Hibbett Sports 2012 Annual Report Download - page 32

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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 quarterly 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 sales in the period earned by the customer. The current liability is reduced, and a corresponding amount is recognized in net
sales, in the amount of and at the time of redemption of the reward certificate. At January 28, 2012 and January 29, 2011, the
amount recorded in current liabilities for reward certificates issued was inconsequential.
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.
Gift card breakage revenue 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. Based on our analyses of redemption activity, we have determined the likelihood of
redemption for gift cards 5 years after the date of initial issuance is remote. For Fiscal 2012, Fiscal 2011 and Fiscal 2010, $0.2
million, $0.2 million and $0.3 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 28, 2012 and January 29, 2011 was $3.5 million and $3.1 million, respectively.
Inventory 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.
Shrink Reserves: We accrue for inventory shrinkage based on the actual historical results of our 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 for Fiscal 2012, Fiscal 2011 and
Fiscal 2010, respectively. Our second largest vendor represented 11.4%, 8.3% and 6.4% of our purchases while our third largest
vendor represented 9.3%, 8.1% and 9.0% of our purchases for 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.
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.