Hibbett
Annual Report 2005

Plain-text annual report

THIS IS A FOOTBALL. How Hibbett Sporting Goods has become one of the nation’s leading sporting goods retailers. A N N U A L R E P O R T 2 0 0 5 F I N A N C I A L H I G H L I G H T S (Dollars in thousands, except per share amounts) For the Year Net sales Operating income Basic earnings per common share Diluted earnings per common share At Year End Working capital Total assets Total debt Stockholders’ investment 2005 (52 Weeks) 2004 (52 Weeks) Percent Change $ 377,534 $ 320,964 $ 039,422 $ 030,826 $ 0001.08 $ 0000.85 $ 0001.06 $ 0000.83 $ 106,012 $ 096,042 $ 202,105 $ 173,759 $ 000,00– $ 173,75– $ 130,039 $ 120,440 18)% 28)% 27)% 28)% 10)% 16)% – % 8)% C O R P O R A T E P R O F I L E Hibbett Spor ting Goods, Inc. is a rapidly-growing operator of spor ting goods stores with 482 locations in small to mid-sized markets predominantly in the Southeast, Mid-Atlantic and Midwest. The Company’s primary retail format is Hibbett Spor ts, a 5,000-square-foot store located in enclosed malls or in strip centers which are generally the center of commerce within the area and which are usually anchored by a Wal-Mart store. Hibbett is the only sporting goods chain committed to serving small markets. With a low-cost operating philosophy and a commitment to providing a high level of customer ser vice, Hibbett has successfully grown its store base at a compounded annual growth rate of 25% over the last nine years. About the Cover All the quotes we have featured in the annual report are from Vince Lombardi. Mr. Lombardi’s quotes are provided courtesy of The Estate of Vince Lombardi. More information on Vince Lombardi can be found on the Internet at www.vincelombardi.com. © Estate of Vince Lombardi by CMG Worldwide, www.VinceLombardi.com S A L E S , E A R N I N G S A N D S T O R E G R O W T H 01 Sales, Earnings and Store Growth 02 Letter to Stockholders 12 Store Locations 13 Financial Statements 01 02 03 04 05 NET SALES (In millions) 01 02 03 04 05 $209.6 $241.1 $279.2 $321.0 $377.5 $0.49 $0.51 $0.62 $0.83 $1.06 EARNINGS PER DILUTED SHARE(1)(2) 01 02 03 04 05 TOTAL STORES 282 329 371 428 482 (1) Fiscal years 2004 and 2003 have been restated to reflect adjustments related to lease accounting that are further discussed in Note 2 – Restatement of Previously Issued Consolidated Financial Statements of the Notes to Consolidated Financial Statements included in this report. Periods prior to February 3, 2002, have not been adjusted as the impact was deemed immaterial by management. (2) All share and per share information has been revised to reflect the effects of the 3-for-2 stock split effective April 16, 2004. 1 L E T T E R T O S T O C K H O L D E R S How do we top a year such as fiscal 2004 – performance in fiscal 2005 and on the strengths of a year where we set new records in sales, operating the Hibbett growth stor y. These quotes margin and earnings per share? The easy answer? demonstrate what we value most as an organization. Return in fiscal 2005 and post a 5.7% increase in It has been noted over the years that Vince comparable store sales, add a net 54 new locations to the store base, enter our 22nd state, improve the operating margin by 84 basis points to above 10% for the first time in our history and increase earnings by 28% to a record $1.06 per share. The explanation for our record year in fiscal 2005 is of course a little more complicated than that. We do not underestimate the contributions of 4,100 associates in 482 stores and in our store support center as well We embrace a daily commitment to work harder than anybody else in the sporting goods industry to do the “little” things well so that much bigger results are possible. Lombardi was fond of holding up a football when speaking with his players at training camp and reminding them that, “This is a football.” While no doubt drawing more than its share of chuckles from professional athletes who had devoted their lives to the sport, we believe that statement demonstrates the need to focus on executing the fundamentals. Coach Lombardi’s teams were noted for being fundamentally sound and for their relentless attention to detail and execution as the continued execution of a very disciplined of his game plan. As a result, the Green Bay growth strategy. In this year’s annual report, we Packers became one of the most successful NFL have featured several quotes from NFL Hall of teams in history. Fame football coach Vince Lombardi. We hope they At Hibbett, we embrace the same daily will help provide insight for our stockholders on our commitment to work harder than anybody else in 2 "Winning is not everything, but wanting to win is." H I B B E T T S P O R T I N G G O O D S 2 0 0 5 the sporting goods industry to do the “little” things and ser vice techniques. Hibbett also hires well so that much bigger results are possible. Our associates who live and breathe sports so that associates share a passion, dedication and they can fully explain the features and benefits of preparation – the “want to” – for delivering superior our products to help sell the customer what is best customer service and growing Hibbett Sporting Goods. As a result, we believe that we have become one of the leading sport- ing goods retailers in the country. Customer service is the number one priority at Hibbett. In April 2005, we completed an annual company meeting where the featured speaker was a leading expert in customer service. The topic was important enough to us that we wanted our largest audience of the year to hear the message again. We Our associates share a passion, dedication and preparation – the “want to” – for delivering superior customer service and growing Hibbett Sporting Goods. for them. Our goal is to provide full ser vice. To achieve that goal we may not have to remind our associates what a football is, but we do emphasize a desire to win in customer service, work hard and work together as a team. Another area where we believe we excel is in merchan- dising. Our strategy is centered on premium brands, middle to higher price points, cleaner inventory and increased inventory turns. The merchandising team bring our new managers to our store suppor t successfully executed this strategy in fiscal 2005. center for an intensive, four-day training session Today, we can safely say that we are more on that we call Hibbett University and provide video tar get with our mer chandise than we have training in every store for the latest in technical ever been and have an improved in-store details of new products and new operational visual presentation. 4 "Individual commitment to a group effort - that is what makes a team work." H I B B E T T S P O R T I N G G O O D S 2 0 0 5 Within our merchandise mix, we have three apparel that we had planned materialized a quar ter components – apparel, footwear and equipment – earlier than we anticipated. To of fset these and remain laser focused in each of these trends and the fashion shift away from pro-licensed categories. Footwear was the stalwart for us in apparel, we focused more on activewear and urban fiscal 2005 with high single- digit to double-digit increases in comparable store sales through- out the year. The strength in this business was led by technical, performance shoes and classics. The technology in running and basketball shoes, such as Nike Shox, and their popularity among consumers provided sizable business in higher price points while the classics trend continued its run. Looking ahead to fiscal 2006, we expect that footwear will once again be a big contributor We maintain a tight geographic focus that has enabled us to leverage our distribution capabilities and focus on the smaller markets where we thrive. apparel brands. We have been pleased with the results. With an expected i m p r o v e m e n t i n a p p a r e l , h i s t o r i c a l l y one of our strongest of ferings, and continued strength of brands such as Under Armour and Nike i n h i g h - e n d t e c h n i c a l and per for mance apparel as well as the success of urban apparel brands such as Encye and Rocawear, we believe this categor y is positioned for a better year in fiscal 2006. We have made a concerted for us. effort to improve our equipment category over the Apparel presented particular challenges last two years, and our results in fiscal 2005 for Hibbett this past year as we were up against reflected this emphasis. Team equipment is the very strong comparable sales from the past two largest piece of this business, and was a major years, and the expected slowdown in licensed focus for us. Over the last two years, we eliminated 6 "The only place success comes before work is in the dictionary." H I B B E T T S P O R T I N G G O O D S 2 0 0 5 categories that meant little to us such as games, original goal, we have targeted a net of approximately golf and tennis and rationalized our vendor base in 70 new stores in fiscal 2006. All of our expansion equipment to highlight vendors that did not in fiscal 2006 will be in the existing 22 states, with h a v e b r o a d e x p o s u r e t o d i s c o u n t e r s . these stores staying within a two-hour driving dis- The smaller component of our equipment category is fitness. Although down for most of the year due to the lack of compelling items within the industry as a whole, we saw an improvement late in the year with basic weights and new items such as Ab Loungers. Our real estate strategy is another appealing and important aspect of the Hibbett growth stor y. We maintain a tight geographic focus, which has enabled us to leverage our Low-cost operations have always been an integral part of the Hibbett culture and one of the main reasons we are successful in smaller markets. tance of existing stores. Even with the continued growth in our stor e base, we still have identified up to an additional 400 markets within our 22 states where we could locate our stores. Of course all of this store growth and the best merchandise would not be of much use if we could not support the growth and did not translate it into increased earnings. Fortunately for Hibbett and our stockholders, we have been able to achieve earnings growth well in excess of our sales distribution capabilities and focus on the smaller and store growth rates. An amazing statistic about markets where we thrive. During fiscal 2005 we our 5.7% increase in comparable store sales for fiscal opened a total of 63 stores, with two of those 2005 is that we were able t o g e n e r a t e t h a t stores located in New Mexico, our 22nd state. i n c r e a s e u s i n g l e s s comparable store Although this total was slightly less than our inventor y. Building on a strong p e r f o r m a n c e 8 "People that work together will win." H I B B E T T S P O R T I N G G O O D S 2 0 0 5 a year ago, we were able to improve inventor y o p e r a t i o n h a s t r a n s i t i o n e d from primarily a turns and reduce average inventory per store. warehouse to a distribution center. With this Better quality merchandise and great improvement in logistics we now expect that we customer service help increase inventory turns can suppor t at least 850 stores at our current and help us sell more at full price. Our growing importance to the world’s leading spor ting goods vendors also enables us to increase allocations in their top merchandise offerings. The result has been an expansion in product margin, which is consistent with our desire to be a full-price and full-service leader rather than a low-price leader. Product margin is only part of the story. Just as impor tant is the leverage we have gained through lower occupancy costs, increased We have improved in many areas over the past year, and I promise we will be striving to improve in all areas again this year. distribution center. With our broader distribution network we have also been able to leverage freight costs by backhauling inventor y to our distribution center, leading to higher utilization rates and lower deadhead miles. In fact, our freight costs in fiscal 2005 were fewer dollars than the previous year. Low-cost operations have always been a part of the Hibbett culture and one of the main reasons why we can thrive in smaller markets when others cross-docking at our distribution center and vendor cannot. We do not knowingly waste stockholder assisted management of inventories. For example, money. We talk about being a low-cost operator in two years ago approximately 40% of our every annual report, presentation to investors and inventor y was cross-docked. At year end, that with every chance we get with our associates. With ratio was 84%, which means that our logistics our full year operating margin reaching 10.4% in 10 H I B B E T T S P O R T I N G G O O D S 2 0 0 5 fiscal 2005 and our fourth quar ter margin reaching We have improved in many areas over the 12%, we believe