Hibbett Sports 2007 Annual Report Download - page 37

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SFAS No. 123R and certain SEC rules and regulations and also the valuation of share-based payment arrangements
for public companies. We adopted SFAS No. 123R effective January 29, 2006 using the modified prospective
transition method. This method requires that compensation cost be recognized on or after the required effective date
for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant
date fair value of those awards calculated under SFAS No. 123, “Accounting for Stock-Based Compensation,” pro-
forma disclosures. The impact of SFAS No. 123R on our consolidated statement of operations in fiscal 2007 and
beyond will depend upon various factors, including the amount of awards granted and the fair value of those awards
at the time of grant. We incurred an incremental expense of $2.8 million, or approximately $0.07 per diluted shares
during the 53 weeks ended February 3, 2007 as a result of the adoption of SFAS No. 123R. See “Stock-Based
Compensation” in Note 3 to the Consolidated Financial Statements in Item 8.
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
the SEC SAB No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue
Recognition.”
Retail merchandise sales occur on-site in our retail stores. 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. We recognize
revenue at the time the customer takes possession of the merchandise. Retail sales are recorded net of returns and
discounts and exclude sales taxes.
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 a current liability.
It is not our policy to take unclaimed layaway deposits and unredeemed gift cards into income. As of
February 3, 2007, January 28, 2006 and January 29, 2005, there was no breakage revenue recorded in income. The
deferred revenue liability for layaway deposits and unredeemed gift cards was $1.8 million, $1.3 million and $1.0
million at February 3, 2007, January 28, 2006 and January 29, 2005, respectively. Any unrecognized breakage
revenue is immaterial.
Inventory Valuation. Cost is assigned to store inventories using the retail inventory method. In using this
method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated
cost-to-retail ratio to the retail value of inventories. The retail method is an averaging method that has been widely
used in the retail industry and results in valuing inventories at lower of cost or market when markdowns are taken as
a reduction of the retail value of inventories on a timely basis.
Inventory valuation methods require certain significant management estimates and judgments. These
include estimates of merchandise markdowns and shrinkage, which significantly affect the ending inventory valuation
at cost, as well as the resulting gross margins. The averaging required in applying the retail inventory valuation
method and the estimates of shrink and markdowns may, under certain circumstances, result in inaccurate cost
figures. Inaccurate inventory cost may be caused by applying the retail inventory method to a group of products that
have differing characteristics related to gross margin and turnover.
We accrue for inventory shrinkage based on the actual historical shrink results of our most recent physical
inventories. These estimates are compared to actual results as physical inventory counts are performed and
reconciled to the general ledger. Store counts are performed on a cyclical basis and the distribution center’s counts
are performed mid-year and at the end of December or in early January every year.
Our management believes that the application of the retail inventory method results in an inventory valuation
that reasonably approximates cost and results in carrying inventory at the lower of cost or market.
Beginning in fiscal 2008, we will value our inventory at the lower of cost or market on a weighted-average
cost basis, using the cost method. We believe the cost method is preferable as compared to the retail method
because it will increase the organizational focus on the actual margin realized on each sale. This change in
accounting method is not expected to have a material effect on our consolidated financial statements.