Hibbett Sports 2012 Annual Report Download - page 43

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Inventories and Valuation
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 28, 2012 and January 29, 2011, the accrual was $1.9 million and $1.8 million,
respectively. A determination of net realizable value requires significant judgment and estimates.
Shrinkage: We accrue for inventory shrinkage based on the actual historical results of physical inventories. These
estimates are compared to actual results as physical inventory counts are performed and reconciled to the general ledger. Store
counts are typically performed on a cyclical basis and the distribution center’s counts are performed quarterly. As of January 28,
2012 and January 29, 2011, the accrual was $1.6 million and $1.8 million, respectively.
Inventory Purchase Concentration: Our business is dependent to a significant degree upon close relationships with our
vendors. Our largest vendor, Nike, represented 48.3%, 47.8% and 49.9% of our purchases in Fiscal 2012, Fiscal 2011 and Fiscal
2010, respectively. Our next largest vendor represented 11.4%, 8.3% and 6.4% of our purchases in Fiscal 2012, Fiscal 2011 and
Fiscal 2010, respectively. Our third largest vendor represented 9.3%, 8.1% and 9.0% of our purchases in Fiscal 2012, Fiscal
2011 and Fiscal 2010, respectively.
Consignment Inventories: Beginning in Fiscal 2010, we expanded our business model to include consignment
merchandise. 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 28, 2012 and January 29, 2011,
vendor-owned inventories held at our locations (and not reported as our inventory) were $1.3 million and $0.7 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 – 5 years
In the case of leasehold improvements, we calculate depreciation using the shorter of the initial 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 costs associated with technology upgrades at period-end. At fiscal year ended January 28, 2012, approximately 95% of
the construction in progress balance was comprised of costs associated with technology projects.
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 received from the landlord.