the message is definitely last year, and I promise you we will be striving to getting through. improve in all areas again this year. Hibbett’s From a balance sheet perspective, we outlook for fiscal 2006 and beyond is indeed an ended the year strong with $58 million in cash and no debt, the third year in a row we have finished debt-free. We also spent approximately $19 million through our stock repurchase authorization to acquire over 845,000 shares of stock in fiscal 2005. Our capital structure is a competitive advantage for us in executing our new store growth plans. During fiscal 2005, we were able to fund capital e x p e n d i t u r e s of over $12 million through cash flow and expect to fund an additional $15 million of capital expenditures in fiscal 2006. As we continue to generate more cash from operations, we will explore strategic options for utilizing that cash. 11 optimistic one. We will continue to focus in small underserved m a r k e t s a n d s t a y t i g h t geographically. Our major goals for fiscal 2006 are a minimum 15% store growth and 20% earnings growth. Over a seven-year period, we have averaged better than a 20% increase in earnings. We look forward to continuing that record in fiscal 2006. Thank you for your continued suppor t and investment in Hibbett Sporting Goods. Sincerely, Mickey Newsome Chairman of the Board, President and Chief Executive Officer S T O R E L O C A T I O N S 2 12 19 26 4 18 22 18 11 11 6 26 43 66 60 38 4 12 37 28 17 2 F I N A N C I A L S T A T E M E N T S 13 Selected Consolidated Financial and Operating Data 14 Management’s Discussion and Analysis 28 Consolidated Balance Sheets 30 Consolidated Statements of Operations 31 Consolidated Statements of Cash Flows 32 Consolidated Statements of Stockholders’ Investment 33 Report of Independent Registered Public Accounting Firm 34 Notes to Consolidated Financial Statements 52 Report of Management Controls and Procedures 56 Directors and Officers IBC Corporate Information 12 S E L E C T E D C O N S O L I D A T E D F I N A N C I A L A N D O P E R A T I N G D A T A ( i n t h o u s a n d s , e x c e p t s h a r e a n d p e r s h a r e i n f o r m a t i o n ) January 29, 2005 (52 Weeks) January 31, 2004(1)(2) (52 Weeks) For the Fiscal Years Ended February 1, 2003(1)(2) (52 Weeks) February 2, 2002(1)(2) (52 Weeks) February 3, 2001(1)(2) (53 Weeks) Income Statement Data: Net sales Cost of goods sold, including warehouse, distribution and store occupancy costs Gross profit $ 377,534 $ 320,964 $ 279,187 $ 241,130 $ 209,626 255,250 122,284 216,938 104,026 192,082 87,105 167,402 73,728 145,800 63,826 Store operating, selling and administrative expenses Depreciation and amortization Operating income 72,923 9,939 39,422 Interest (income) expense, net Income before provision for income taxes (475) 39,897 63,514 9,686 30,826 ( 106) 30,932 55,748 8,727 22,630 214 22,416 48,891 5,873 18,964 625 18,339 40,789 4,802 18,235 830 17,405 Provision for income taxes Net income 14,750 $ 325,147 11,290 $ 319,642 8,182 $ 314,234 6,786 $ 311,553 6,593 $ 310,812 Earnings per common share: Basic: Diluted: Weighted average shares outstanding: $ 3 31.08 $ 3 31.06 $ 3 30.85 $ 3 30.83 $ 3 30.63 $ 3 30.62 $ 3 30.52 $ 3 30.51 $ 3 30.50 $ 3 30.48 Basic: Diluted: 23,237,121 23,793,575 23,014,449 23,598,059 22,579,529 23,035,518 22,219,160 22,677,840 21,823,692 22,364,058 Selected Operating Data: Number of stores open at end of period: Sports & Co. Sports Additions Total 461 4 17 482 408 4 16 428 351 4 16 371 309 4 16 329 261 4 17 282 Balance Sheet Data: Working capital Total assets Long-term debt Stockholders’ investment $ 106,012 202,105 — 130,039 $ 796,042 173,759 — 120,440 $ 770,204 133,729 — 95,606 $ 756,334 115,315 3,903 80,063 $ 751,684 101,252 9,748 66,665 (1) Income Statement Data and Balance Sheet Data for fiscal years 2004 and 2003 have been restated to reflect adjustments related to lease accounting that are further discussed in Note 2 – Restatement of Previously Issued Consolidated Financial Statements of the Notes to Consolidated Financial Statements included in this report. Periods prior to February 3, 2002, have not been adjusted as the impact was deemed immaterial by management. (2) All share and per share information has been revised to reflect the effects of the 3-for-2 stock split effective April 16, 2004. 13 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Overview Hibbett is a rapidly growing operator of sporting goods stores in small to mid sized markets predominantly in the Southeast, Mid-Atlantic and Midwest. Our stores offer a broad assortment of quality athletic equipment, footwear and apparel with a high level of customer service. As of January 29, 2005, we operated a total of 482 retail stores composed of 461 Hibbett Sports stores, 17 Sports Additions athletic shoe stores and four Sports & Co. superstores in 22 states. Our primary retail format and growth vehicle is Hibbett Sports, a 5,000-square-foot store located in enclosed malls and in dominant strip centers which are generally the center of commerce within the area and which are usually anchored by a Wal-Mart store. We believe Hibbett Sports stores are typically the primary sporting goods retailers in their markets due to the extensive selection of traditional team merchandise and a high level of customer service. We do not expect that the average size of our stores opening in fiscal 2006 will vary significantly from the average size of stores opened in fiscal 2005. Hibbett historically has comparable store sales in the low to mid-single digit range and we plan to increase total square footage by approximately 15% in fiscal year 2006. We believe total sales percentage growth will be in the mid teens in fiscal 2006. Over the past three years, we have increased our product margin due to improved vendor discounts, increased efficiencies in logistics and favorable leveraging of our store occupancy costs. We expect gross profit to increase 15 to 20 basis points in fiscal 2006 attributable to an expected decrease in markdowns as a percent of sales and continued improvement of inventory turns. Due to our increased sales, we have leveraged our store operating, selling and administrative expenses and have offset recent increases in certain expenses relating to corporate governance. With our expected sales increase, we plan to leverage expenses 10 to 20 basis points in fiscal 2006. We also expect to continue to generate sufficient cash to enable us to expand and remodel our store base, provide capital expenditures for both warehouse and technology upgrade projects and to repurchase our Company stock while increasing our cash position. 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 years ended January 29, 2005, January 31, 2004, and February 1, 2003, all include 52 weeks of operations. Restatement of Financial Statements Following disclosure by several restaurant companies and other retailers in fiscal 2005 and in connection with performing our fiscal 2005 year-end reporting control processes, we performed a comprehensive review of our lease accounting practices. We reviewed our lease portfolio and adjusted the amortization period for leasehold improvements to the shorter of fixed, non-cancelable, initial lease term or the asset's useful life and have recognized the effect of pre-opening “rent holidays” related to the build-out period over the related lease term. Landlord reimbursements of leasehold improvements have been reclassified from a contra asset in property and equipment to other liabilities in the Consolidated Statements of Operations and from a reduction of capital expenditures to an increase in cash provided 14 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S by operating activities in the Consolidated Statements of Cash Flows. Retained earnings at the beginning of the fiscal year ended February 1, 2003, has been adjusted for the after-tax impacts of the restatements of earlier periods. While we do not consider the net dollar amounts to be material to net earnings, financial position or net cash flows for the periods presented, we believe it is appropriate to align our historical accounting results with the SEC's comments on lease accounting under GAAP, and we have done so, as reflected in our decision to restate results for certain prior years. These accounting changes reduced net income by $0.4 million, $0.7 million and $0.5 million for the fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003, respectively, and resulted in a $1.2 million reduction in retained earnings at the beginning of fiscal year ended February 1, 2003. Results of Operations The following table sets forth the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations expressed for the periods indicated. Percentages may not add due to rounding: Net sales Cost of goods sold, including warehouse, distribution and store occupancy costs Gross profit Store operating, selling and administrative expenses Depreciation and amortization Operating income Interest income, net Income before provision for income taxes Provision for income taxes Net income Fiscal 2005 Compared to Fiscal 2004 (as restated) January 29, 2005 100.0% For the Fiscal Years Ended January 31, 2004 (as restated) 100.0% February 1, 2003 (as restated) 100.0% 67.6 32.4 19.3 2.6 10.4 (0.1) 10.6 3.9 6.7% 67.6 32.4 19.8 3.0 9.6 0.0 9.6 3.5 6.1% 68.8 31.2 20.0 3.1 8.1 0.1 8.0 2.9 5.1% Net sales. Net sales increased $56.5 million, or 17.6%, to $377.5 million for the 52 weeks ended January 29, 2005, from $321.0 million for the 52 weeks ended January 31, 2004. We attribute this increase to the following factors: • We opened 62 Hibbett Sports stores and 1 Sports Additions store and closed 9 Hibbett Sports stores for a net stores opened of 54 stores in the 52 weeks ended January 29, 2005. New stores and stores not in the comparable store net sales calculation accounted for $40.9 million of the increase in net sales. 15 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S • We experienced a 5.7% increase in comparable store net sales for the 52 weeks ended January 29, 2005. Higher comparable store net sales contributed $15.6 million to the increase in net sales. The increase in comparable store sales was driven by an increase in sales in footwear and equipment. • Apparel was negative in comp stores due to a weakness in the pro-licensed and college apparel categories. • Footwear was led by women's performance, primarily running shoes, and the children's shoe categories. Performance and retro styles such as Nike Shox, Nike Air Force 1, Nike Impax, Nike Miler, K-Swiss and New Balance styles were the most popular in the period. • Equipment sales were positively impacted by team sports, particularly by baseball and softball as our premium focus began to take effect. These positive gains were somewhat offset by a decline in the demand for fitness equipment and individual sports equipment. Comparable store net sales data for the period 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. Gross profit. Cost of goods sold includes the cost of inventory, occupancy costs for stores and occupancy and operating costs for the distribution center. Gross profit was $122.3 million, or 32.4% of net sales, in the 52 weeks ended January 29, 2005, compared with $104.0 million, or 32.4% of net sales, in the same period of the prior fiscal year. This year's gross margin is primarily attributable to strong footwear sales which carry a somewhat lower gross margin than apparel and the leveraging of occupancy and warehouse cost and improved inventory turn. Product margin rate decreased somewhat due to a shift toward lower margin footwear and markdowns in licensed apparel. Occupancy, as a percent of net sales, improved by 9 basis points year over year due to above average comparable store sales gains. Warehouse costs improved by 11 basis points, primarily due to the leveraging of salaries and benefits. Store operating, selling and administrative expenses. Store operating, selling and administrative expenses were $72.9 million, or 19.3% of net sales, for the 52 weeks ended January 29, 2005, compared with $63.5 million, or 19.8% of net sales, for the comparable period a year ago. We attribute this decrease in store operating, selling and administrative expenses as a percentage of net sales to the following factors: • Labor and benefits expenses accounted for a decrease as a percent of net sales of 36 basis points as compared to the same period last year. • Business insurance expense experienced a decrease as a percent of net sales of 9 basis points as compared to the same period last year. • Returned check expense and net advertising expense accounted for a decrease as a percent of net sales of 7 and 6 basis points, respectively, as compared to the same period last year. The decrease in store operating, selling and administrative expenses was somewhat offset by a 22 basis point increase in professional fees related to Sarbanes-Oxley compliance and testing and a 5 basis point increase in credit card fees as a result of an increase in Visa and MasterCard interchange rates. 