)
|
|
|
1,093
|
|
|
|
738
|
|
Net cash provided by operating activities
|
|
|
58,479
|
|
|
|
102,392
|
|
|
|
53,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments, net
|
|
|
65
|
|
|
|
(90
|
)
|
|
|
(704
|
)
|
Capital expenditures
|
|
|
(25,147
|
)
|
|
|
(22,873
|
)
|
|
|
(50,507
|
)
|
Proceeds from sale of property and equipment
|
|
|
298
|
|
|
|
320
|
|
|
|
221
|
|
Proceeds from insurance
|
|
|
107
|
|
|
|
84
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(24,677
|
)
|
|
|
(22,559
|
)
|
|
|
(50,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for stock repurchases
|
|
|
(89,212
|
)
|
|
|
(56,302
|
)
|
|
|
(15,807
|
)
|
Net payments on capital lease obligations
|
|
|
(346
|
)
|
|
|
(377
|
)
|
|
|
(268
|
)
|
Excess tax benefit from stock option exercises
|
|
|
900
|
|
|
|
2,911
|
|
|
|
4,357
|
|
Cash used to settle net share equity awards
|
|
|
(2,120
|
)
|
|
|
(4,669
|
)
|
|
|
(4,288
|
)
|
Proceeds from options exercised and purchase of shares under the employee stock purchase plan
|
|
|
853
|
|
|
|
774
|
|
|
|
3,011
|
|
Net cash used in financing activities
|
|
|
(89,925
|
)
|
|
|
(57,663
|
)
|
|
|
(12,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(56,123
|
)
|
|
|
22,170
|
|
|
|
(10,684
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
88,397
|
|
|
|
66,227
|
|
|
|
76,911
|
|
Cash and cash equivalents, end of year
|
|
$
|
32,274
|
|
|
$
|
88,397
|
|
|
$
|
66,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
308
|
|
|
$
|
306
|
|
|
$
|
195
|
|
Income taxes, net of refunds
|
|
$
|
42,500
|
|
|
$
|
32,626
|
|
|
$
|
42,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions under capital leases
|
|
$
|
508
|
|
|
$
|
909
|
|
|
$
|
1,086
|
|
See accompanying notes to consolidated financial statements.
HIBBETT SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(in thousands, except share information)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Number of
Shares
|
|
|
Amount
|
|
|
Total
Stockholders'
Investment
|
|
Balance-February 2, 2013
|
|
|
37,846,321
|
|
|
$
|
378
|
|
|
$
|
140,423
|
|
|
$
|
421,594
|
|
|
|
12,023,834
|
|
|
$
|
(323,268
|
)
|
|
$
|
239,127
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,877
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,877
|
|
Issuance of shares through the Company's equity plans, including tax benefit of $4,357
|
|
|
356,165
|
|
|
|
4
|
|
|
|
7,364
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,368
|
|
Adjustment to income tax benefit from exercises of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
908
|
|
Purchase of shares under the stock repurchase program
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288,224
|
|
|
|
(15,807
|
)
|
|
|
(15,807
|
)
|
Settlement of net share equity awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,473
|
|
|
|
(4,288
|
)
|
|
|
(4,288
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
5,838
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,838
|
|
Balance-February 1, 2014
|
|
|
38,202,486
|
|
|
|
382
|
|
|
|
154,533
|
|
|
|
492,471
|
|
|
|
12,389,531
|
|
|
|
(343,363
|
)
|
|
|
304,023
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73,584
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73,584
|
|
Issuance of shares through the Company's equity plans, including tax benefit of $2,911
|
|
|
263,328
|
|
|
|
3
|
|
|
|
3,682
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,685
|
|
Adjustment to income tax benefit from exercises of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
Purchase of shares under the stock repurchase program
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,124,111
|
|
|
|
(56,302
|
)
|
|
|
(56,302
|
)
|
Settlement of net share equity awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,895
|
|
|
|
(4,669
|
)
|
|
|
(4,669
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
4,468
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,468
|
|
Balance-January 31, 2015
|
|
|
38,465,814
|
|
|
|
385
|
|
|
|
162,675
|
|
|
|
566,055
|
|
|
|
13,595,537
|
|
|
|
(404,334
|
)
|
|
|
324,781
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,528
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,528
|
|
Issuance of shares through the Company's equity plans, including tax benefit of $900
|
|
|
162,571
|
|
|
|
1
|
|
|
|
1,753
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,754
|
|
Adjustment to income tax benefit from exercises of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
Purchase of shares under the stock repurchase program
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,193,512
|
|
|
|
(89,212
|
)
|
|
|
(89,212
|
)
|
Settlement of net share equity awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,877
|
|
|
|
(2,120
|
)
|
|
|
(2,120
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
5,198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,198
|
|
Balance-January 30, 2016
|
|
|
38,628,385
|
|
|
$
|
$386
|
|
|
$
|
$169,543
|
|
|
$
|
$636,583
|
|
|
|
15,831,926
|
|
|
$
|
($495,666
|
)
|
|
$
|
$310,846
|
|
See accompanying notes to consolidated financial statements.
