HIBBETT SPORTS INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

IMPORTANT NOTICE 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" or "estimate." For example, our forward-looking statements include statements regarding:

            · our expectations concerning store locations, types and size;     · the trends relating to data processing costs, store traffic, transaction size     and the customer experience;     · the costs and possible outcomes of pending legal actions and other     contingencies;     · our cash needs and capital expenditures, including our intentions and ability     to fund our new stores and other future capital expenditures and working     capital requirements;      · our ability and plans to renew or increase our revolving credit facilities;     · our estimates and assumptions as they relate to the preparation of our     unaudited condensed consolidated financial statements including our estimates     of economic and useful lives of depreciable assets and leases, our anticipated     annual effective tax rate based on expected taxable income and the expected     tax deductions from future employee stock option exercises;                      · seasonality and the effect of inflation; and     · the possible effect of the current economic state on our costs and     profitability.   

Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You are cautioned not to rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties, many of which are beyond our control or are currently unknown to us, as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations. For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully consider the risk factors described from time to time in our other documents and reports, including the factors described under "Risk Factors," "Business" and "Properties" in our Form 10-K for the fiscal year ended January 29, 2011 filed with the Securities and Exchange Commission on March 29, 2011. You should also read such information in conjunction with our unaudited condensed financial statements and related notes and "Management Discussion and Analysis of Financial Condition and Results of Operations" in this report. There may also be other factors that we cannot anticipate or that are not described in this report, generally because we do not currently perceive them to be material. Such factors could cause results to differ materially from our expectations.

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 non-public information. Nor do we confirm forecasts or projections or any statement or report issued by securities analysts and others regardless of the content of the statement or report. Thus, to the extent that reports issued by others, including securities analysts, contain any projections, forecasts or opinions, such reports are not our responsibility to confirm or reject.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake an obligation to update or revise any forward-looking statements to reflect actual results or changes in our assumptions, estimates or projections, except as required by law.

INVESTOR ACCESS TO COMPANY FILINGS

We make available free of charge on our website, www.hibbett.com under the heading "Investor Relations," copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Securities Exchange Act") as well as all Forms 4 and 5 filed by our executive officers and directors, as soon as the filings are made publicly available by the Securities and Exchange Commission on its EDGAR database at www.sec.gov. In addition to accessing copies of our reports online, you may request a copy of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011, at no charge, by writing to: Investor Relations, Hibbett Sports, Inc., 451 Industrial Lane, Birmingham, Alabama 35211.

General Overview

Hibbett Sports, Inc. operates sporting goods stores in small and mid-sized markets, predominantly in the Southeast, Southwest, Mid-Atlantic and the Midwest. Our stores offer a broad assortment of quality athletic equipment, footwear and apparel with a high level of customer service. As of October 29, 2011, we operated a total of 815 retail stores composed of 795 Hibbett Sports stores, 18 Sports Additions athletic shoe stores and 2 Sports & Co. superstores in 26 states.

Our primary retail format and growth vehicle is Hibbett Sports, a 5,000-square-foot store located primarily in strip centers which are usually influenced by a Wal-Mart store. Over the last several years, we have concentrated and expect to continue our store growth in strip centers versus enclosed malls. We do not expect that the average size of our stores will vary significantly in the future.

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We operate 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 28, 2012 and January 29, 2011 will each include 52 weeks of operations. We have operated as a public company and have been incorporated under the laws of the State of Delaware since October 6, 1996.

We utilize a merchandise management system that allows us to identify and monitor trends. However, this system does not produce U.S. GAAP financial information by product category. Therefore, it is impracticable to provide U.S. GAAP net sales by product 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. If a store remodel or relocation results in the store being closed for a significant period of time, its sales are removed from the comparable store base until it has been open a full 12 months. Our Sports & Co. stores are not and have never been included in the comparable store net sales comparison because we have not opened a superstore since September 1996 nor do we have plans to open additional superstores in the future.

Executive Summary

The strong sales trend we experienced in Fiscal 2011 continued throughout the first three quarters of Fiscal 2012. Our overall positive sales performance in the third quarter of Fiscal 2012 was driven by strong performances in active wear, footwear and licensed apparel. Net sales for the thirteen weeks ended October 29, 2011, increased 10.6% to $185.2 million compared with $167.4 million for the thirteen weeks ended October 30, 2010. Comparable store sales increased 7.0% versus an increase of 12.5% in the third quarter of last year. Net income for the third quarter of Fiscal 2012 increased 26.8% to $16.0 million compared with $12.6 million for the third quarter of Fiscal 2011. Earnings per diluted share increased 34.1% to $0.59 compared with $0.44 for the third quarter of Fiscal 2011.