16 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Depreciation and amortization. Depreciation and amortization as a percentage of net sales was 2.6% in the 52 weeks ended January 29, 2005, and 3.0% in the 52 weeks ended January 31, 2004. The leveraging in depreciation and amortization expense as a percentage of net sales is due to an increase in sales this year compared to the same 52 weeks last year. Provision for income taxes. Provision for income taxes as a percentage of net sales was 3.9% in the 52 weeks ended January 29, 2005, compared to 3.5% for the 52 weeks ended January 31, 2004, due to an increase in pre-tax income and an increase in the effective tax rate for fiscal 2005. The combined federal, state and local effective income tax rate as a percentage of pre-tax income was 37.0% for fiscal 2005 and 36.5% for fiscal 2004. Fiscal 2004 (as restated) Compared to Fiscal 2003 (as restated) Net sales. Net sales increased $41.8 million or 15.0%, to $321.0 million for the 52 weeks ended January 31, 2004, from $279.2 million for the comparable period in the prior year. We attribute this increase to the following factors: • We opened 63 Hibbett Sports stores and 2 Sports Additions stores and closed 8 Hibbett Sports stores for a net stores opened of 57 stores in the 52 weeks ended January 31, 2004. New stores and stores not in the comparable store net sales calculation accounted for $28.7 million of the increase in net sales. • We experienced a 5.3% increase in comparable store net sales for the 52 weeks ended January 31, 2004. Higher comparable store net sales contributed $13.1 million to the increase in net sales. The increase in comparable store net sales was primarily due to increased sales in apparel, although there were some gains in the footwear categories as well. • Apparel sales, mainly college and pro-licensed products and active wear, were driven by retro NBA and NFL jerseys, Under Armour and Nike Dri-Fit performance wear, women's active wear and college apparel and cheerleading shorts. • Footwear was led by basketball, New Balance running shoes, Nike Shox, K-Swiss athletic shoes and the retro-classic look. • Equipment sales were down from prior year's numbers, primarily due to category elimination in individual sports such as racket sports, golf and in-line skates. Our team sports business, which consists of baseball, basketball, football and soccer, improved during the fourth quarter but did not offset the decreases from the eliminated categories and the softness in the fitness category. Comparable store net sales data for the period 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. 17 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Gross profit. Cost of goods sold includes the cost of inventory, occupancy costs for stores and occupancy and operating costs for the distribution center. Gross profit was $104.0 million, or 32.4% of net sales, in the 52 weeks ended January 31, 2004, compared with $87.1 million, or 31.2% of net sales, in the same period of the prior fiscal year. The improved gross margin is primarily attributed to selling more merchandise at full price, the leveraging of occupancy and warehouse cost and improved logistics flow. Product margin improved 89 basis points due to gains in initial mark up, a reduction in markdown rate and improvements in shrinkage. Occupancy, as a percent of net sales, improved by 13 basis points year over year due to above average comparable store sales gains. Warehouse costs improved by 18 basis points, primarily due to the leveraging of salaries and benefits. Store operating, selling and administrative expenses. Store operating, selling and administrative expenses were $63.5 million, or 19.8% of net sales, for the 52 weeks ended January 31, 2004, compared with $55.7 million, or 20.0% of net sales, for the comparable period a year ago. We attribute this decrease in store operating, selling and administrative expenses as a percentage of net sales to the following factors: • Retail store labor decreased as a percent of net sales by 16 basis points this period compared with the same period last year due to higher than expected comparable store sales and improved labor controls. • Store supplies were down 10 basis points year over year and net advertising costs were reduced by 5 basis points this year compared to the same 52-week-period last year. Depreciation and amortization. Depreciation and amortization as a percentage of net sales was 3.0% in the 52 weeks ended January 31, 2004, and 3.1% in the 52 weeks ended February 1, 2003. The reduction in depreciation and amortization expense as a percentage of net sales is due to an increase in sales this year compared to the same period last year. Provision for income taxes. Provision for income taxes as a percentage of net sales was 3.5% in the 52 weeks ended January 31, 2004, compared to 2.9% for the 52 weeks ended February 1, 2003, due to an increase in pre-tax income. The combined federal, state and local effective income tax rate as a percentage of pre-tax income was 36.5% for fiscal 2004 and for fiscal 2003. Liquidity and Capital Resources As described in Note 2 to the Consolidated Financial Statements, we restated previously issued consolidated financial statements for the fiscal years ended January 31, 2004, and February 1, 2003, to correct our accounting for leases, related leasehold improvements and construction allowances. While this restatement changed several cash flow components, cash and cash equivalents were not impacted for any fiscal year. Our capital requirements relate primarily to new store openings, stock repurchase 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. 18 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Historically, we have funded our cash requirements primarily through cash flow from operations and occasionally from borrowings under our revolving credit facilities. Our Statements of Cash Flows are summarized as follows (in thousands): January 29, 2005 For the Fiscal Years Ended January 31, 2004 (as restated) February 1, 2003 (as restated) Net cash provided by operating activities: $ 46,123 $ 37,479 $ 19,885 Cash flows provided by (used in) investing activities: Capital expenditures Proceeds from sales of property and equipment (12,671) 45 (11,226) 12 (8,401) 611 Net cash (used in) investing activities $(12,626) $(11,214) $ (7,790) Cash flows provided by (used in) financing activities: Revolving loan borrowings and repayments, net Proceeds from options exercised and purchase of shares under the employee stock purchase plan Cash used for stock repurchase Net cash provided by (used in) financing activities -- -- 1,993 (19,111) $(17,118) -- (3,903) 3,682 -- $ 3,682 1,852 -- $ (2,051) Net cash provided by operating activities has historically been driven by net income levels combined with fluctuations in inventory and accounts payable balances. Net income has increased in each of the last three fiscal years. In addition, we have continued to increase our inventory levels and turns throughout these periods as the number of stores has increased. However, inventory levels on a per-store basis have decreased. We financed this increase in total inventory primarily through cash generated from operations in each of the last three fiscal years. These activities resulted in cash flows provided by operating activities of $46.1 million, $37.5 million and $19.9 million in fiscal 2005, fiscal 2004 and fiscal 2003, respectively. With respect to cash flows from investing activities, capital expenditures for fiscal 2005 were $12.6 million compared with $11.2 million in fiscal 2004 and $8.4 million in fiscal 2003. Capital expenditures for the 52 weeks ended January 29, 2005, were primarily related to the opening of 62 new Hibbett Sports stores and 1 new Sports Additions store, the refurbishing of existing stores and purchasing corporate assets, including automobiles, warehouse equipment and technology upgrades. We estimate the cash outlay for capital expenditures in fiscal 2006 will be approximately $15.0 million, which relates to the opening of approximately 80 Hibbett Sports stores (exclusive of store closings), remodeling of selected existing stores and improvements at the Company's headquarters and distribution center. 19 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Net cash provided by (used in) financing activities was ($17.1 million), $3.7 million and ($2.1 million) in fiscal 2005, fiscal 2004 and fiscal 2003, respectively. Cash flows from financing activities have historically represented financing of our long-term growth. In fiscal 2005 and 2004, we received $2.0 million and $3.7 million, respectively, excluding the related tax benefit, from proceeds related to stock options exercised and shares issued under the employee stock purchase plan. In fiscal 2005, we expended $19.1 million on the repurchase of our common stock (see Note 1 to the Consolidated Financial Statements). We have an unsecured revolving credit facility that allows borrowings up to $25.0 million and which will expire November 5, 2005. The credit facility is subject to renewal every two years. Under the provisions of this facility, we pay a commitment fee of $10,000 annually and can draw down funds when the balance of our main operating account falls below $100,000. We plan to renew this facility in November 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 the Company. In fiscal 2003, the unsecured revolving credit facility allowed borrowings up to $35.0 million and we also maintained an unsecured working capital line of credit for $7.0 million, which expired on January 5, 2004 and was not renewed. As of January 29, 2005, January 31, 2004, and February 1, 2003, we had no debt outstanding under any of these facilities. Based on our current operating and store opening plans, management believes we can adequately fund our cash needs for the foreseeable future through cash generated from operations. The following table lists the aggregate maturities of various classes of obligations and expiration amounts of various classes of commitments related to Hibbett Sporting Goods, Inc. at January 29, 2005: Fiscal 2006 Fiscal 2007 Fiscal 2008 Fiscal 2009 Fiscal 2010 Thereafter Payments due under contractual obligations (in thousands) Revolving Credit(1) Capital Lease Obligations (2) $11-- -- -- -- -- -- $11-- $11-- -- -- -- -- -- $11-- Operating Leases(3) $127,792 24,434 20,458 15,898 11,773 22,312 $122,667 Total $127,792 24,434 20,458 15,898 11,773 22,312 $122,667 (1)See “Long-term Debt” - Consolidated Financial Statement Note 3. (2)As of fiscal year ended 2005, we do not have any capital lease obligations. (3)See “Lease Commitments” - Consolidated Financial Statement Note 8. 20 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Off-Balance Sheet Arrangements We have not provided any financial guarantees as of January 29, 2005. All purchase obligations are cancelable and therefore are not included in the table above. 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 the war on terrorism, 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. Merchandise Costs. Based on current economic conditions, we expect that merchandise costs per unit will remain constant in fiscal 2006. Freight Costs. Due to rising fuel costs, we may experience increases in freight costs. However, we do not expect these fuel cost increases to have a material effect on our results of operations as we continue to leverage the costs associated with inbound freight against the cost of outbound freight. Minimum Wage. An increase in the mandated minimum wage could significantly increase our payroll costs. In prior years, proposals increasing the federal minimum wage by at least $1.00 per hour have narrowly failed to pass both houses of Congress. Insurance Costs. During fiscal 2004, property, casualty and health insurance costs increased significantly. In fiscal 2005, general business insurance and health insurance leveraged favorably as a percent to sales. We expect that these costs will remain relatively stable in fiscal 2006. Recent Accounting Pronouncements In December 2003, the FASB issued Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities,” (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces Interpretation 46, “Consolidation of Variable Interest Entities,” which was issued in January 2003. We were required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation was applied beginning on January 1, 2005. For any VIEs that must be 21 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non- controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. There was no impact on our consolidated financial statements upon adoption. SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For us, the Statement was effective for instruments entered into or modified after May 31, 2003 was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for us on January 31, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. We currently do not have any financial instruments that are within the scope of this Statement. In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges and that the allocation of fixed production overheads to the cost of conver ting work in process to finished goods be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R requires the measurement of all stock-based payments to employees, including grants of employee stock options and stock purchase rights granted pursuant to certain employee stock purchase plans, using a fair-value based method and the recording of such expense in the consolidated statement of operations. The accounting provisions of SFAS No. 123R are effective for reporting periods beginning after June 15, 2005. Accordingly, we are required to adopt SFAS No. 123R in the third quarter of fiscal 2006. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. See ”Stock-Based Compensation” in Note 1 to Consolidated Financial Statements. We are currently reviewing the applicability of SFAS No. 123R on our operations and its potential impact on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets: an Amendment of APB Opinion No. 29.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. 22 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S The amendments also eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this pronouncement is not expected to have a significant impact on our consolidated financial statements. In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. This Interpretation is effective for fiscal years ending after December 15, 2005. Accordingly, we are required to adopt FIN 47 in our fiscal year ended January 28, 2006. We are currently reviewing the applicability of FIN 47 on our operations and its potential impact on our consolidated financial statements. Our Critical Accounting Policies Our critical accounting policies reflected in the consolidated financial statements are detailed below. Revenue Recognition. Retail merchandise sales occur on-site in our retail stores. The 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. We record the down payment and any installments as deferred revenue until the customer pays the entire purchase price for the merchandise and takes possession of such merchandise. We recognize merchandise revenues at the time the customer takes possession of the merchandise. 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 and such proceeds are subsequently recognized as revenue at the time the customer redeems such gift cards and takes possession of the merchandise. 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. 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S 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. Accrued Expenses. On a monthly basis, we estimate certain material expenses in an effort to record those expenses in the period incurred. Our most material estimates relate to payroll and payroll tax expenses, property taxes, insurance-related expenses, utilities and other expenses. Estimates are primarily based on current activity and historical results and are adjusted as our estimates change. Differences in our estimates and assumptions could result in an accrual materially different from the accrual calculated. Historically, the differences in these accruals have not had a material effect on our financial condition or results of operations. Income Taxes. On a quarterly basis, we estimate our required tax liability and assess the recoverability of our deferred tax assets. Our taxes payable are estimated based on enacted tax rates, including estimated tax rates in states where our store base is growing applied to the income expected to be taxed currently. We assess the realizability of our deferred tax projections for future taxable income. We cannot guarantee that we will generate income in future years. Historically, we have not experience significant differences in our estimates of our tax accrual. 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, 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. Quarterly and Seasonal Fluctuations We have historically experienced and expect to continue to experience seasonal fluctuations in our net sales and operating income. Our net sales and operating income are typically higher in the fourth quarter 24 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S due to sales increases during the holiday selling season. However, the seasonal fluctuations are mitigated by the strong product demand in the spring and back to school sales periods. Our quarterly results of operations may also 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, the level of pre opening expenses associated with new stores, the relative proportion of new stores to mature stores, merchandise mix, the relative proportion of stores represented by each of our three store concepts and demand for apparel and accessories driven by local interest in sporting events. The following tables set forth certain unaudited financial data for the quarters indicated: UNAUDITED QUARTERLY FINANCIAL DATA (in thousands, except per share amounts) Net sales Gross profit Operating income Net income Fiscal Year Ended January 29, 2005 First (13 weeks) (as restated) $ 96,519 32,261 12,665 7,994 Second (13 weeks) (as restated) $ 81,794 24,153 4,552 2,911 Third (13 weeks) (as restated) $ 92,140 30,899 9,592 6,112 Fourth (13 weeks) $107,081 34,971 12,613 8,130 Basic earnings per common share $0 0 0.34 $0 0 0.12 $0 0 0.26 $0 0 0.36 Diluted earnings per common share $0 0 0.33 $0 0 0.12 $0 0 0.26 $0 0 0.35 Net sales Gross profit Operating income Net income First (13 weeks) (as restated) $ 79,593 25,343 7,941 5,057 Fiscal Year Ended January 31, 2004 Third (13 weeks) (as restated) $ 78,418 26,878 8,166 5,206 Second (13 weeks) (as restated) $ 71,731 22,383 4,795 3,057 Fourth (13 weeks) (as restated) $ 91,222 29,422 9,924 6,322 Basic earnings per common share $0 0 0.22 $0 0 0.13 $0 0 0.23 $0 0 0.27 Diluted earnings per common share $0 0 0.22 $0 0 0.13 $0 0 0.22 $0 0 0.26 In the opinion of our management, this unaudited information has been prepared on the same basis as the audited information presented elsewhere herein and includes all adjustments necessary to present fairly the information set forth therein. The operating results from any quarter are not necessarily indicative of the results to be expected for any future period. 25 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S As discussed in Note 2 to the Consolidated Financial Statements, we restated our Consolidated Balance Sheets as of February 3, 2003 and the related quarterly Consolidated Statements of Operations, Stockholders' Investment and Statements of Cash Flows for fiscal 2004 and the first three quarters of fiscal 2005. The following tables reconcile the change in net earnings for the restated quarters by fiscal year. This information should be read in conjunction with Note 2 to the Consolidated Financial Statements: (dollars in thousands) Fiscal 2005 Net Income As previously reported Cost of goods sold Store operating expenses Depreciation Provision for income taxes As restated Fiscal 2004 Net Income As previously reported Cost of goods sold Store operating expenses Depreciation Provision for income taxes As restated First Quarter Second Quarter Third Quarter Fourth Quarter $ 8,060 530 (52) (584) 40 $ 7,994 $ 5,255 384 (49) (647) 114 $ 5,057 $ 3,033 474 (76) (592) 72 $ 2,911 $ 3,242 396 (68) (619) 106 $ 3,057 $ 6,263 470 (88) (623) 90 $ 6,112 $ 5,376 431 (114) (585) 98 $ 5,206 $ 6,475 416 (90) (567) 88 $ 6,322 Quantitative and Qualitative Disclosure About Market Risk Our financial condition, results of operations and cash flows are subject to market risk from interest rate fluctuations on our revolving credit facility and working capital facility, each of which bears interest at rates that vary with LIBOR, prime or quoted cost of funds rates. At the end of fiscal 2005, we had no borrowings outstanding under these agreements. There were three days during the fifty-two weeks ended January 29, 2005, where we incurred borrowings against our credit facility for an average borrowing of $297,000. During fiscal 2005, the maximum amount outstanding against these agreements was approximately $435,000 and the weighted average interest rate was 2.63%. There were eighteen days during the fiscal year ended January 31, 2004, where we incurred borrowings against our credit facility for an average borrowing of $978,000. During fiscal 2004, the maximum amount outstanding against these agreements was approximately $3,943,000 and the weighted average interest rate was 1.95%. A 2% increase or decrease in market interest rates would not have a material impact on our financial condition, results of operations or cash flows. 26 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Special Note Regarding 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: • our anticipated sales, including comparable store net sales, net sales growth and earnings growth; • our growth, including our plans to add, expand or relocate stores and square footage growth; • the possible effect of inflation and other economic changes on our costs and profitability; • the possible effect of recent accounting pronouncements; • our cash needs, including our ability to fund our future capital expenditures and working capital requirements; • our gross profit margin and earnings and our ability to leverage store operating, selling and administrative expenses and offset other operating expenses; • our seasonal sales patterns; • the future reliability of, and cost associated with, our sources of supply, particularly imported goods; • the capacity of our distribution center; • our ability to renew or replace store leases satisfactorily; and • our expectations regarding competition. You should assume that the information appearing in this annual 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, develop- ments or results, you should carefully review the “Risk Factors” described in our Annual Report on Form 10-K dated April 14, 2005, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein. Our forward-looking statements could be wrong in light of these and other 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 nonpublic information or other confidential commercial information. Accordingly, stockholders should not assume that we agree 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. 27 C O N S O L I D A T E D B A L A N C E S H E E T S ( i n t h o u s a n d s , e x c e p t s h a r e a n d p e r s h a r e i n f o r m a t i o n ) January 29, 2005 January 31, 2004 (as restated) ASSETS Current Assets: Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other Deferred income taxes Total current assets Property and Equipment: Land and building Equipment Furniture and fixtures Leasehold improvements Construction in progress Less accumulated depreciation & amortization Total property and equipment Non-current Assets: Deferred income taxes Other, net Total non-current assets Total Assets $158,342 4,857 103,009 996 149 167,353 245 26,261 15,017 37,869 456 79,848 46,935 32,913 1,684 155 1,839 $202,105 $141,963 3,594 94,777 942 983 142,259 245 22,808 13,584 31,875 365 68,877 38,312 30,565 805 130 935 $173,759 See accompanying notes to consolidated financial statements. 28 C O N S O L I D A T E D B A L A N C E S H E E T S , c o n t . ( i n t h o u s a n d s , e x c e p t s h a r e a n d p e r s h a r e i n f o r m a t i o n ) LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Accounts payable Accrued income taxes Accrued expenses: Payroll-related Deferred rent Other Total current liabilities Non-current liabilities: Deferred rent Total non-current liabilities Stockholders' Investment: Preferred Stock, $.01 par value 1,000,000 shares authorized, no shares outstanding Common Stock, $.01 par value, 50,000,000 shares authorized, 23,488,665 and 23,229,660 shares issued at January 29, 2005, 2 and January 31, 2004, respectively Paid-in capital Retained earnings Treasury stock at cost, 845,400 shares at January 29, 2005, and none at January 31, 2004 Total stockholders' investment Total Liabilities and Stockholders' Investment January 29, 2005 January 31, 2004 (as restated) $150,188 2,763 $137,976 -- 4,528 2,625 1,237 61,341 10,725 10,725 4,284 2,874 1,083 46,217 7,102 7,102 -- -- 235 68,915 80,000 (19,111) 130,039 $202,105 232 65,355 54,853 -- 120,440 $173,759 See accompanying notes to consolidated financial statements. 