HIBBETT SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Hibbett Sports, Inc. is an athletic specialty retailer in small to mid-sized markets predominately in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. References to "we," "our," "us" and the "Company" refer to Hibbett Sports, Inc. and its subsidiaries as well as its predecessors. Our fiscal year ends on the Saturday closest to January 31 of each year. The consolidated statements of operations for Fiscal 2016, Fiscal 2015 and Fiscal 2014 include 52 weeks of operations. Our merchandise assortment features a core selection of brand name merchandise emphasizing athletic footwear, team sports equipment, athletic and fashion apparel and related accessories. We complement this core assortment with a selection of localized apparel, footwear and accessories designed to appeal to a wide range of customers within each market.
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 had 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 estimates and assumptions that affect:
|
· |
the reported amounts of certain assets, including inventories and property and equipment; |
|
· |
the reported amounts of certain liabilities, including legal, tax-related and other accruals; and |
|
· |
the reported amounts of certain revenues and expenses during the reporting period. |
The assumptions used by management could change significantly in future estimates due to changes in circumstances and actual results could differ from those estimates.
Reportable Segments
Given the economic characteristics of the store formats, the similar nature of 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.
Customers
No customer accounted for more than 5.0% of our net sales during the fiscal years ended January 30, 2016, January 31, 2015 or February 1, 2014.
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.
Advertising
We expense advertising costs when incurred. We participate in various advertising and marketing cooperative programs with our vendors, who, under these programs, reimburse us for certain costs incurred. A receivable for cooperative advertising to be reimbursed is recorded as a decrease to expense as advertisements are run.
The following table presents the components of our advertising expense (in thousands):
|
Fiscal Year Ended
|
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
|
Gross advertising costs
|
|
$
|
9,983
|
|
|
$
|
9,763
|
|
|
$
|
8,980
|
|
Advertising reimbursements
|
|
|
(2,949
|
)
|
|
|
(3,456
|
)
|
|
|
(3,335
|
)
|
Net advertising costs
|
|
$
|
7,034
|
|
|
$
|
6,307
|
|
|
$
|
5,645
|
|
Cost of Goods Sold
We include inbound freight charges, merchandise purchases, store occupancy costs and a portion of our logistics costs related to our retail business in cost of goods sold. Costs associated with moving merchandise to and between stores are included in store operating, selling and administrative expenses.
Stock Repurchase Program
In November 2015, the Board of Directors (Board) authorized a Stock Repurchase Program (2015 Program) of $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). Stock repurchases may be made in the open market or in negotiated transactions, with the amount and timing of repurchases dependent on market conditions and at the discretion of our management.
No stock repurchases have been made under the 2015 Program. Under the 2012 Program, we repurchased 2.2 million shares of our common stock during Fiscal 2016 at a cost of $91.3 million, including 43,000 shares acquired from holders of restricted stock to satisfy tax withholding requirements of $2.1 million. We repurchased 1.2 million shares of our common stock during Fiscal 2015 at a cost of $61.0 million, including 82,000 shares acquired from holders of restricted stock unit awards to satisfy tax withholding requirements of $4.7 million.