Net sales for the thirty-nine weeks ended October 29, 2011, increased 10.2% to $542.0 million compared with $491.7 million for the thirty-nine weeks ended October 30, 2010. Comparable store sales increased 6.6% and net income for the thirty-nine weeks ended October 29, 2011 increased 27.4% to $43.2 million compared with $33.9 million for the thirty-nine weeks ended October 30, 2010. Earnings per diluted share increased 34.5% to $1.56 compared with $1.16 for the same period of Fiscal 2011.

During the third quarter of Fiscal 2012, we opened 16 new stores, expanded 4 high performing stores and closed 3 underperforming stores, bringing the store base to 815 in 26 states as of October 29, 2011. We ended the third quarter with $53.0 million of available cash and cash equivalents on the unaudited condensed consolidated balance sheet and full availability under our credit facilities. We also acquired 698,880 shares of our common stock for a total expenditure of $25.4 million under our stock repurchase authorization during the third quarter.

Significant Accounting Estimates

The unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Our significant accounting policies and estimates are described more fully in the Annual Report on Form 10-K for the fiscal year ended January 29, 2011, and filed on March 29, 2011. There have been no changes in our accounting policies in the current period that had a material impact on our unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements

See Note 2 of this Form 10-Q for the period ended October 29, 2011, for information regarding recent accounting pronouncements.

Results of Operations

Thirteen Weeks Ended October 29, 2011 Compared to Thirteen Weeks Ended October 30, 2010

Net sales. Net sales increased $17.8 million, or 10.6%, to $185.2 million for the thirteen weeks ended October 29, 2011 from $167.4 million for the comparable period in the prior year. Furthermore:

   · We opened 16 Hibbett Sports stores, closed 3 underperforming stores and     expanded 4 high performing stores in the thirteen weeks ended October 29,     2011. New stores and stores not in the comparable store net sales calculation     increased net sales by $6.6 million during the thirteen weeks.     · We experienced a 7.0% increase in comparable store net sales, which amounted     to $11.2 million, for the thirteen weeks ended October 29, 2011.                                            10

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During the thirteen weeks ended October 29, 2011, 748 stores were included in comparable store net sales. We believe we are experiencing higher traffic per store and an increase in dollars per transaction and items sold per transaction. We also believe we are improving the customer service experience by satisfying more customers with our in-stock position and product assortments specific to each store. The increase in comparable store sales was driven by strong performances in active wear, footwear, accessories and licensed apparel.

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 $67.8 million, or 36.6% of net sales, in the thirteen weeks ended October 29, 2011, compared with $59.1 million, or 35.3% of net sales, in the same period of the prior fiscal year. The increase in gross profit percent was due primarily to fewer promotions and less aged inventory. Distribution expense as a percentage of net sales increased by 9 basis points compared to a year ago primarily because of increased data processing costs and fuel costs. Occupancy expense as a percentage of net sales decreased 69 basis points, with the largest decrease in rent expense resulting from lease renegotiations.

Store operating, selling and administrative expenses. Store operating, selling and administrative expenses were $39.5 million, or 21.3% of net sales, for the thirteen weeks ended October 29, 2011, compared to $35.6 million, or 21.3% of net sales, for the comparable period a year ago. We closely monitor and carefully manage these costs. For the third quarter:

   · Salary and benefit expenses decreased 17 basis points as a percentage of net     sales at the administrative level, primarily from a decrease in health     insurance expenses and in corporate payroll as a percentage to net     sales. These costs remained relatively constant at the retail level as a     percentage to net sales, increasing 4 basis points in benefit costs.     · Stock-based compensation expense increased 13 basis points primarily due to an     increase in the accrual of estimated achievement of performance-based awards     in the current fiscal year.     · Data processing costs increased by 4 basis points as a percentage of net sales     due primarily to broadband implementation in a large portion of our stores. We     expect these costs to increase throughout the fiscal year as we bring all our     stores on-line through broadband implementation.   

Depreciation and amortization. Depreciation and amortization as a percentage of net sales was 1.8% in the thirteen weeks ended October 29, 2011, compared to 2.0% for the comparable period a year ago. We attribute the decrease in depreciation expense as a percentage of net sales to a decrease in the overall investment in leasehold improvements.