29 C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S ( i n t h o u s a n d s , e x c e p t s h a r e a n d p e r s h a r e i n f o r m a t i o n ) January 29, 2005 For the Fiscal Years Ended January 31, 2004 (as restated) February 1, 2003 (as restated) Net sales Cost of goods sold, including warehouse, distribution and store occupancy costs Gross profit Store operating, selling and administrative expenses Depreciation and amortization Operating income Interest income Interest expense Income before provision for income taxes Provision for income taxes Net income Basic earnings per share Diluted earnings per share Weighted average shares outstanding: Basic Diluted $377,534 $320,964 $279,187 255,250 122,284 216,938 104,026 192,082 87,105 72,923 9,939 39,422 (517) 42 39,897 14,750 $125,147 $1111.08 $1111.06 63,514 9,686 30,826 ( 165) 59 30,932 55,748 8,727 22,630 ( 26) 240 22,416 11,290 $119,642 8,182 $114,234 $1110.85 $1110.83 $1110.63 $1110.62 23,237,121 23,793,575 23,014,449 23,598,059 22,579,529 23,035,518 See accompanying notes to consolidated financial statements. 30 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S ( i n t h o u s a n d s ) January 29, 2005 For the Fiscal Years Ended January 31, 2004 (as restated) February 1, 2003 (as restated) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes (credit) (Gain) loss on disposal of assets (Increase) decrease in operating assets: Accounts receivable, net Inventories Prepaid expenses and other Other non-current assets Increase (decrease) in operating liabilities Accounts payable Accrued income taxes Accrued expenses Deferred rent Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Proceeds from sales of property and equipment Net cash used in investing activities Cash flows from financing activities: Cash used for stock repurchase Proceeds from options exercised and purchase of 2 shares under the employee stock purchase plan Revolving loan borrowings and repayments, net Net cash provided by (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest Income taxes, net of refunds See accompanying notes to consolidated financial statements. 31 $25,147 $19,642 $14,234 9,939 (45) 531 (1,263) (8,232) (56) (37) 12,212 3,196 957 3,774 20,976 46,123 (12,671) 45 (12,626) (19,111) 1,993 -- (17,118) 16,379 41,963 $58,342 9,686 72 336 (223) (8,531) (182) (27) 13,107 731 349 2,519 17,837 37,479 (11,226) 12 (11,214) -- 3,682 -- 3,682 8,727 1,178 (465) (1,018) (5,163) 138 64 1,148 (264) 539 767 5,651 19,885 (8,401) 611 (7,790) -- 1,852 (3,903) (2,051) 29,947 12,016 $41,963 10,044 1,972 $12,016 $58,342 $10,388 $41,959 $11,120 $41,194 $17,220 C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S ’ I N V E S T M E N T ( i n t h o u s a n d s , e x c e p t s h a r e i n f o r m a t i o n ) Common Stock Number of Shares Amount Paid-In Capital Retained Earnings Treasury Stock Number of Shares Amount BALANCE, February 2, 2002 (as previously reported) 22,336,463 $224 $57,614 $22,225 -- $ -- Restatement adjustments -- -- -- ( 1,248) BALANCE, February 2, 2002 (as restated) Net income Issuance of shares from the employee stock purchase plan and the exercise of stock options, net of tax benefit $706 BALANCE, February 1, 2003 (as restated) Net income Issuance of shares from the employee stock purchase plan and the exercise of stock options, net of tax benefit $1,510 BALANCE, January 31, 2004 (as restated) Net income Issuance of shares from the employee stock purchase plan and the exercise of stock options, net of tax benefit $1,569 Purchase of shares under the stock repurchase program 22,336,463 -- 224 -- 57,614 -- 20,977 14,234 346,162 3 2,555 -- 22,682,625 -- 227 -- 60,169 -- 35,211 19,642 547,035 5 5,186 -- 23,229,660 -- 232 -- 65,355 -- 54,853 25,147 259,005 -- 3 -- 3,560 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 845,400 (19,111) BALANCE, January 29, 2005 23,488,665 $235 $68,915 $80,000 845,400 $(19,111) See accompanying notes to consolidated financial statements. 32 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M The Board of Directors and Stockholders Hibbett Sporting Goods, Inc.: We have audited the accompanying consolidated balance sheets of Hibbett Sporting Goods, Inc. and subsidiaries (the Company) as of January 29, 2005, and January 31, 2004, and the related consolidated statements of operations, stockholders’ investment, and cash flows for each of the years in the three- year period ended January 29, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hibbett Sporting Goods, Inc. and subsidiaries as of January 29, 2005, and January 31, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 2005, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2004 and 2003 consolidated financial statements. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 13, 2005, expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting. Birmingham, Alabama April 13, 2005 33 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Hibbett Sporting Goods, Inc. (the "Company") is an operator of sporting goods retail stores in small to mid-sized markets predominately in the Southeast, Mid-Atlantic and Midwest. The Company’s fiscal year ends on the Saturday closest to January 31 of each year. The consolidated statements of operations for fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003, include 52 weeks of operations. The Company’s merchandise assortment features a core selection of brand name merchandise emphasizing team sports complemented by a selection of localized apparel and accessories designed to appeal to a wide range of customers within each market. Principles of Consolidation The consolidated financial statements of the Company include its accounts and the accounts of all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform previously reported data to the current presentation. Such reclassifications had no impact on total assets or on stockholders’ investment. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect (1) the reported amounts of certain assets and liabilities and disclosure of certain contingent assets and liabilities at the date of the consolidated financial statements and (2) the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Reportable Segments Hibbett is an operator of sporting good stores in small to mid-sized markets predominately in the Southeast, Mid-Atlantic and Midwest. Given the economic characteristics of the store formats, the similar nature of products offered for sale, the types of customers and the methods of distribution, the operations of Hibbett constitute only one reportable segment. Customers No customer accounted for more than 5% of the Company’s sales during the 52-week periods ended January 29, 2005, January 31, 2004, or February 1, 2003. 34 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Vendor Arrangements The Company enters into arrangements with many of its vendors that entitle it to a partial refund of the cost of merchandise purchased during the year or payments for reimbursement of certain costs it incurs to advertise or otherwise promote its product. The volume based rebates, supported by a vendor agreement, are estimated throughout the year and reduce the cost of inventory 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. Advertising The Company expenses advertising costs when incurred. The Company participates in various advertising and marketing cooperative programs with its vendors, who, under these programs, reimburse it for certain costs incurred. A receivable for cooperative advertising to be reimbursed is recorded as a decrease to expense as the reimbursements are earned. The following table presents the components of the Company’s advertising expense (in thousands): Gross advertising costs Advertising reimbursements Net advertising costs Stock Repurchase Plan January 29, 2005 $4,471 (2,785) $1,686 For the Fiscal Years Ended January 31, 2004 $3,533 (1,921) $1,612 February 1, 2003 $2,948 (1,396) $1,552 In August 2004, the Board of Directors authorized the repurchase of up to $30.0 million of the Company’s outstanding common stock. In November 2004, the Board of Directors increased the maximum authorization to $40.0 million. Stock repurchases may be made until August 19, 2005, and may be made in the open market or in negotiated transactions, with the amount and timing of repurchases dependent on market conditions at the discretion of Company management. As of January 29, 2005, the Company had repurchased 845,400 shares at a cost of approximately $19.1 million. Stock Splits On March 10, 2004, the Board of Directors declared a 3-for-2 stock split on the Company’s Common Stock to holders of record on April 1, 2004, effective April 16, 2004. All share and per share data has been revised to reflect the effects of the stock split retroactively for all periods presented. Cash and Cash Equivalents The Company considers all short term, highly liquid investments with original maturities of three months or less to be cash equivalents. 35 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Trade and Other Accounts Receivable Trade accounts receivable at fiscal year-end consist primarily of amounts due to the Company from sales to educational institutions and youth associations as related to Team Sales. The Company does not require collateral and maintains reserves for potential uncollectible accounts based on historical losses and existing economic conditions, when relevant. The allowance for doubtful accounts at January 29, 2005 and January 31, 2004 was $59,000 and $107,000, respectively. Other accounts receivable consists primarily of tenant allowances due from landlords. Inventories Inventories are valued at the lower of cost or market using the retail inventory method of accounting, with cost determined on a first in, first out basis and market based on the lower of replacement cost or estimated realizable value. The Company’s business is dependent to a significant degree upon close relationships with its vendors. The Company’s largest vendor, Nike, represented approximately 39%, 34% and 36% of its purchases in fiscal 2005, 2004 and 2003, respectively. The Company’s next largest vendor in fiscal 2005 represented approximately 10%, 9% and 11% of its purchases in fiscal 2005, 2004 and 2003, respectively. The Company’s third largest vendor in fiscal 2005 represented approximately 8%, 11% and 9% of its purchases in fiscal 2005, 2004 and 2003, respectively. Property and Equipment Property and equipment are recorded at cost. It is the Company's policy to depreciate assets acquired prior to January 28, 1995, using accelerated and straight-line methods over their estimated service lives (3 to 10 years for equipment, 5 to 10 years for furniture and fixtures and 10 to 31.5 years for buildings) and to amortize leasehold improvements using the straight-line method over the shorter of the initial term of the underlying leases or the estimated economic lives of the improvements. Depreciation on assets acquired subsequent to January 28, 1995, is provided using the straight-line method over their estimated service lives (3 to 5 years for equipment, 7 years for furniture and fixtures and 39 years for buildings) or, in the case of leasehold improvements, the shorter of the initial term of the underlying leases or the estimated economic lives of the improvements. Construction in progress is primarily comprised of property and equipment related to unopened stores at period end. 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 the accounts and the related gain or loss is credited or charged to income. 36 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Deferred Rent from Landlords Deferred rent from landlords consist of step rent and allowances from landlords related to the Company’s leased properties. Step rent represents the difference between actual operating lease payments due and straight-line rent expense, which is recorded by the Company 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 expense. Landlord allowances are generally comprised of amounts received and/or promised to the Company by landlords in the form of leasehold improvements. These allowances are part of the negotiated terms of the lease. The Company records a receivable from the landlord and a deferred rent liability when the allowances are earned. This deferred rent is amortized into 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. The liability for the unamortized landlord allowances, including the current portion, was approximately $13,350,000 and $9,976,000 at January 29, 2005, and January 31, 2004, respectively. Revenue Recognition Retail merchandise sales occur on-site in the Company’s 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 Hibbett within 30 days. The down payment and any installments are recorded by the Company as deferred revenue until the customer pays the entire purchase price for the merchandise and takes possession of such merchandise. The Company recognizes merchandise revenues at the time the customer takes possession of the merchandise. The cost of coupon sales incentives is recognized at the time the related revenue is recognized by the Company. Proceeds received from the issuance of gift cards are initially recorded as deferred revenue and such proceeds are subsequently recognized as revenue at the time the customer redeems such gift cards and takes possession of the merchandise. 