Historically, under all stock repurchase authorizations, we have repurchased a total of 15.8 million shares of our common stock at an approximate cost of $495.7 million as of January 30, 2016, and had the full $300.0 million remaining under the 2015 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. We are exposed to credit risk in the event of default by our financial institutions where we maintain deposits to the extent the amount recorded on the consolidated balance sheet exceeds the FDIC insurance limits per institution. 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 January 30, 2016 and January 31, 2015 were $4.3 million and $5.2 million, respectively.
Investments
We hold 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). These are trading securities. At January 30, 2016, we had $2.6 million of investments of which $0.1 million was included in prepaid expenses and other and $2.5 million was included in other assets, net. At January 31, 2015, we had $2.7 million of investments of which $0.1 million was included in prepaid expenses and other and $2.6 million was included in other assets, net. Net unrealized holding losses for Fiscal 2016 were $0.1 million and net unrealized holding gains for Fiscal 2015 was $31,000.
Trade and Other Accounts Receivable
Trade accounts receivable consist primarily of amounts due to us from sales to educational institutions for athletic programs. We do not require collateral, and we maintain an allowance for potential uncollectible accounts based on an analysis of the aging of accounts receivable at the date of the financial statements, historical losses and existing economic conditions, when relevant. The allowance for doubtful accounts at January 30, 2016 and January 31, 2015 was $89,000 and $79,000, respectively.
Other accounts receivable consists primarily of tenant allowances due from landlords and cooperative advertising due from vendors. We analyze other accounts receivable 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 market method. Items are removed from inventory using the weighted average cost method.
Lower of Cost or Market: Market is determined based on estimated net realizable value. We regularly review inventories to determine if the carrying value exceeds 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 or market accrual based on historical trends and specific identification. As of January 30, 2016 and January 31, 2015, the accrual was $3.7 million and $3.5 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 January 30, 2016 and January 31, 2015, the accrual was $1.3 million and $1.2 million, respectively.
Inventory Purchase Concentration: Our business is dependent to a significant degree upon close relationships with our vendors. Our largest vendor, Nike, represented 57.5%, 55.7% and 52.3% of our purchases for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. Our second largest vendor, Under Armour, represented 15.9%, 15.4% and 15.6% of our purchases. Our third largest vendor represented 4.2%, 6.4% and 8.6% of our purchases for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.
Consignment Inventories: Consignment inventories, which are owned by the vendor but located in our stores, are not reported as our inventory until title is transferred to us or our purchase obligation is determined. At January 30, 2016 and January 31, 2015, vendor-owned inventories held at our locations (and not reported as our inventory) were $5.7 million and $3.8 million, respectively.
Property and Equipment
Property and equipment are recorded at cost and include assets acquired through capital leases. Depreciation on assets 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 January 30, 2016, approximately 94% of the construction in progress balance was comprised of costs associated with information technology capital projects. The remaining balance consisted of costs associated with unopened stores and leasehold improvements.
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.
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. 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 current portion is included as a change in accrued expenses and the long-term portion is included as a change in deferred rent, non-current. The liability for the current portion of unamortized landlord allowances was $3.7 million and $3.3 million at January 30, 2016 and January 31, 2015, respectively. The liability for the long-term portion of unamortized landlord allowances was $14.4 million and $12.4 million at January 30, 2016 and January 31, 2015, respectively. We estimate the non-cash portion of landlord allowances was $1.1 million and $1.3 million at January 30, 2016 and January 31, 2015, respectively.
Revenue Recognition
We recognize revenue, including gift card and layaway sales, in accordance with the Accounting Standards Codification (ASC) Topic 605, Revenue Recognition.
Retail merchandise sales occur on-site in our stores. We recognize revenue at the time the customer takes possession of the merchandise. Customers have the option of paying the full purchase price of the merchandise upon sale or paying a down payment and placing the merchandise on layaway. The customer may make further payments in installments, but the entire purchase price for merchandise placed on layaway must be received by us within 30 days. The down payment and any installments are recorded by us as short-term deferred revenue until the customer pays the entire purchase price for the merchandise. Retail sales are recorded net of returns and discounts and exclude sales taxes.