Provision for income taxes. Provision for income taxes as a percentage of net sales was 4.8% in the thirteen weeks ended October 29, 2011, compared to 4.5% for the thirteen weeks ended October 30, 2010. This increase was primarily due to operating efficiencies achieved resulting in higher pre-tax income as a percentage of net sales. The combined federal, state and local effective income tax rates as percentages of pre-tax income were 36.0% and 37.3% for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively. The decrease in rate resulted from the resolution of an income tax matter with a state taxing authority and the expiration of the statute of limitations on previously open tax years.

Thirty-Nine Week Period Ended October 29, 2011 Compared to Thirty-Nine Week Period Ended October 30, 2010

Net sales. Net sales increased $50.2 million, or 10.2%, to $542.0 million for the thirty-nine weeks ended October 29, 2011 from $491.7 million for the comparable period in the prior year. Furthermore:

   · We opened 32 Hibbett Sports stores, closed 15 stores and remodeled, relocated     or expanded 15 stores in the thirty-nine week period ended October 29,     2011. New stores and stores not in the comparable store net sales calculation     increased net sales by $19.0 million during the thirty-nine week period.     · We experienced a 6.6% increase in comparable store net sales, which amounted     to $31.2 million, for the thirty-nine week period ended October 29, 2011.   

During the thirty-nine week period ended October 29, 2011, 735 stores were included in comparable store net sales. The increase in comparable store sales was broad-based with strong performances across active wear, footwear, accessories and licensed apparel. Strong product performances were led by trends in girls' active wear, licensed apparel and kids' footwear.

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 $194.2 million, or 35.8% of net sales, in the thirty-nine weeks ended October 29, 2011, compared with $169.9 million, or 34.6% of net sales, in the same period of the prior fiscal year. The increase in gross profit percent was due primarily to a higher percentage of merchandise sold at full price. Distribution expense as a percentage of net sales increased 10 basis points primarily due to increases in data processing and fuel costs compared to a year ago. Occupancy expense as a percentage of net sales decreased 50 basis points. The largest decrease was rent expense as a percentage of net sales as we continue to experience rent savings from lease renegotiations, offset somewhat by a decrease in construction allowance used to offset rent expense.

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Store operating, selling and administrative expenses. Store operating, selling and administrative expenses were $115.9 million, or 21.4% of net sales, for the thirty-nine weeks ended October 29, 2011, compared to $105.5 million, or 21.5% of net sales, for the comparable period a year ago. For the first three quarters:

   · Salary and benefit expenses decreased 25 basis points as a percentage of net     sales at the retail level, but increased in dollars, primarily from annual pay     rate increases, increased staffing to support sales and customer service, and     incentive payments associated with higher sales.     · Stock-based compensation as a percentage of net sales increased by 12 basis     points due to an increase in the accrual of estimated achievement of     performance-based awards to our executives in the current fiscal year and by     the higher fair value of our annual employee and director equity awards for     Fiscal 2012.     · Legal fees decreased by 6 basis points due to a decrease in accrued legal fees     compared to last year. Maintenance expenses increased by 4 basis points     primarily due to the outfitting of stores for broadband capabilities.   

Depreciation and amortization. Depreciation and amortization as a percentage of net sales was 1.8% in the thirty-nine weeks ended October 29, 2011, compared to 2.1% for the comparable period a year ago. We attribute the decrease in depreciation expense as a percentage of net sales to a decrease in the investment in leasehold improvements in recent years, offset somewhat by changes in estimates of useful lives of leasehold improvements in some underperforming stores.

Provision for income taxes. Provision for income taxes as a percentage of net sales was 4.6% in the thirty-nine week period ended October 29, 2011, compared to 4.1% for the thirty-nine week period ended October 30, 2010. This increase was primarily due to operating efficiencies achieved resulting in higher pre-tax income as a percentage of net sales. The combined federal, state and local effective income tax rate as a percentage of pre-tax income was 36.7% and 37.4% for the thirty-nine week period ended October 29, 2011 and October 30, 2010, respectively. The decrease in rate resulted from a decrease in incentive stock option expense, an increase in employment-related income tax credits, the resolution of an income tax matter with a state taxing authority and the expiration of the statute of limitations on previously open tax years.

Liquidity and Capital Resources

Our capital requirements relate primarily to new store openings and existing store expansions or remodels, stock repurchases 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. Historically, we have funded our cash requirements through our cash flow from operations and occasionally from borrowings under our revolving credit facilities.

  Our unaudited condensed consolidated statements of cash flows are summarized as follows (in thousands):                                             Thirty-Nine Weeks Ended                                        October 29,         October 30,                                            2011               2010 Net cash provided by operating activities:                            $     41,528       $      35,828 Net cash used in investing activities:                                  (9,794 )            (6,693 ) Net cash used in financing activities:                                 (54,250 )           (26,334 ) Net (decrease) increase in cash and cash equivalents                       $    (22,516 )     $       2,801    Operating Activities. 

Cash flow from operations is seasonal in our business. Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, such as winter holidays and back-to-school. Inventory levels are reduced in connection with higher sales during the peak selling seasons and this inventory reduction, combined with proportionately higher net income, typically produces a positive cash flow. In recent periods, we have experienced a trend of increasing free rent provisions in lieu of cash construction allowances in our leases. We believe this is primarily the result of the tightening of commercial credit on our landlords.

Net cash provided by operating activities was $41.5 million for the thirty-nine weeks ended October 29, 2011 compared with net cash provided by operating activities of $35.8 million for the thirty-nine weeks ended October 30, 2010. The largest sources of cash during the period was an increase in accounts payable as we effectively managed cash and extended some terms through the use of a purchasing card. The largest use of cash during the period was an increase in inventory balances. At October 29, 2011, the inventory level on a per store basis increased 9.0% while total inventory increased 11.3% compared to October 30, 2010, partially from cost increases from vendors. Non-cash charges included depreciation and amortization expense and stock-based compensation expense.

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Investing Activities.

Net cash used in investing activities in the thirty-nine weeks ended October 29, 2011 totaled $9.8 million compared with net cash used in investing activities of $6.7 million in the thirty-nine weeks ended October 30, 2010. Capital expenditures used $9.6 million and $6.5 million of cash in the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively. We use cash in investing activities to open new stores and remodel or relocate existing stores. The increase of capital expenditures over last year is due to the timing of technology-related investments this year compared to last year. Furthermore, net cash used in investing activities includes capital expenditures for our distribution facility and corporate headquarters.

We opened 32 new stores and relocated or expanded 15 existing stores during the thirty-nine weeks ended October 29, 2011 as compared to opening 30 new stores and relocating or expanding 10 existing stores during the thirty-nine weeks ended October 30, 2010.

We estimate the cash outlay for capital expenditures in the fiscal year ending January 28, 2012 will be approximately $13.0 million, which relates to the opening of 51 to 53 new stores, remodeling of selected existing stores, information system upgrades and various improvements at our headquarters and distribution center. Of the total budgeted dollars for capital expenditures for Fiscal 2012, we anticipate that over 56% will be related to the opening of new stores and remodeling and/or relocating existing stores. Approximately 34% will be related to information systems with the remaining 10% related primarily to automobiles, distribution center equipment and security equipment for our stores.

Financing Activities.

Net cash used in financing activities was $54.3 million in the thirty-nine weeks ended October 29, 2011 compared to net cash used in financing activities of $26.3 million in the prior year period. The cash fluctuation was primarily due to the repurchase of shares of our common stock when compared to the same period last year. As stock options are exercised, we will continue to receive proceeds and expect a tax deduction; however, the amounts and timing cannot be predicted.

At October 29, 2011, we had two unsecured revolving credit facilities that allow borrowings up to $50.0 million and $30.0 million, respectively, and which renew in November 2011 and August 2012, respectively. The facilities do not require a commitment or agency fee nor are there any covenant restrictions. We plan to renew these facilities as they expire 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 us. We had no debt outstanding under either of these facilities as of October 29, 2011.

Subsequent to October 29, 2011, we renewed our existing November facility of $50.0 million at an interest rate of prime plus 2%. The renewal was effective November 19, 2011 and will expire on November 18, 2012. The facility is unsecured and does not require a commitment or agency fee nor are there any covenant restrictions.

Based on our current operating and store opening plans and plans for the repurchase of our common stock, we believe that we can fund our cash needs for the foreseeable future through cash generated from operations and, if necessary, through periodic future borrowings against our credit facilities.

Off-Balance Sheet Arrangements.

We have not provided any financial guarantees as of October 29, 2011. All merchandise purchase obligations are cancelable. 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.

Quarterly and Seasonal Fluctuations

We experience seasonal fluctuations in our net sales and results of operations. Customer buying patterns around the spring sales period and the holiday season historically result in higher first and fourth quarter net sales. In addition, our quarterly results of operations may 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, merchandise mix and demand for apparel and accessories driven by local interest in sporting events.

Although our operations are influenced by general economic conditions, we do not believe that, historically, inflation has had a material impact on our results of operations as we are generally able to pass along inflationary increases in costs to our customers.

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