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. The Company considers individual store closings to be a normal part of operations and regularly reviews store performance against expectations and closes stores not meeting its investment requirements. Costs associated with store closings are recognized at the time of closing or when a liability has been incurred. Store assets are also reviewed for possible impairment or reduction of their useful lives. 37 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Self-Insurance Reserve The Company is self-insured for a significant portion of its health insurance. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims of the Company. The estimated accruals for these liabilities could be affected if future occurrences and claims differ from these assumptions. As of Januar y 29, 2005, and Januar y 31, 2004, these reser ves were $367,000 and $400,000, respectively, and were included in accrued expenses in the consolidated balance sheets. Sales Returns, net Net sales returns were $10.5 million for fiscal 2005, $8.5 million for fiscal 2004 and $7.4 million for fiscal 2003. The effect of the reserve for estimated returns on pre-tax income at January 29, 2005 was $83,000 and was zero at January 31, 2004. Stock-Based Compensation The Company discloses stock-based compensation information in accordance with the Financial Accounting Statement Board’s (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123” and FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides additional transition guidance for companies that elect to voluntarily adopt the provisions of SFAS No. 123. SFAS No. 148 does not change the provisions of SFAS No. 123 that permit entities to continue to apply the intrinsic value method of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Hibbett has elected to continue to account for its stock-based plans under APB No. 25, as well as to provide disclosure of stock-based compensation as outlined in SFAS No. 123, as amended by SFAS No. 148. No compensation expense has been recognized related to its stock-based plans. SFAS No. 123 requires disclosure of pro forma net income, earnings per share (“EPS”) and other information as if the fair value method of accounting for stock options and other equity instruments described in SFAS No. 123 had been adopted. All pro forma disclosures include the effects of all options granted by the Company. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of SFAS No. 123. As a result, the pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The Company is required to adopt SFAS No. 123R in the third quarter of fiscal 2006. See “Recent Accounting Standards.” At January 29, 2005, the Company had three active stock-based plans: the Amended and Restated 1996 Stock Option Plan, the Employee Stock Purchase Plan and the Stock Plan for Outside Directors. The Company uses the Black-Scholes option pricing model to estimate the fair value at the date of grant of stock options granted under its stock option plans and stock purchase rights associated with the Employee Stock Purchase Plan. A summary of the assumptions used for stock option grants and stock purchase right grants follows: 38 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S For the Fiscal Years Ended January 29, 2005 January 31, 2004 February 1, 2003 Stock option plans: Dividend yield Expected volatility(1) Risk free interest rate(2) Expected lives Employee Stock Purchase Plan: Dividend yield Expected volatility(1) Risk free interest rate(2) Expected lives 0.0% 0.0% 48.7% to 54.5% 54.7% to 57.0% 2.9% to 3.2% 7 years 3.0% to 3.9% 7 years 0.0% 0.0% 49.2% to 53.2% 55.0% to 57.0% 2.4% to 3.4% .25 years 2.9% to 3.8% .25 years 0.0% 57.6% 4.0% to 5.1% 7 years 0.0% 58.0% 3.7% to 5.4% .25 years (1) Volatility is estimated as of date of grant or purchase date and is calculated on 4 years as the Company believes that period of time captures the relative volatility of its stock. (2) Risk free interest rate is based on the U.S. Treasury rate with maturities approximating the expected lives of the options. The rate is determined as of the date of grant or purchase date. A reconciliation of net income, as reported in the consolidated statements of operations, to pro forma net income including compensation expense for its stock-based plans as calculated in accordance with the provisions of SFAS No. 123, as amended by SFAS No. 148, as well as a comparison of as reported in the consolidated statements of operations and pro forma basic and diluted EPS follows (in thousands, except per share information): For the Fiscal Years Ended January 29, 2005 $25,147 -- -- -- -- (1,759) $23,388 $231.08 $231.01 $231.06 $231.00 January 31, 2004 (as restated) $19,642 February 1, 2003 (as restated) $14,234 -- -- (1,251) $18,391 (983) $13,251 $180.85 $180.80 $180.83 $180.78 $180.63 $180.59 $180.62 $180.58 Net income – as reported Add: Stock-based employee compensation expense, included in the determination of net income, net of tax Deduct: Stock-based employee compensation expense, determined under the fair value based method for all awards, net of tax Net income – pro forma Basic earnings per share – as reported Basic earnings per share – pro forma Diluted earnings per share – as reported Diluted earnings per share – pro forma 39 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The effects on pro forma net income and pro forma EPS of the estimated stock-based compensation expense, net of tax, calculated using the fair value of stock options and stock purchase rights in accordance with the Black-Scholes options pricing model for fiscal 2005, fiscal 2004 and fiscal 2003 are not necessarily representative of the effects of the Company’s results of operations in the future. In addition, the compensation expense estimates utilize an option pricing model developed for traded options with relatively short lives. Hibbett stock option grants typically 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 the Company’s estimates. The Company believes that its estimates incorporate all relevant information and represent a reasonable approximation in light of the difficulties involved in valuing non-traded stock options. Beginning in the third quarter of fiscal 2006, the Company will include the expense associated with share-based payments in its consolidated statements of operations. Fair Value of Financial Instruments In preparing disclosures about the fair value of financial instruments, the Company believes that the carrying amount approximates fair value for cash and cash equivalents, receivables, inventories, short term borrowings and accounts payable, because of the short maturities of those instruments. Earnings Per Share Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock are exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings. Diluted EPS has been computed based on the weighted average number of shares outstanding, including the effect of outstanding stock options, if dilutive, in each respective year. A reconciliation of the weighted average shares for basic and diluted EPS is as follows: Weighted average shares outstanding: Basic Diluted effect of stock options Diluted January 29, 2005 23,237,121 556,454 23,793,575 Fiscal Year Ended January 31, 2004 February 1, 2003 23,014,449 583,610 23,598,059 22,579,529 455,989 23,035,518 For the 52 weeks ended January 29, 2005, January 31, 2004, and February 1, 2003, the anti-dilutive options appropriately excluded from the computation were 45 shares, 12,971 shares and 1,805 shares, respectively. 40 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Accounting for the Impairment of Long-Lived Assets The Company continually evaluates whether events and circumstances have occurred that indicate the remaining balance of long-lived assets and intangibles may be impaired and not recoverable. The Company’s 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. Recent Accounting Pronouncements In December 2003, the FASB issued Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities,” (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces Interpretation 46, “Consolidation of Variable Interest Entities,” which was issued in January 2003. The Company was required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation was applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. There was no impact to the Company’s consolidated financial statements upon adoption. SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 31, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement. In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges and that the allocation of fixed 41 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S production overheads to the cost of conver ting work in process to finished goods be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R requires the measurement of all stock-based payments to employees, including grants of employee stock options and stock purchase rights granted pursuant to certain employee stock purchase plans, using a fair-value based method and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS No. 123R are effective for reporting periods beginning after June 15, 2005. Accordingly, we are required to adopt SFAS No. 123R in the third quarter of fiscal 2006. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to recognition in the financial statements. See “Stock-Based Compensation” in Note 1 to Consolidated Financial Statements. The Company is currently reviewing the applicability of SFAS No. 123R on its operations and its potential impact on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets: an Amendment of APB Opinion No. 29.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The amendments also eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. This Interpretation is effective for fiscal years ending after December 15, 2005. Accordingly, The Company is required to adopt FIN 47 in its fiscal year ended January 28, 2006. The Company is currently reviewing the applicability of FIN 47 on its operations and its potential impact on its consolidated financial statements. 2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS Following disclosure by several restaurant companies and other retailers in fiscal 2005 and in connection with per forming it fiscal 2005 year-end repor ting control processes, the Company per formed a comprehensive review of its lease accounting practices. Historically, the Company recorded rent expense on a straight-line basis over the initial non-cancelable lease term commencing upon location opening. The Company has concluded that any build-out period should also be included in its determination of straight-line rent expense. Additionally, the Company reassessed the depreciable lives of leasehold improvements to be the shorter of their estimated useful lives or the initial non-cancelable lease term at the inception of the lease. The Company also concluded that landlord allowances for normal tenant 42 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S improvements, which had previously been recorded as a reduction to related leasehold improvements, should be reflected as deferred rent and amortized over the lease term, including the build-out period, as a reduction to rent expense rather than depreciation. The Company evaluated the materiality of these corrections on its financial statements and concluded that the incremental impact of these corrections is not material to any quarterly or annual period; however, the cumulative effect of these corrections is material to the fourth quarter of fiscal 2005. As a result, the Company has recorded the cumulative effect as of the beginning of fiscal year 2003 and has restated previously issued consolidated financial statements for the fiscal years ended January 31, 2004 and February 1, 2003 to recognize the impact of including the build-out period in our straight line rent expense, recording depreciation on leasehold improvements over the shorter of their estimated useful lives or the initial, non-cancelable lease term and to classify landlord allowances for normal tenant improvements as deferred rent and amortize them over the lease term as a reduction to rent expense rather than depreciation. The after tax cumulative effect of the restatement through fiscal year ended Februar y 2, 2002, of $1.2 million was recorded as a reduction to the Company’s beginning retained earnings balance at February 3, 2002, as reflected in its consolidated statements of stockholders’ investment. The cumulative effect of the restatement through fiscal 2004 increased property and equipment by $4.4 million, increased deferred rent liability by $8.2 million and increased deferred income taxes by $1.4 million. Expenses related to store occupancy and pre-opening costs for fiscal 2004 and fiscal 2003 decreased by $1.6 million and $1.3 million, respectively, while depreciation expenses for the same fiscal periods increased by $2.4 million and $1.9 million, respectively. As a result of the restatements, operating profit for fiscal 2004 and fiscal 2003 decreased by $1.1 million and $0.8 million, respectively, as did income before the provision for income taxes. Net income decreased by $0.7 million in fiscal 2004 and $0.5 million in fiscal 2003. The restatement did not impact the Company’s previously repor ted net increase in cash and cash equivalents, revenues or compliance with revolving line of credit covenants. 