We offer a customer loyalty program, the MVP Rewards program, whereby customers, upon registration, can earn points in a variety of ways, including store purchases, website surveys and other activities on our website. Based on the number of points accumulated, customers receive reward certificates on a monthly basis that can be redeemed in our stores. An estimate of the obligation related to the program, based on historical redemption rates, is recorded as a current liability and a reduction of net retail sales in the period earned by the customer. The current liability is reduced, and a corresponding amount is recognized in net retail sales, in the amount of and at the time of redemption of the reward certificate. At January 30, 2016 and January 31, 2015, the amount recorded in other accrued expenses on our consolidated balance sheet for reward certificates issued was not significant.
The cost of coupon sales incentives is recognized at the time the related revenue is recognized by us. Proceeds received from the issuance of 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 as other accrued expenses on our consolidated balance sheet.
Income from gift card breakage is recognized to the extent not required to be remitted to jurisdictions as unclaimed property and is based upon historical redemption patterns and represents the balance of gift cards for which we believe the likelihood of redemption by the customer is remote. We have determined the likelihood of redemption is remote when redemptions are equal to or less than five percent of the remaining balances of gift cards aged by activation year. For Fiscal 2016, we recaptured $24,000 of breakage revenue as other income which is included in the accompanying consolidated statements of operations within store operating, selling and administrative expenses. For Fiscal 2015 and Fiscal 2014, $0.7 million and $0.2 million of breakage revenue, respectively, was recorded as other income and is included in the accompanying consolidated statements of operations as a reduction to store operating, selling and administrative expenses. The net deferred revenue liability at January 30, 2016 and January 31, 2015 was $5.5 million and $4.7 million, respectively.
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 2016, Fiscal 2015 or Fiscal 2014.
Impairment of Long-Lived Assets
We continually evaluate whether events and circumstances have occurred that indicate the remaining balance of long-lived assets may be impaired and not recoverable. Our policy is to recognize any impairment loss on long-lived assets as a charge to current income when certain events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment is assessed considering the estimated undiscounted cash flows over the asset's remaining life. If estimated cash flows are insufficient to recover the investment, an impairment loss is recognized based on a comparison of the cost of the asset to fair value less any costs of disposition. Evaluation of asset impairment requires significant judgment.
Insurance Accrual
We are self-insured for a significant portion of our health 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 $0.2 million per covered person per year. As of January 30, 2016 and January 31, 2015, the accrual for these liabilities was $0.7 million and $0.8 million, respectively, and was included in other accrued expenses in the consolidated balance sheets.
We are also self-insured for our workers' compensation, property and general liability insurance up to an established deductible with a cumulative stop-loss on workers' compensation. As of January 30, 2016 and January 31, 2015, the accrual for these liabilities (which is not discounted) was $0.4 million and was included in other accrued expenses in the consolidated balance sheets.
Sales Returns
Net sales returns were $34.8 million for Fiscal 2016, $32.3 million for Fiscal 2015 and $30.5 million for Fiscal 2014. The accrual for the effect of estimated returns was $0.4 million and $0.5 million as of January 30, 2016 and January 31, 2015, respectively, and was included in other accrued expenses in the consolidated balance sheets. Determination of the accrual for estimated returns requires significant judgment.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
We continuously monitor and review all current accounting pronouncements and standards from the Financial Accounting Standards Board (FASB) and other authoritative sources of U.S. GAAP for applicability to our operations.
In May 2014, the FASB issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is not permitted. Accordingly, we will adopt this ASU in the first quarter of Fiscal 2019. We are currently evaluating the impact of the adoption of this pronouncement on our results of operations and cash flows.
In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software – Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If an arrangement includes a software license, the customer should account for the fees related to the software license element in a manner consistent with licenses of other intangible assets. If the arrangement does not include a license, the arrangement will be accounted for as a service contract. This ASU is effective for fiscal years beginning after December 15, 2015. The adoption of ASU 2015-05 will not have any impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory – Simplifying the Measurement of Inventory, which requires all inventory, other than inventory measured at last-in, first out (LIFO) or the retail inventory method, to be measured at the lower of cost and net realizable value. This ASU is effective for fiscal years beginning after December 15, 2016. The amendments in this ASU should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 will not have any impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes – Balance Sheet Reclassification of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and the amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We early adopted this ASU in the fourth quarter of Fiscal 2016 on a prospective basis and included all deferred income taxes as non-current in our Fiscal 2016 consolidated balance sheets. We did not adjust our Fiscal 2015 consolidated balance sheet as a result of the adoption of this ASU. See Note 9, "Income Taxes".
