Hibbett Sports, Inc.

“Game Tested. Athlete Approved.” Hibbett Sports, Inc. Kevin A. Pribil Module 7 Residual Enterprise Income Valuation Model

Company overview • Residual Enterprise Income Valuation • Introduction • Derivation • Relation to Accounting • Calculating REI – Equation • Calculating REI – Tabular • Key Takeaways Agenda

Est. 1945 as Dixie Supply Co. in Alabama • Began in the marine and small aircraft markets but moved into sporting goods by the ‘60s • IPO in October 1996; operated 79 stores at the time • Incorporated in Delaware in 2007 • Immense growth into a now 873 store company • CEO- Jeffry Rosenthal, 55, former executive at Champs • Chairman- Michael Newsome, 74, began at Hibbett over 45 years ago and worked his way up from cashier Company Overview

As a retailer Hibbettoperates typically in 5,000 sq. ft. stores usually influenced by the location of a WalMart • 4 different types of stores • Hibbett Sports: full retail format • Sports Additions: 90% footwear and headgear • Sports & Co.: a 25,000 sq. ft. superstore (1 in operation) • Team: leading customized apparel supplier • CEO and CFO conduct annual evaluation of efficiency of internal controls procedures based on COSO standards • KPMG released audit report on Hibbett’s internal controls Company Operations

Increased competition not only between sporting goods stores but also with departments stores and online merchandisers • Increased store overhead (ex: rock-climbing walls, putting greens) • The fight for exclusive contracts with vendors • Analysts expect a slight decline in revenue of .1% per year through 2018. Industry Drivers Source: www.ibisworld.com

Moves away from cash flow based valuation and towards accounting based valuation • Calculate value over: • The 5-year forecasted period and; • Continual value that sums years beyond the forecast horizon because we cannot assume company will only be around for ‘x’ amount of years Introduction to Residual Enterprise Income (REI) Valuation

Step 1: understanding that REI begins with FCF • Value= Sum of Discounted Cash Flows • Step 2: introduce NEA and understand REI anchors valuation on NEA at t=0. Future retained income acts as an adjustment to his valuation • Value= (NEA at t=0) plus (the sum of discounted, retained earnings over a period) Deriving REI

Finite-life project example illustrates connection between FCF and Accounting EPAT NEA REI connecting FCF to Accounting

V0 = $4,198,500 REI – Equation Format

REI- rather than using expected cash flows; find and discount the expected residual income per year DCF- notice the difference in what numbers are being discounted REI – Tabular Format

Residual Income valuation calculates the same enterprise value as DCF model • Illustrates that both accounting and cash-flow models can be used to find a value • REI requires attention to a growth factor. For the purpose of this module we assumed g= sales growth • This may not be the case in reality… • Does including another assumption deem this valuation model less accurate? And more prone to error? Key Takeaways

Questions…

Hibbett Sports, Inc.