43 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following table shows the impact of these changes on the consolidated balance sheet and the consolidated statement of operations for the fiscal year ended January 31, 2004 (in thousands, except per share information): Consolidated Balance Sheet Equipment Furniture and fixtures Leasehold improvements Property and equipment Accumulated depreciation Total property and equipment Deferred income taxes Total non-current assets Total assets Deferred rent, short-term Total current liabilities Deferred rent, long-term Total non-current liabilities Retained earnings Total stockholders’ investment Total liabilities and stockholders’ investment Consolidated Statement of Operations Cost of goods sold, including warehouse, distribution and store occupancy costs Gross profit Store operating, selling and administrative expenses Depreciation and amortization Operating income Income before provision for income taxes Provision for income taxes Net income Basic earnings per share Diluted earnings per share Consolidated Statement of Cash Flows Net cash provided by operating activities Net cash used in investing activities 44 As Previously Reported Adjustments As Restated $122,590 13,376 19,721 56,297 30,124 26,173 -- 130 $168,562 $1,726 45,069 -- 603 57,303 122,890 $168,562 $218,565 102,399 63,194 7,267 31,938 32,044 11,696 $120,348 $1110.88 $1110.86 $1111218 208 12,154 12,580 8,188 4,392 805 805 $175,197 $111,148 1,148 7,102 6,499 (2,450) (2,450) $115,197 $1 (1,627) 1,627 320 2,419 (1,112) (1,112) (406) $111(706) $122,808 13,584 31,875 68,877 38,312 30,565 805 935 $173,759 $112,874 46,217 7,102 7,102 54,853 120,440 $173,759 $216,938 104,026 63,514 9,686 30,826 30,932 11,290 $119,642 $111(0.03) $111(0.03) $1110.85 $1110.83 $133,816 $1 (7,551) $113,663 $1 (3,663) $137,479 $ (11,214) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following table shows the impact of these changes on the consolidated balance sheet and the consolidated statement of operations for fiscal year ended February 1, 2003 (in thousands, except per share information): As Previously Reported Adjustments As Restated Consolidated Balance Sheet Equipment Furniture and fixtures Leasehold improvements Property and equipment Accumulated depreciation Total property and equipment Deferred income taxes Total non-current assets Total assets Deferred rent, short-term Total current liabilities Deferred rent, long-term Total non-current liabilities Retained earnings Total stockholders’ investment Total liabilities and stockholders’ investment Consolidated Statement of Operations Cost of goods sold, including warehouse, distribution and store occupancy costs Gross profit Store operating, selling and administrative expenses Depreciation and amortization Operating income Income before provision for income taxes Provision for income taxes Net income Basic earnings per share Diluted earnings per share Consolidated Statement of Cash Flows Net cash provided by operating activities Net cash used in investing activities 45 $120,549 12,531 18,681 52,868 26,663 26,205 60 184 $129,580 $111,565 32,230 -- -- 36,954 97,350 $129,580 $193,383 85,804 55,529 6,866 23,409 23,195 8,466 $114,729 $1110.65 $1110.64 $1111121 142 8,654 8,917 5,769 3,148 1,001 1,001 $114,149 $1111755 755 5,137 5,137 (1,743) (1,744) $114,149 $1 (1,301) 1,301 219 1,861 (779) (779) (284) $111(495) $120,670 12,673 27,335 61,785 32,432 29,353 1,061 1,185 $133,729 $112,320 32,985 5,137 5,137 35,211 95,606 $133,729 $192,082 87,105 55,748 8,727 22,630 22,416 8,182 $114,234 $1 1 (0.02) $1 1 (0.02) $1110.63 $1110.62 $118,203 $1 (6,108) $111,682 $1 (1,682) $119,885 $1 (7,790) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 3. LONG-TERM DEBT The Company has an unsecured revolving credit facility, which will expire November 5, 2005. The facility allows borrowings up to $25.0 million at a rate of LIBOR plus 80 basis points or prime at our election. As of Januar y 29, 2005, the Company had no borrowings outstanding under this facility. Under the provisions of this facility, the Company pays a commitment fee of $10,000 annually and can draw down on the line of credit when its main operating account balance falls below $100,000. The following table sets forth a summary of key information for the credit facility as of the periods indicated: January 29, 2005 For the Fiscal Years Ended January 31, 2004 February 1, 2003 Average amount of borrowings outstanding Maximum balance outstanding Weighted average interest rate $11,297,000 $11,435,000 2.63% $11,978,000 $13,943,000 1.95% $15,227,000 $11,823,000 2.75% The average amount of borrowings outstanding is averaged using only the total number of days the Company had borrowings against its facility. For fiscal 2005, the Company had utilized its credit facility for a total of three days for an average borrowing of $297,000. The Company's revolving credit facility contains certain restrictive covenants common to such agreements. The Company was in compliance with respect to its covenants at January 29, 2005. 4. PROFIT SHARING PLAN The Company maintains a 401(k) profit-sharing plan (the "Plan") which permits participants to make pretax contributions to the Plan. The Plan covers all employees who have completed one year of service and who are at least 21 years of age. Participants of the Plan may voluntarily contribute from 1% to 100% of their compensation subject to certain yearly dollar limitations as allowed by law. These elective contributions are made under the provisions of Section 401(k) of the Internal Revenue Code which allows deferral of income taxes on the amount contributed to the Plan. The Company's contribution to the Plan equals (1) an amount determined at the discretion of the Board of Directors plus (2) a matching contribution equal to a discretionary percentage of up to 6% of a participant's compensation. For fiscal 2005, the Company matched 75% of contributions made to the plan by the employees up to 6% of the employee’s compensation. Contribution expense amounts for fiscal years 2005, 2004 and 2003 were approximately $462,000, $366,000 and $404,000, respectively. 5. RELATED PARTY TRANSACTIONS The Company's former largest stockholder, The SK Equity Fund, L.P. and SK Investment Fund, L.P., diluted 46 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S their holdings in the Company with a public offering on May 1, 2003, and the subsequent exercise of the underwriters’ over allotment option on May 13, 2003. Prior to this date, The SK Equity Fund, L.P. and SK Investment Fund, L.P., provided financial advisory services to the Company. Such services included, but were not necessarily limited to, advice and assistance concerning any and all aspects of the operation, planning and financing of the Company. There were no management fees associated with this arrangement in fiscal 2005. Management fee expense under this arrangement was approximately $50,000 in fiscal 2004 and $200,000 in fiscal 2003. The Company leases one store under a sublease arrangement from Books-A-Million, Inc., of which Clyde B. Anderson, a director of Hibbett, is a stockholder. This sublease agreement expires in June 2008. Minimum lease payments were $191,000 in fiscal 2005, fiscal 2004 and fiscal 2003. Future minimum lease payments under this non-cancelable sublease aggregate approximately $652,000. 6. INCOME TAXES A summary of the components of the provision (benefit) for income taxes is as follows (in thousands): January 29, 2005 For the Fiscal Years Ended January 31, 2004 (as restated) February 1, 2003 (as restated) Federal: Current Deferred State: Current Deferred $ 13,556 (161) 13,395 $ 10,442 (12) 10,430 $ 16,536 999 7,535 1,239 116 1,355 776 84 860 468 179 647 $ 14,750 $ 11,290 $ 18,182 A reconciliation of the statutory federal income tax rate as a percentage of income tax rate as a percent- age of income before income taxes follows: Tax provision computed at the federal statutory rate Effect of state income taxes, net of federal benefits Other 47 January 29, 2005 For the Fiscal Years Ended January 31, 2004 (as restated) 35.00% 1.81% (0.30%) 36.51% February 1, 2003 (as restated) 35.00% 1.88% (0.38%) 36.50% 35.00% 2.21% (0.24%) 36.97% N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S In fiscal 2004, the Company settled favorably an examination with state taxing authorities. A tax contingency liability had been provided in previous years. As a result of the settlement, state tax expense was reduced by approximately $700,000 in fiscal 2004. Temporary differences that create deferred taxes are detailed below (in thousands): Rent Depreciation Inventory Accruals Other Deferred taxes January 29, 2005 Current $1,14-- -- 79 66 4 Non-current $5,247 (3,563) -- -- -- January 31, 2004 (as restated) Current $3,98-- -- 349 710 (76) Non-current $3,011 (2,206) -- -- -- $1,149 $1,684 $3,983 $3,805 The Company has not recorded a valuation allowance for deferred taxes as realization is considered more likely than not based on the amount of income taxes paid in prior years. 7. STOCK OPTION AND STOCK PURCHASE PLANS Stock Option Plans The Company maintains the Hibbett Sporting Goods, Inc. 1996 Stock Option Plan, as amended (the “1996 Option Plan”). The 1996 Option Plan authorizes the granting of stock options for the purchase of up to 2,998,910 shares of common stock. Options granted vest over a five-year period and expire on the tenth anniversary of the date of grant. 48 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A summary of the status of the Company’s stock option plan is as follows: January 29, 2005 For the Fiscal Years Ended January 31, 2004 February 1, 2003 Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Shares 999,850 232,875 (213,975) (11,509) 1,007,241 Weighted Average Exercise Price $ 8.87 22.69 7.56 14.99 $12.27 Weighted Average Exercise Price $ 7.33 11.11 6.50 9.69 $ 8.87 Weighted Average Exercise Price $ 6.28 9.83 5.17 7.67 $ 7.33 Shares 1,293,684 309,768 (331,641) (61,526) 1,210,285 Shares 1,210,285 298,911 (501,426) (7,920) 999,850 Exercisable at end of year 224,954 $17.99 157,323 $ 7.48 392,073 $ 6.36 Weighted average fair value of options granted $14.74 $ 7.41 $ 6.83 The following table summarizes information about stock options outstanding at January 29, 2005: Range of Exercise Prices $01.81 to $04.74 $05.26 to $08.29 $08.85 to $09.82 $10.21 to $11.11 $18.41 to $25.71 Options Outstanding at January 29, 2005 Options Outstanding Weighted Average Remaining Contractual Life (years) 93,665 41,928 374,120 269,078 228,450 4.35 4.33 6.60 8.12 9.07 Weighted Average Exercise Price $24.37 $26.01 $29.42 $11.10 $22.69 Options Exercisable Options Exercisable at January 29, 2005 Weighted Average Exercise Price 42,697 37,203 111,110 33,944 -- $24.02 $25.90 $29.27 $11.09 2222-- The tax benefit associated with the exercise of stock options is credited to paid-in capital and amounted to approximately $1,569,000 in fiscal 2005, $1,510,000 in fiscal 2004 and $706,000 in fiscal 2003. Other Plans The Company maintains an Employee Stock Purchase Plan and an Outside Director Stock Plan and has reserved 253,125 shares and 393,750 shares of the Company’s common stock, respectively, for purchase by the employees and directors at 85% and 100% of the fair value of the common stock, respectively. 