In February 2016, the FASB issued ASU 2016-02 – Leases, which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current accounting practice, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease; however under ASU 2016-02, both types of leases will be recognized on the balance sheet. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This ASU shall be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes expedients that an entity may elect to apply. We are currently evaluating the impact this change in accounting will have on our consolidated financial statements, but we expect that it will be material because we are party to a significant number of lease contracts.
NOTE 3. STOCK-BASED COMPENSATION
At January 30, 2016, we had four stock-based compensation plans:
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(a) |
The 2015 Equity Incentive Plan (EIP) provides that the Board of Directors may grant equity awards to certain employees of the Company at its discretion. The EIP was adopted effective July 1, 2015 and authorizes grants of equity awards of up to 1,000,000 authorized but unissued shares of common stock. At January 30, 2016, there were 1,000,000 shares available for grant under the EIP. |
Prior to the adoption of the EIP by our stockholders, equity awards to employees were given under the Amended 2005 Equity Incentive Plan (2005 EIP) which also provided for grants of equity awards to certain employees of the Company at its discretion. The 2005 EIP was superseded by the EIP.
|
(b) |
The 2015 Employee Stock Purchase Plan (ESPP) allows for qualified employees to participate in the purchase of up to 300,000 shares of our common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The ESPP was adopted effective July 1, 2015. At January 30, 2016, there were 293,240 shares available for purchase under the ESPP. |
Prior to the adoption of the ESPP by our stockholders, qualified employees could participate in the Amended 2005 Employee Stock Purchase Plan (2005 ESPP) which allowed the purchase of our common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The 2005 ESPP was superseded by the ESPP.
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(c) |
The 2015 Director Deferred Compensation Plan (Deferred Plan) allows non-employee directors an election to defer all or a portion of their fees into stock units or stock options. The Deferred Plan was adopted effective July 1, 2015 and authorizes grants up to 150,000 authorized but unissued shares of common stock. At January 30, 2016, there were 145,652 shares available for grant under the Deferred Plan. |
Prior to the adoption of the Deferred Plan by our stockholders, non-employee directors were allowed to defer all or a portion of their fees into stock units or stock options through the Amended 2005 Director Deferred Compensation Plan (2005 Deferred Plan). The 2005 Deferred Plan was superseded by the Deferred Plan.
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(d) |
The 2012 Non-Employee Director Equity Plan (DEP) provides for grants of equity awards to non-employee directors. The DEP was adopted effective May 24, 2012 and authorizes grants of equity awards of up to 500,000 authorized but unissued shares of common stock. At January 30, 2016, there were 416,682 shares available for grant under the DEP. |
Our plans allow for a variety of equity awards including stock options, restricted stock awards, stock appreciation rights and performance awards. As of January 30, 2016, we had only granted awards in the form of stock options, restricted stock units (RSUs) and performance-based units (PSUs) to our employees. The annual grants made for Fiscal 2016, Fiscal 2015 and Fiscal 2014 to employees consisted solely of RSUs. We have also awarded PSUs to our Named Executive Officers (NEOs) and expect the Compensation Committee of the Board will continue to grant PSUs to our NEOs in the future.
As of January 30, 2016, we had only granted awards in the form of stock, stock options and deferred stock units (DSUs) to our Board members. Under the DEP, Board members currently receive an annual value of $75,000 worth of equity in the form of stock options or RSUs upon election to the Board and a value of $100,000 worth of equity in any form allowed within the DEP, for each full year of service, pro-rated for Directors who serve less than one full year. The Chairman of the Board receives an annual value of $150,000 worth of equity in any form allowed within the DEP.
The terms and vesting schedules for stock-based awards vary by type of grant and generally vest upon time-based conditions. Under the DEP, Directors have the option with certain equity forms to set vesting dates. Upon exercise, stock-based compensation awards are settled with authorized but unissued company stock. All of our awards are classified as equity awards.