49 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S During fiscal 2005, the Company granted 7,500 options (in August 2004) under the Outside Director Stock Plan at an exercise price of $18.41 (market value at date of grant) and 20,435 options (in January 2005) at an exercise price of $24.67 (market value at date of grant) for total options granted under the Plan of 27,935 for fiscal 2005. During fiscal 2004, the Company granted a total of 35,169 options under the Outside Director Stock Plan at an exercise price of $20.73 (market value at date of grant, adjusted for applicable stock splits). During fiscal 2003, the Company granted 33,750 options on January 31, 2003, under the Outside Director Stock Plan at an exercise price of $9.51 (market value at date of grant, adjusted for applicable stock splits) and 16,875 options on June 5, 2002, at an exercise price of $11.55 (market value at date of grant, adjusted for applicable stock splits). Director options vest immediately and expire on the earlier of the tenth anniversary of the grant or one year from the date on which an optionee ceases to be an Eligible Director. The Employee Stock Purchase Plan became effective on April 1, 1997, and as of January 29, 2005, 111,065 shares have been issued and 142,060 shares are reserved for future purchase. 8. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases the premises for its retail sporting goods stores under non-cancelable operating leases having initial or remaining terms of more than one year. Many of its leases contain scheduled increases in annual rent payments and the majority of its leases also require it to pay maintenance, insurance and real estate taxes. Additionally, certain of its leases include provisions for the payment of additional rent based on a percentage of sales over an established minimum. The Company also leases certain computer hardware, office equipment and transportation equipment under non-cancelable operating leases having initial or remaining terms of more than one year. In February 1996, the Company entered into a sale-leaseback transaction to finance its warehouse and office facilities. In December 1999, the related operating lease was amended to include the fiscal 2000 expansion of these facilities. The amended lease rate is $784,000 per year and will expire in December 2014. At January 29, 2005, the future minimum lease payments for leased properties and equipment, excluding maintenance, insurance and real estate taxes, for operating leases having a remaining term in excess of one year at such date were as follows (in thousands): Fiscal 2006 Fiscal 2007 Fiscal 2008 Fiscal 2009 Fiscal 2010 Thereafter TOTAL 50 $127,792 24,434 20,458 15,898 11,773 22,312 $122,667 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Rental expense for all operating leases consisted of the following (in thousands): Minimum rentals Contingent rentals January 29, 2005 $ 24,086 1,230 $ 25,316 Fiscal Year Ended January 31, 2004 $ 20,066 1,553 $ 21,619 February 1, 2003 $ 17,189 1,342 $ 18,531 Most of the Company’s retail store leases contain provisions that allow for early termination of the lease by either party if certain predetermined annual sales levels are not met. Generally, these provisions allow the lease to be terminated between the third and fifth year of the lease. Should the lease be terminated under these provisions, in some cases, the unamortized portion of any landlord allowances related to that property would be payable to the landlord. Legal Proceedings and other Contingencies The Company is a par ty to various legal proceedings incidental to its business. In the opinion of management, after consultation with legal counsel responsible for such matters, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect the financial position, results of operations or cash flows of the Company. 51 R E P O R T O F M A N A G E M E N T C O N T R O L S A N D P R O C E D U R E S Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to its management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, with the participation of its principal executive officer and principal financial officer, of the effectiveness of its disclosure controls and procedures as of January 29, 2005. Based on this evaluation and due to the material weakness in internal control over financial reporting described below in “Management’s Report on Internal Control Over Financial Reporting,” its principal executive officer and principal financial officer concluded that, as of January 29, 2005, its disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), were not effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of January 29, 2005, based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In performing this assessment, management concluded that the Company’s controls over the selection, monitoring and review of assumptions and factors affecting lease accounting practices were ineffective in ensuring that the related transactions were accounted for in accordance with generally accepted accounting priciples, and as a result, management determined that the Company’s financial statements for fiscal 2004 and fiscal 2003 were misstated. Specifically, amounts previously reported for annual rent expense and depreciation expense were understated. On March 9, 2005, the Company announced its decision to restate its financial statements as of and for the years ended January 31, 2004 and February 1, 2003, and for the previously issued interim financial information for fiscal year 2005 and fiscal year 2004 to reflect the aforementioned correction of errors in lease accounting. 52 R E P O R T O F M A N A G E M E N T C O N T R O L S A N D P R O C E D U R E S , c o n t . Management evaluated the impact of the aforementioned deficiencies on the Company’s assessment of internal control over financial reporting and concluded that the control deficiency that resulted in the incorrect lease accounting represented a material weakness in internal control over financial reporting as of January 29, 2005. As a result of this material weakness, management concluded that, as of January 29, 2005, the Company’s internal control over financial reporting was not effective based on the criteria set forth in the COSO framework. In accordance with the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2, a material weakness in internal control over financial reporting is a control deficiency or combination of control deficiencies that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. PCAOB Auditing Standard No. 2 identifies a number of circumstances that, because of their likely significant negative effect on internal control over financial reporting, are to be regarded as at least significant deficiencies as well as strong indicators that a material weakness exists, including the restatement of previously issued financial statements to reflect the correction of a misstatement. The Company’s independent registered public accounting firm, KPMG LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. This report appears below. Changes in Internal Control Over Financial Reporting In connection with its evaluation of the Company’s internal control over financial reporting described above, management has determined that no change in internal control over financial reporting occurred during the fourth quarter of fiscal 2005 that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. Subsequent to January 29, 2005, and in response to the material weakness in internal control over financial reporting noted above, the Company has implemented additional review procedures over the selection and monitoring of appropriate assumptions and factors affecting its lease accounting practices. The Company has taken these steps which are intended to remediate the material weakness in internal control over financial reporting and the ineffectiveness of its disclosure controls and procedures. Mickey Newsome Chairman of the Board, President and Chief Executive Officer Gary A. Smith Vice President and Chief Financial Officer April 14, 2005 53 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M The Board of Directors and Stockholders Hibbett Sporting Goods, Inc.: We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting), that Hibbett Sporting Goods, Inc. and subsidiaries (the Company) did not maintain effective internal control over financial repor ting as of Januar y 29, 2005, because of the effect of the material weakness in internal controls over the selection, monitoring, and review of assumptions and factors affecting lease accounting practices, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the internal control over financial reporting of the Company based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial repor ting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and per forming such other procedures as we considered necessar y in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 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. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will 54 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M , c o n t . not be prevented or detected. The following material weakness has been identified and included in management’s assessment as of Januar y 29, 2005: Management identified deficiencies in the Company’s internal control over financial reporting regarding the selection, monitoring, and review of assumptions and factors affecting its lease accounting practices. As a result of these deficiencies in the Company’s internal control, previously reported annual rent expense and depreciation was understated, resulting in the restatement of the consolidated financial statements as of and for the years ended January 31, 2004, and February 1, 2003, and for the previously issued interim financial information for fiscal 2005 and 2004. We audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hibbett Sporting Goods, Inc. and subsidiaries as of January 29, 2005, and January 31, 2004, and the related consolidated statements of operations, stockholders’ investment, and cash flows for each of the years in the three-year period ended January 29, 2005. The aforementioned material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and this report does not affect our report dated April 13, 2005, which expressed an unqualified opinion on those financial statements. In our opinion, management’s assessment that Hibbett Sporting Goods, Inc. and subsidiaries did not maintain effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 29, 2005, based on the criteria established in Internal Control – Integrated Framework issued by COSO. Birmingham, Alabama April 13, 2005 55 D I R E C T O R S A N D O F F I C E R S Board of Directors Officers Michael J. Newsome Chairman of the Board, Michael J. Newsome Chairman of the Board, President and Chief Executive Officer President and Chief Executive Officer Gary A. Smith Vice President and Chief Financial Officer Cathy E. Pryor Vice President of Store Operations Jeffry O. Rosenthal Vice President of Merchandising Hibbett Sporting Goods, Inc. Clyde B. Anderson Chairman of the Board Books-A-Million, Inc. H. Ray Compton Former Executive Vice President Dollar Tree Stores, Inc. Carl Kirkland Chairman Emeritus Kirkland’s, Inc. Ralph T. Parks Former President and Chief Executive Officer FOOTACTION USA Thomas A. Saunders, III Partner Saunders Karp & Megrue, L.P. Alton E. Yother Executive Vice President and Controller AmSouth Bancorporation 56 C O R P O R A T E I N F O R M A T I O N Corporate Offices 451 Industrial Lane Birmingham, Alabama 35211 (205) 942-4292 (205) 912-7290 Fax www.hibbett.com Stock Transfer Agent and Registrar SunTrust Bank Corporate Trust Department 58 Edgewood Avenue Atlanta, Georgia 30303 (800) 568-3476 Shareholders seeking information concerning stock transfers, change of address, and lost certificates should contact SunTrust directly. Annual Report on Form 10-K A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005, as filed with the Securities and Exchange Commission, may be obtained without charge upon written request to the Company’s Investor Relations department. Annual Meeting The 2005 Annual Meeting of Stockholders will be held at 10:00 A.M. Central Daylight Time on May 31, 2005, at The Harbert Center, 2019 Fourth Avenue North, Birmingham, Alabama. Stock Market Information The Company’s common stock is traded on the NASDAQ National Market under the symbol HIBB. The following table sets forth, for the periods indicated, the high and low sales prices of shares of the common stock as reported by NASDAQ: Fiscal 2005: Quarter ended May 1, 2004 Quarter ended July 31, 2004 Quarter ended October 30, 2004 Quarter ended January 29, 2005 Fiscal 2004: Quarter ended May 3, 2003 Quarter ended August 2, 2003 Quarter ended November 1, 2003 Quarter ended January 31, 2004 High $26.43 $28.44 $22.37 $27.27 High $12.64 $16.50 $19.33 $22.33 Low $21.07 $16.80 $16.12 $21.61 Low $08.56 $11.58 $14.23 $16.20 Independent Registered Public Accounting Firm KPMG LLP Birmingham, Alabama General Counsel Williams Mullen Hofheimer Nusbaum, P.C. Norfolk, Virginia Hibbett Sporting Goods, Inc. 451 Industrial Lane Birmingham, Alabama 35211 205.942.4292 www.hibbett.com

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