The compensation cost for these plans was as follows (in thousands):
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Fiscal Year Ended
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|
|
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January 30, 2016
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|
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January 31, 2015
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|
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February 1, 2014
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Stock-based compensation expense by type:
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|
|
|
|
|
|
|
|
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Stock options
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$
|
391
|
|
|
$
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469
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|
|
$
|
358
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|
Restricted stock units
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|
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4,632
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|
|
|
3,833
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|
|
|
5,250
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|
Employee stock purchases
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|
|
105
|
|
|
|
96
|
|
|
|
100
|
|
Director deferred compensation
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|
|
70
|
|
|
|
70
|
|
|
|
130
|
|
Total stock-based compensation expense
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|
|
5,198
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|
|
|
4,468
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|
|
|
5,838
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Income tax benefit recognized
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|
|
1,895
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|
|
|
1,645
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|
|
|
2,154
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|
Stock-based compensation expense, net of income tax
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|
$
|
3,303
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|
|
$
|
2,823
|
|
|
$
|
3,684
|
|
Stock-based and deferred stock compensation expenses are included in store operating, selling and administrative expenses. There is no capitalized stock-based compensation cost.
The income tax benefit recognized in our consolidated financial statements, as disclosed above, is based on the amount of compensation expense recorded for book purposes. The actual income tax benefit realized in our income tax return is based on the intrinsic value, or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock unit awards vested during the period. The actual income tax benefit realized for the deductions considered on our income tax returns for Fiscal 2016, Fiscal 2015 and Fiscal 2014 was from option exercises and restricted stock unit releases and totaled $2.5 million, $5.3 million and $6.5 million, respectively.
Stock Options
Stock options are granted with an exercise price equal to the closing market price of our common stock on the date of grant. Vesting and expiration provisions vary between equity plans, but options granted to employees under the EIP typically vest over a four or five-year period in equal installments beginning on the first anniversary of the grant date and typically expire on the eighth or tenth anniversary of the date of grant. Grants awarded to outside directors under the DEP and Deferred Plan vest immediately upon grant and expire on the tenth anniversary of the date of grant.
Following is the weighted average fair value of each option granted during Fiscal 2016. The fair value was estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions for each period:
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|
Quarter Ended
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|
|
|
May 2, 2015
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|
|
August 1, 2015
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|
|
October 31, 2015
|
|
|
January 30, 2016
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|
Grant date
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|
Mar 17
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|
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Mar 31
|
|
|
Jun 30
|
|
|
Sep 30
|
|
|
Dec 31
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|
Exercise price
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|
$
|
50.48
|
|
|
$
|
49.06
|
|
|
$
|
46.58
|
|
|
$
|
35.01
|
|
|
$
|
30.24
|
|
Weighted average fair value at date of grant
|
|
$
|
17.86
|
|
|
$
|
17.19
|
|
|
$
|
16.14
|
|
|
$
|
10.52
|
|
|
$
|
9.23
|
|
Expected option life (years)
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|
|
5.36
|
|
|
|
5.36
|
|
|
|
5.36
|
|
|
|
4.84
|
|
|
|
4.84
|
|
Expected volatility
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|
|
36.19%
|
|
|
|
36.17%
|
|
|
|
35.11%
|
|
|
|
32.21%
|
|
|
|
31.95%
|
|
Risk-free interest rate
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|
|
1.59%
|
|
|
|
1.41%
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|
|
|
1.67%
|
|
|
|
1.33%
|
|
|
|
1.71%
|
|
Dividend yield
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
We calculate the expected term for our stock options based on the historical exercise behavior of our participants. Historically, an increase in our stock price has led to a pattern of earlier exercise by participants. Grants made to our Directors have a contractual term of 10 years, while grants made to our employees have a contractual term of 8 years. We have not awarded a stock option grant to employees since 2009. With the absence of option grants to employees, we anticipate the expected term will remain relatively stable.
The volatility used to value stock options is based on historical volatility. We calculate historical volatility using an average calculation methodology based on daily price intervals as measured over the expected term of the option. We have consistently applied this methodology since our adoption of the provisions of ASC Topic 718, Stock Compensation.
In accordance with ASC Topic 718, we base the risk-free interest rate on the annual continuously compounded risk-free rate with a term equal to the option's expected term. The dividend yield is assumed to be zero since we have no current plan to declare dividends.
Activity for our option plans during Fiscal 2016 was as follows: