Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES
Business
Hibbett, Inc. is a leading athletic-inspired fashion retailer with an omni-channel platform and over 1,100 stores under the Hibbett, City Gear and Sports Additions banners, primarily located in underserved communities. References to “we,” “our,” “us,” “Hibbett” and the “Company” refer to Hibbett, Inc. and its subsidiaries as well as its predecessors. Our fiscal year ends on the Saturday closest to January 31 of each year. The consolidated statements of operations for Fiscal 2023, Fiscal 2022 and Fiscal 2021 all include 52-weeks of operations. Our merchandise assortment features a core selection of brand name merchandise emphasizing athletic footwear, athletic and fashion apparel, related accessories and team sports equipment. We complement this core assortment with a selection of localized footwear, apparel and accessories designed to appeal to customers within each market.
Principles of Consolidation
The consolidated financial statements of our Company include its accounts and the accounts of all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Occasionally, certain reclassifications are made to conform previously reported data to the current presentation. Such reclassifications have no impact on total assets, total liabilities, net income or stockholders’ investment in any of the years presented.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and the disclosure of intangible assets and contingent liabilities at the date of the financial statements. We believe our estimates are reasonable; however, the assumptions used by management could change significantly in future estimates due to changes in circumstances and actual results could differ materially from those estimates.
Reportable Segments
We identify our operating segments according to how our business activities are managed and evaluated by our chief executive officer, who is our chief operating decision maker. Our shopping channels primarily include store locations, website and mobile apps. Store sales are primarily filled from the store’s inventory but may also be shipped from a different store location or our logistics network if an item is not available at the original store. Direct-to-consumer orders are generally shipped to our customers from a store, our logistics network or some combination thereof, depending on the availability of the desired item.
Given the economic similarity of the store formats, the products offered for sale, the type of customers, the methods of distribution and how our Company is managed, our operations constitute only one reportable segment.
Vendor Arrangements
We enter into arrangements with some of our vendors that entitle us to a partial refund of the cost of merchandise purchased during the year or reimbursement of certain costs we incur to advertise or otherwise promote their product. Volume-based rebates, supported by vendor agreements, are estimated throughout the year and reduce the cost of inventories and cost of goods sold during the year. This estimate is regularly monitored and adjusted for sales activity and current or anticipated changes in purchase levels.
We also receive consideration from vendors through a variety of other programs, including markdown reimbursements, vendor compliance charges and defective merchandise credits. If the payment is a reimbursement for costs incurred, it is recognized as an offset against those related costs; otherwise, it is treated as a reduction to the cost of merchandise. Markdown reimbursements related to sold merchandise are negotiated by our merchandising teams and are credited directly to cost of goods sold in the period received. If vendor funds are received prior to merchandise being sold, they are recorded as a reduction of merchandise cost. Vendor compliance charges and defective merchandise credits reduce the cost of inventories.
Marketing
We expense marketing costs when incurred. We participate in various marketing cooperative programs with our vendors, who, under these programs, reimburse us for certain costs incurred.
The following table presents the components of our marketing expense (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | January 30, 2021 (52-weeks) |
Gross marketing costs | $ | 36,525 | | | $ | 32,964 | | | $ | 23,576 | |
Marketing reimbursements | (6,892) | | | (4,525) | | | (1,524) | |
Net marketing costs | $ | 29,633 | | | $ | 28,439 | | | $ | 22,052 | |
Cost of Goods Sold
We include merchandise costs, store occupancy costs, logistics-related occupancy and operating costs, and ship-to-home freight in cost of goods sold.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments with original maturities of 90 days or less, including commercial paper and money market funds, to be cash equivalents. Amounts due from third-party credit card processors for the settlement of debit and credit card transactions are included as cash equivalents as they are generally collected within three business days. Cash equivalents related to credit and debit card transactions at January 28, 2023 and January 29, 2022 were $7.4 million and $6.6 million, respectively.
Inventories
Inventories are valued using the lower of weighted average cost or net realizable value method. Items are removed from inventory using the weighted average cost method.
Lower of Cost and Net Realizable Value: We regularly review inventories to determine if the carrying value exceeds net realizable value, and we record an accrual to reduce the carrying value to net realizable value as necessary. We account for obsolescence as part of our lower of cost and net realizable value accrual based on historical trends and specific identification. As of January 28, 2023 and January 29, 2022, the accrual was $5.6 million and $5.3 million, respectively. A determination of net realizable value requires significant judgment.
Shrink Reserves: We accrue for inventory shrinkage based on the actual historical results of our physical inventory counts. These estimates are compared to actual results as physical inventory counts are performed and reconciled to the general ledger. Physical inventory counts are performed on a cyclical basis. As of January 28, 2023 and January 29, 2022, the accrual was $0.7 million and $0.9 million, respectively.
Inventory Purchase Concentration: Our business is dependent to a significant degree upon close relationships with our vendors. Our largest vendor, Nike, represented 69.9%, 61.0%, and 65.0% of our purchases for Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.
Property and Equipment
Property and equipment are recorded at cost. Finance lease assets are shown as right-of-use (ROU) assets and are excluded from property and equipment. (See Note 3, Leases).
Property and equipment consists of the following (in thousands):
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
Land | $ | 7,277 | | | $ | 7,277 | |
Buildings | 22,529 | | | 22,247 | |
Equipment | 134,304 | | | 119,505 | |
Furniture and fixtures | 67,522 | | | 59,137 | |
Leasehold improvements | 170,773 | | | 137,279 | |
Construction in progress | 5,501 | | | 4,086 | |
Total property and equipment | 407,906 | | | 349,531 | |
Less: accumulated depreciation and amortization | 238,430 | | | 203,564 | |
Total property and equipment, net | $ | 169,476 | | | $ | 145,967 | |
Depreciation on property and equipment utilizes the straight-line method generally over the following estimated service lives:
| | | | | |
Buildings | 39 years |
Leasehold improvements | 3 – 10 years |
Furniture and fixtures | 7 years |
Equipment | 3 – 7 years |
For leasehold improvements, we calculate depreciation using the shorter of the term of the underlying leases or the estimated economic lives of the improvements. The term of the lease includes option periods when exercise of the option is reasonably certain. We continually reassess the remaining useful life of leasehold improvements in light of store closing plans.
Construction in progress has historically been comprised primarily of property and equipment related to unopened stores and amounts associated with technology upgrades.
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from property and equipment and the related gain or loss is credited or charged to net income, net of proceeds received.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and the City Gear tradename are indefinite-lived intangible assets which are not amortized, but rather tested for impairment at least annually, or on an interim basis if events and circumstances have occurred that indicate that is more likely than not that an asset is impaired. Such events or circumstances could include, but are not limited to, significant negative industry or economic trends, unanticipated changes in the competitive environment and a significant sustained decline in the market price of our stock. If an asset is impaired, the amount that the carrying value exceeds the fair value is recorded as an impairment charge to current income.
In valuing goodwill, we use a combination of the Discounted Cash Flow methodology and the Guideline Public Company methodology, which requires assumptions related to future cash flows, discount rate and comparable public company entities. In the first quarter of Fiscal 2021, we determined that goodwill of our City Gear reporting unit was fully impaired and recognized a non-cash impairment charge of $19.7 million. No impairment related to goodwill was recognized during Fiscal 2023 or Fiscal 2022.
Historically, we have performed a quantitative assessment utilizing the Relief from Royalty method which required assumptions related to future revenues, royalty rate, and discount rate in valuing the tradename intangible. In the first quarter of Fiscal 2021, we determined that the City Gear tradename was partially impaired and recognized a non-cash impairment charge of $8.9 million in store operating, selling and administrative expenses. In Fiscal 2023, we performed a qualitative assessment based on specific facts and circumstances including microeconomic and market conditions, current year financial results and the results from the prior quantitative assessment. No impairment related to the tradename was recognized during Fiscal 2023 or Fiscal 2022.
Long-Lived Assets
Long-lived assets, including lease assets, are evaluated for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. When evaluating long-lived assets for impairment, we first compare the carrying value of the asset or asset group to its estimated undiscounted future cash flows. Our estimate of undiscounted future cash flows is based on historical operations and predictions of future profitability. Significant assumptions are required to estimate cash inflows and outflows directly resulting from the use of assets in operations, including margin on net sales, occupancy costs, payroll and related costs, and other costs to operate a store. If the estimated future cash flows are less than the carrying value of the related asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the related asset or asset group to its estimated fair value, which may be based on an estimated future cash flow model, quoted market value or other valuation technique, as appropriate. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For depreciable long-lived assets, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset. Impairment loss calculations require significant judgment to estimate future cash flows and asset fair values.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, when control of the merchandise is transferred to our customer which is at delivery. Sales are recorded net of expected returns at the time the customer takes possession of the merchandise. Net sales exclude sales taxes because we are a pass-through conduit for collecting and remitting these taxes.
The net deferred revenue liability for gift cards and customer orders at January 28, 2023 and January 29, 2022 was $9.8 million and $9.6 million, respectively, recognized in accounts payable on our consolidated balance sheets. We recognize revenue when a gift card is redeemed by the customer and recognize gift card breakage income in net sales in proportion to the redemption pattern of rights exercised by the customer. In Fiscal 2023, Fiscal 2022 and Fiscal 2021, gift card breakage income was immaterial for all years.
During the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021, $1.6 million, $1.4 million and $1.2 million of gift card deferred revenue from prior periods was realized, respectively.
Loyalty Program: We offer the Hibbett Rewards program whereby upon registration and in accordance with the terms of the program, customers earn points on certain purchases. Points convert into rewards at defined thresholds. The short-term future performance obligation liability is estimated at each reporting period based on historical conversion and redemption patterns. The liability is included in other accrued expenses on our consolidated balance sheets and was $4.1 million and $3.7 million at January 28, 2023 and January 29, 2022, respectively.
Return Sales: The liability for return sales is estimated at each reporting period based on historical return patterns and is recognized at the transaction price. The liability is included in accounts payable on our consolidated balance sheets. The return asset and corresponding adjustment to cost of goods sold for our right to recover the merchandise returned by the customer is immaterial.
Revenues disaggregated by major product categories are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal 2023 (52-weeks) | | Fiscal 2022 (52-weeks) | | Fiscal 2021 (52-weeks) |
Footwear | $ | 1,135,475 | | | $ | 1,044,191 | | | $ | 911,789 | |
Apparel | 412,021 | | | 483,236 | | | 384,431 | |
Equipment | 160,820 | | | 163,757 | | | 123,437 | |
| $ | 1,708,316 | | | $ | 1,691,184 | | | $ | 1,419,657 | |
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.
We generally consider individual store closings to be a normal part of operations and regularly review store performance against expectations. Costs associated with store closings are recognized at the time of closing or when a liability has been incurred. These costs were not material in Fiscal 2023, Fiscal 2022 or Fiscal 2021.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Standards that were adopted
We adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” on January 31, 2021. ASU 2019-12 removes certain exceptions to the general provisions of Topic 740 and provides simplification in other areas of Topic 740. The adoption of ASU 2019-12 had no material impact on our consolidated financial statements.
Standards that are not yet adopted
We continuously monitor and review all current accounting pronouncements and standards from the FASB for applicability to our operations. As of January 28, 2023, there were no other new pronouncements or interpretations that had or were expected to have a significant impact on our operations.
NOTE 3. LEASES
We lease our retail store locations, nearly all of which are operating leases. Store leases typically provide for initial terms of five to ten years. Many of our leases contain the following provisions:
•scheduled increases in rent payments over the lease term;
•tenant inducements;
•free rent periods;
•contingent rent based on net sales in excess of stipulated amounts;
•one or more renewal options at our discretion; and
•payments for common area maintenance, insurance and real estate taxes, most of which are variable in nature.
Most of our store leases contain provisions that allow for early termination between the third and fifth year of the term if predetermined sales levels are not met, or upon the occurrence of other specified contingent events. When we have the option to extend the lease term (including by not exercising an available termination option) or purchase the leased asset, and it is reasonably certain that we will do so, we consider these options in determining the classification and measurement of the lease. However, generally at lease commencement, it is not reasonably certain that we will exercise an extension or purchase option. For contingent termination provisions, we consider both the likelihood of the contingency occurring in addition to the economic factors we consider when assessing any other termination or renewal option.
We also lease certain office, transportation and technology equipment under operating and finance leases. Generally, these leases have initial terms of two to six years.
We determine whether an arrangement is a lease at inception. We have lease agreements that contain both lease and non-lease components. For store leases, we account for the lease components together with the non-lease components, such as common area maintenance. For office and transportation equipment leases, we separate the non-lease components from the lease components.
Operating lease liabilities are recognized based on the present value of remaining fixed lease payments over the lease term. Operating lease ROU assets are recognized based on the calculated lease liability, adjusted for lease prepayments, initial direct costs and tenant inducements. Because the implicit rate is generally not readily determinable for our leases, we use our estimated incremental borrowing rate, on a collateralized basis over a similar term, as the discount rate to measure operating lease liabilities. Due to the absence of an independently published credit rating, our estimated incremental borrowing rate is determined based on a synthetic credit rating. We use a blend of a financial ratio analysis and a Z-spread analysis to calculate our synthetic credit rating. Our most recent debt instrument terms and interest rates are also considered. The collateralized synthetic credit rating is then used to determine the yield most consistent with the tenor of our portfolio lease term and is adjusted on an ongoing basis by the movement in the market rates. The collateralized synthetic credit rating is reevaluated periodically as needed based on company-specific and market conditions. Operating lease cost for fixed lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred.
ROU lease assets are periodically reviewed for impairment losses. We use the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, to determine when to evaluate assets and asset groups, including ROU assets, for impairment and to calculate any impairment loss to be recognized. Asset group impairment charges of approximately $0.6 million, $2.9 million and $8.5 million were recognized during Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.
Store operating lease cost and logistics-related transportation equipment operating lease cost are included in cost of goods sold in the consolidated statements of operations. Office equipment and other equipment operating lease cost is included in store operating, selling and administrative expenses in the consolidated statements of operations.
| | | | | | | | | | | | | | | | | |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | January 30, 2021 (52-weeks) |
Operating lease cost | $ | 76,051 | | | $ | 68,359 | | | $ | 67,030 | |
Finance lease cost: | | | | | |
Amortization of assets | 977 | | | 849 | | | 913 | |
Interest on lease liabilities | 116 | | | 136 | | | 179 | |
Variable lease cost (1) | 18,188 | | | 18,379 | | | 13,328 | |
| $ | 95,332 | | | $ | 87,723 | | | $ | 81,450 | |
(1) Includes rent based on a percent of sales, common area maintenance, insurance and property tax.
Short-term leases are not recorded on our consolidated balance sheet and short-term lease cost is immaterial.
Finance right-of-use assets on the consolidated balance sheet at January 28, 2023 and January 29, 2022 are shown net of accumulated amortization of $3.3 million and $2.5 million, respectively.
The following table provides supplemental balance sheet information related to leases:
| | | | | | | | | | | |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) |
Weighted average remaining lease term (in years): | | | |
Operating leases | 5 | | 5 |
Finance leases | 3 | | 3 |
| | | |
Weighted average discount rate: | | | |
Operating leases | 3.5 | % | | 3.0 | % |
Finance leases | 5.2 | % | | 5.1 | % |
Maturities of lease liabilities (in thousands):
| | | | | | | | | | | | | | | | | |
| January 28, 2023 (52-Weeks) |
| Operating | | Finance | | Total |
Fiscal 2024 | $ | 81,744 | | | $ | 1,218 | | | $ | 82,962 | |
Fiscal 2025 | 73,763 | | | 493 | | | 74,256 | |
Fiscal 2026 | 59,111 | | | 413 | | | 59,524 | |
Fiscal 2027 | 45,075 | | | 211 | | | 45,286 | |
Fiscal 2028 | 30,539 | | | 192 | | | 30,731 | |
Thereafter | 40,452 | | | 99 | | | 40,551 | |
Total minimum lease payments | 330,684 | | | 2,626 | | | 333,310 | |
Less amount representing interest | 28,752 | | | 189 | | | 28,941 | |
| $ | 301,932 | | | $ | 2,437 | | | $ | 304,369 | |
As of January 28, 2023, we have entered into operating leases of approximately $11.0 million related to future store locations that have not yet commenced.
NOTE 4. DEBT
On July 9, 2021, we executed an unsecured Credit Agreement (the "2021 Credit Facility") between the Company and its
subsidiaries and Regions Bank. The 2021 Credit Facility provided an unsecured line of credit of up to $100.0 million and is effective through July 9, 2026 with an interest rate of one-month LIBOR plus 1.0% to 1.8% depending on specified leverage levels.
The 2021 Credit Facility includes an annual commitment fee, payable quarterly in arrears, in an amount between 15 and 20
basis points of the unused portion of the line of credit as determined on a daily basis, dependent on the amount of debt
outstanding. In addition, the Company is subject to certain financial covenants which include:
•advance limitation of 55% of the net book value of the Company's inventory;
•a Consolidated Lease-Adjusted Leverage Ratio comparing lease-adjusted funded debt (funded debt plus all lease liabilities) to EBITDAR (as defined in the 2021 Credit Facility) with a maximum of 3.5x; and
•a Consolidated Fixed Coverage Charge Ratio comparing EBITDAR to fixed charges and certain current liabilities (as defined in the 2021 Credit Facility) with a minimum of 1.2x.
On April 7, 2022, we executed a First Note Modification Agreement (the "Modification Agreement") between the Company and its subsidiaries and Regions Bank. The Modification Agreement increased the line of credit specified in the 2021 Credit Facility to $125.0 million. The expiration date of July 9, 2026 and the financial covenants included in the 2021 Credit Facility remained unchanged.
In addition, on April 7, 2022, we executed a First Amendment to the 2021 Credit Facility (the "First Amendment") and to the Modification Agreement, between the Company and its subsidiaries and Regions Bank. The First Amendment replaced LIBOR as the benchmark rate with the Bloomberg Short-Term Bank Yield ("BSBY) Index Rate. Pursuant to the First Amendment, the 2021 Credit Facility carries an interest rate of BSBY plus 1.0% to 1.8% depending on specified leverage levels.
As of January 28, 2023, we were in compliance with these covenants.
Activity against our credit facilities during the periods indicated are as follows (dollars in millions):
| | | | | | | | | | | |
| 52-Weeks Ended January 28, 2023 | | 52-Weeks Ended January 29, 2022 |
Number of day borrowings incurred | 307 | | 21 |
Average borrowings | $40.8 | | $2.0 |
Maximum borrowings | $110.5 | | $18.7 |
Average interest rate | 3.21% | | 1.35% |
Subsequent to January 28, 2023, on February 28, 2023, we entered into a new unsecured Credit Agreement (the "2023 Credit Facility") with Regions Bank, as administrative agent for the lenders, swingline leader and issuing bank. The 2023 Credit Facility matures on February 28, 2028, and restates and replaces the 2021 Credit Facility and amends certain of its terms and conditions, including the following:
•increases the aggregate principal amount of commitments by $35 million, from $125 million to $160 million, which includes a $25 million sublimit for the issuance of standby letters of credit and $25 million sublimit for swingline loans;
•permits us to increase the aggregate principal amount of commitments by up to an additional $50 million, subject to certain terms and conditions;
•provides that borrowings bear interest at either (i) an annual rate equal to the BSBY Rate, plus an applicable margin ranging from 1.0% to 2.0% depending on specified leverage levels (the "Applicable Margin"), or (ii) at the Company's option, (x) a base rate as set forth in the 2023 Credit Facility plus the Applicable Margin or (y) the BSBY Rate plus the Applicable Margin; and
•adjusts the annual commitment fee to an amount, dependent on the amount of debt outstanding, between 12.5 and 25 basis points of the unused portion of the 2023 Credit Facility, from an amount between 15 and 20 basis points of such amount under the 2021 Credit Facility.
Except as described above, the 2023 Credit Facility did not make any material changes to the principal terms of the 2021 Credit Facility, including with respect to financial covenants.
NOTE 5. STOCK-BASED COMPENSATION
At January 28, 2023, we had four stock-based compensation plans:
(a)The Amended and Restated 2015 Equity Incentive Plan (EIP) provides that the Board may grant equity awards to certain employees of the Company at its discretion. The EIP was adopted effective July 1, 2015 and subsequently amended and restated effective May 28, 2020. Including shares added in the amendment and restatement, the EIP authorizes grants of equity awards of up to 2,500,000 authorized but unissued shares of common stock. At January 28, 2023, there were 1,368,840 shares available for grant under the EIP.
(b)The 2015 Employee Stock Purchase Plan (ESPP) allows for qualified employees to participate in the purchase of up to 300,000 shares of our common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The ESPP was adopted effective July 1, 2015. At January 28, 2023, there were 119,541 shares available for purchase under the ESPP.
(c)The 2015 Director Deferred Compensation Plan (Deferred Plan) allows non-employee directors an election to defer all or a portion of their fees into stock units or stock options. The Deferred Plan was adopted effective July 1, 2015 and authorizes grants up to 150,000 authorized but unissued shares of common stock. At January 28, 2023, there were 119,362 shares available for grant under the Deferred Plan.
(d)The Amended and Restated 2012 Non-Employee Director Equity Plan (DEP) provides for grants of equity awards to non-employee directors. The DEP was adopted effective May 24, 2012 and subsequently amended and restated effective May 25, 2022. The amendment and restatement reset the authorization of grants of equity awards of up to 500,000 authorized but unissued shares of common stock. At January 28, 2023, there were 496,858 shares available for grant under the DEP.
Our plans allow for a variety of equity awards including stock options, restricted stock awards, stock appreciation rights and performance awards. As of January 28, 2023, we had only granted awards in the form of stock options, restricted stock units (RSUs) and performance-based units (PSUs) to our employees. The annual grants made for Fiscal 2023, Fiscal 2022 and Fiscal
2021 to employees consisted solely of RSUs. We have also awarded PSUs to our Named Executive Officers (NEOs). Due to the economic uncertainties at the onset of the COVID-19 pandemic, coupled with the timing of our annual equity awards, the Board elected to award only service-based units to our NEOs in Fiscal 2021.
As of January 28, 2023, we had only granted awards in the form of stock, stock options and deferred stock units (DSUs) to our Board members. Under the DEP, Board members currently receive an annual value of $75,000 worth of equity in the form of stock options or RSUs upon election to the Board and a value of $110,000 worth of equity in any form allowed within the DEP, for each full year of service, pro-rated for Directors who have served less than one full year. The Chairman of the Board receives an annual value of $135,000 of equity in any form allowed within the DEP. Due to the economic uncertainties at the onset of the COVID-19 pandemic, coupled with the timing of our annual equity awards, the Board elected to reduce the value of the annual equity award to each applicable Director in Fiscal 2021.
The terms and vesting schedules for stock-based awards vary by type of grant and generally vest upon time-based conditions. Under the DEP, Directors have the option with stock awards to set release dates. Upon exercise, stock-based compensation awards are settled with authorized but unissued company stock. All of our awards are classified as equity awards.
The compensation expense for these plans was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | January 30, 2021 (52-weeks) |
Stock-based compensation expense by type: | | | | | |
Stock options | $ | 155 | | | $ | 174 | | | $ | 90 | |
Restricted stock units | 6,204 | | | 5,111 | | | 3,495 | |
Employee stock purchases | 358 | | | 199 | | | 120 | |
Director deferred compensation | 94 | | | 56 | | | 94 | |
Total stock-based compensation expense | 6,811 | | | 5,540 | | | 3,799 | |
Income tax benefit recognized | 1,562 | | | 1,316 | | | 882 | |
Stock-based compensation expense, net of income tax | $ | 5,249 | | | $ | 4,224 | | | $ | 2,917 | |
Stock-based and deferred stock compensation expenses are included in store operating, selling and administrative expenses. There is no capitalized stock-based compensation expense.
The income tax benefit recognized in our consolidated financial statements, as disclosed above, is based on the amount of compensation expense recorded for book purposes. The actual income tax benefit realized in our income tax return is based on the intrinsic value, or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock unit awards vested during the period. The actual income tax benefit realized for the deductions considered on our income tax returns for Fiscal 2023, Fiscal 2022 and Fiscal 2021 was from option exercises and restricted stock unit releases and totaled $2.8 million, $3.2 million and $1.0 million, respectively.
Stock Options
Stock options are granted with an exercise price equal to the closing market price of our common stock on the business day immediately preceding the date of grant. Vesting and expiration provisions vary between equity plans, but options granted to employees under the EIP have historically vested over a four or five-year period in equal installments beginning on the first anniversary of the grant date and expiring on the eighth or tenth anniversary of the date of grant. Grants awarded to tenured outside directors under the DEP and Deferred Plan vest immediately upon grant. Grants awarded to outside directors upon appointment to our Board under the DEP vest in full on the first anniversary of the date of grant. Grants awarded to outside directors upon appointment to our Board under the Deferred Plan vest immediately upon grant. All grants awarded to outside directors expire on the tenth anniversary of the date of grant.
Activity for our option plans during Fiscal 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value ($000’s) |
Options outstanding at January 29, 2022 | 165,926 | | | $ | 41.28 | | | 3.66 | | $ | 3,106 | |
Granted | 7,212 | | | 46.22 | | | | | |
Exercised | (54,801) | | | 43.91 | | | | | |
Forfeited, cancelled or expired | (17,386) | | | 52.73 | | | | | |
Options outstanding at January 28, 2023 | 100,951 | | | $ | 38.24 | | | 4.03 | | $ | 2,859 | |
| | | | | | | |
Exercisable at January 28, 2023 | 100,951 | | | $ | 38.24 | | | 4.03 | | $ | 2,859 | |
We use the Black-Scholes pricing model to estimate the fair value of stock option on the date of grant. The Black-Scholes pricing model utilizes expected term, expected volatility, a risk-free interest rate and a dividend yield to estimate fair value. We calculate the expected term for our stock options based on the historical exercise behavior of our participants. The volatility used to value stock options is based on historical volatility. We calculate historical volatility using an average calculation methodology based on daily price intervals as measured over the expected term of the option. We have consistently applied this methodology since our adoption of the provisions of ASC Topic 718, Stock Compensation. In accordance with ASC Topic 718, we base the risk-free interest rate on the annual continuously compounded risk-free rate with a term equal to the option’s expected term. The dividend yield is based on dividend amounts over past time periods equal in length to the expected life of the options.
Details of stock options granted and the assumptions used in the option pricing model were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
Stock option grants | 1 | | 1 | | 2 |
Stock option grant date | March 30, 2022 | | March 22, 2021 | | April 7, 2020 |
Total stock options granted | 7,212 | | 4,384 | | 27,000 |
Exercise price | $46.22 | | $76.04 | | $12.30 |
Fair value of stock options | $21.46 | | $39.73 | | $3.33 |
Expected term | 4.59 years | | 4.63 years | | 2.70 years |
Expected volatility | 65.05% | | 64.75% | | 41.63% |
Risk-free interest rate | 2.44% | | 0.77% | | 0.33% |
Dividend yield | 2.28% | | 0.00% | | 0.00% |
Intrinsic value of stock options exercised (in millions) | $1.1 | | $2.7 | | $0.8 |
Total cash received by participants from stock options exercised (in millions) | $3.5 | | $4.7 | | $1.8 |
Unamortized compensation expense at fiscal period end | none | | none | | none |
Restricted Stock and Performance-Based Units
RSUs and PSUs are granted with a fair value equal to the closing market price of our common stock on the business day immediately preceding the grant date. All PSUs have been awarded in the form of restricted stock units. An award may vest completely at a point in time (cliff-vest) or in increments over time (graded-vest). The majority of awards, including PSUs, are subject to cliff-vest provisions. A small portion of awards to our executive officers are subject to graded-vest provisions. Generally, RSUs vest over two to four years with the exception of awards to our Board of Directors who can choose the vest date for their annual award. PSUs provide for awards based on achievement of certain predetermined corporate performance goals and typically cliff-vest in three years from the date of grant after achievement of stated performance criterion and upon meeting stated
service conditions.
The following table summarizes the restricted stock unit awards activity under all our plans during Fiscal 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RSUs | | PSUs | | Totals |
| Number of Awards | | Weighted Average Grant-Date Fair Value | | Number of Awards | | Weighted Average Grant-Date Fair Value | | Number of Awards | | Weighted Average Grant-Date Fair Value |
Nonvested at January 29, 2022 | 555,498 | | | $ | 23.28 | | | 35,117 | | | $ | 55.19 | | | 590,615 | | | $ | 25.18 | |
Granted | 108,610 | | | 46.26 | | | 49,978 | | | 46.22 | | | 158,588 | | | 46.25 | |
PSU adjustment (1) | — | | | — | | | 5,050 | | | 18.04 | | | 5,050 | | | 18.04 | |
Vested | (190,547) | | | 22.15 | | | (17,675) | | | 18.04 | | | (208,222) | | | 21.80 | |
Forfeited, cancelled or expired | (8,728) | | | 31.65 | | | — | | | — | | | (8,728) | | | 31.65 | |
Nonvested at January 28, 2023 | 464,833 | | | $ | 28.62 | | | 72,470 | | | $ | 55.48 | | | 537,303 | | | $ | 32.24 | |
(1)PSU adjustment represents the net RSUs awarded to our NEOs above or below their target grants resulting from the achievement of performance goals above or below the performance targets established at grant. One grant goal was achieved at 200% of its target based on Fiscal 2020 through Fiscal 2022 financial results.
Compensation expense is recognized on a straight-line basis over the vesting period for cliff-vest awards and, in the case of PSUs, at the estimated percentage of achievement. For graded-vest awards, the award is divided into vesting tranches and the compensation expense is recognized on a straight-line basis for each tranche separately.
Details of RSUs granted and vested were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
RSUs granted, including PSUs | 158,588 | | 84,523 | | 337,749 |
Weighted average grant date fair value of RSU awards | $46.25 | | $76.22 | | $12.42 |
Vested RSU awards, including PSUs | 208,222 | | 150,410 | | 147,042 |
Intrinsic value of vested awards (in millions) | $7.3 | | $10.5 | | $3.3 |
Intrinsic value of outstanding and unvested awards (in millions) | $35.5 | | $35.2 | | $38.1 |
Unrecognized compensation expense at fiscal period end (in millions) | $7.5 | | $7.0 | | $4.4 |
Estimated weighted average period unrecognized compensation expense expected to be recognized | 1.7 years | | 2.0 years | | 2.3 years |
Employee Stock Purchase Plan
The Company’s ESPP allows eligible employees the right to purchase shares of our common stock, subject to certain limitations, at 85% of the lesser of the market value at the end of each calendar quarter (purchase date) or the beginning of each calendar quarter. Our employee purchases of common stock and the average price per share through the ESPP, as well as the assumptions used in the option pricing model were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
Shares purchased | 32,586 | | 14,447 | | 36,059 |
Average price per share | $48.33 | | $50.01 | | $11.99 |
Weighted average fair value at date of grant | $14.33 | | $14.33 | | $4.18 |
Expected life (years) | 0.25 | | 0.25 | | 0.25 |
Expected volatility | 51.4% - 53.6% | | 49.2% - 50.4% | | 41.4% - 50.2% |
Risk-free interest rate | 1.56% - 7.31% | | 0.11% - 0.33% | | 0.20% - 3.60% |
Dividend yield | 1.39% - 2.36% | | 1.12% - 1.41% | | None |
The expense related to the ESPP was determined using the Black-Scholes option pricing model and the provisions of ASC Topic 718 as it relates to accounting for certain employee stock purchase plans with a look-back option.
Director Deferred Compensation
Under the Deferred Plan, non-employee directors can elect to defer all or a portion of their Board and Board Committee fees into cash, stock options or deferred stock units. Those fees deferred into stock options are subject to the same provisions as provided for in the DEP and are expensed and accounted for accordingly. Director fees deferred into stock units are calculated and expensed each calendar quarter by taking deferred fees earned during the calendar quarter and dividing by the closing price of our common stock on the last day of the calendar quarter, rounded to the nearest whole share. Director fees deferred into stock units are calculated and expensed each calendar quarter by taking deferred fees earned during the calendar quarter and dividing by the closing price of our common stock on the business day immediately preceding the last day of the calendar quarter, rounded to the nearest whole share. The total annual retainer, Board and Board Committee fees for non-employee directors that are not deferred into stock options, but which includes amounts deferred into stock units under the Deferred Plan, are expensed as incurred in all periods presented. The number of Directors who participated in the Deferred Plan as well as the number of shares deferred each year were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
Number of directors that deferred all or a portion of their fees | 1 | | 2 | | 2 |
Shares deferred under the Deferred Plan | 1,832 | | 729 | | 4,368 |
NOTE 6. EARNINGS PER SHARE
The computation of basic earnings per share ("EPS") is based on the number of weighted average common shares outstanding during the period. The computation of diluted EPS is based on the weighted average number of shares outstanding plus the incremental shares that would be outstanding assuming exercise of dilutive stock options and issuance of restricted stock. The number of incremental shares is calculated by applying the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per share in thousands:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | January 30, 2021 (52-weeks) |
Net income | $ | 128,057 | | | $ | 174,313 | | | $ | 74,266 | |
| | | | | |
Weighted average number of common shares outstanding | 12,951 | | | 14,993 | | | 16,547 | |
Dilutive stock options | 298 | | | 130 | | | 77 | |
Dilutive restricted stock units | 66 | | | 459 | | | 413 | |
Weighted average number of common shares outstanding and dilutive shares | 13,315 | | | 15,582 | | | 17,037 | |
| | | | | |
Basic earnings per share | $ | 9.89 | | | $ | 11.63 | | | $ | 4.49 | |
Diluted earnings per share | $ | 9.62 | | | $ | 11.19 | | | $ | 4.36 | |
In calculating diluted earnings per share, no options to purchase shares of common stock outstanding as of the end of the periods were excluded in the computations of diluted earnings per share due to their anti-dilutive effect in Fiscal 2023 and Fiscal 2022. In calculating diluted earnings per share, 95,724 options to purchase shares of common stock outstanding as of the end of the period were excluded in the computations of diluted earnings per share due to their anti-dilutive effect in Fiscal 2021.
At January 28, 2023, we excluded 77,470 non-vested stock awards granted to certain employees from the computation of diluted weighted average common shares and common share equivalents outstanding, because they are subject to performance-based annual vesting conditions which had not been achieved by the end of Fiscal 2023. Assuming the performance criteria had been achieved at target as of January 28, 2023, the incremental dilutive impact would have been 39,579 shares.
NOTE 7. STOCK REPURCHASE PROGRAM
Our Board of Directors (the "Board") has authorized a stock repurchase program (the "Repurchase Program") since August 2004; replacing, amending, renewing and extending the Repurchase Program periodically. In the most recent amendment in May 2021, the Board authorized an expansion and extension of the Repurchase Program by $500.0 million to a total of $800.0 million to repurchase our common stock in the periods of November 2015 through February 1, 2025.
The Repurchase Program authorizes repurchases of our common stock in open market or negotiated transactions, with the amount and timing of repurchases dependent on market conditions and at the discretion of our management. In addition to the Repurchase Program, we also acquire shares of our common stock from holders of restricted stock unit awards to satisfy withholding tax requirements due at vesting. Shares acquired from holders of restricted stock unit awards to satisfy tax withholding requirements do not reduce the authorized amounts of repurchases under the Repurchase Program.
The number of shares repurchased under the Repurchase Program and acquired from holders of restricted stock unit awards to satisfy tax withholding requirements were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 52-Weeks Ended |
| | January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
Common stock repurchased under the Repurchase Program | | 797,033 | | | 3,370,751 | | | 578,336 | |
Aggregate cost of repurchases under the Repurchase Program | | $ | 38,458 | | | $ | 267,826 | | | $ | 16,718 | |
Shares acquired from holders of restricted stock unit awards to satisfy tax withholding requirements | | 51,558 | | | 46,095 | | | 42,449 | |
Tax withholding requirements from holders of restricted stock unit awards | | $ | 2,446 | | | $ | 3,257 | | | $ | 897 | |
Historically, under all stock repurchase authorizations and including shares acquired from holders of restricted stock unit awards to satisfy tax withholding requirements, we have repurchased a total of 27.2 million shares of our common stock at an
approximate cost of $974.8 million as of January 28, 2023 and had approximately $330.1 million remaining under the Repurchase Program authorization.
Subsequent to January 28, 2023, we have repurchased 121,996 shares at a cost of $7.9 million. As of March 20, 2023, approximately $322.1 million remained under the Repurchase Program authorization.
NOTE 8. DIVIDENDS
On June 2021, the Board instituted a recurring quarterly cash dividend with the first cash dividend payment made on July 20, 2021. Since inception, our quarterly dividend has been $0.25 per share.
The number of declarations and cash dividends paid were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 52-Weeks Ended |
| | January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
Number of declarations | | 4 | | 3 | | N/A |
Cash dividends paid (in millions) | | $12.9 | | $10.9 | | N/A |
Total paid per share during fiscal year | | $1.00 | | $0.75 | | N/A |
Subsequent to January 28, 2023, on March 1, 2023, the Board declared a cash dividend of $0.25 per common share, payable on March 28, 2023, to stockholders of record at the close of business on March 16, 2023. The estimated payment is expected to be $3.2 million.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Annual Bonuses and Equity Incentive Awards
Specified officers and corporate employees of our Company are entitled to annual bonuses, primarily based on measures of Company operating performance. At January 28, 2023, there was no annual bonus-related expense included in accrued payroll expenses. At January 29, 2022, $13.0 million of annual bonus-related expense was included in accrued payroll expenses.
The Compensation Committee (the "Committee") of the Board places performance criteria on awards of PSUs made in the form of RSUs to our NEOs under the EIP. The performance criteria are tied to performance targets with respect to future sales and operating income over a specified period of time. These PSUs are expensed under the provisions of ASC Topic 718 and are evaluated each quarter to determine the probability that the performance conditions set within will be met.
Legal Proceedings and Other Contingencies
We are a party to various legal proceedings incidental to our business. Where we are able to reasonably estimate an amount of probable loss in these matters based on known facts, we have accrued that amount as a current liability on our balance sheet. We are not able to reasonably estimate the possible loss or range of loss in excess of the amount accrued for these proceedings based on the information currently available to us, including, among others, (i) uncertainties as to the outcome of pending proceedings (including motions and appeals) and (ii) uncertainties as to the likelihood of settlement and the outcome of any negotiations with respect thereto. We do not believe that any of these matters will, individually or in the aggregate, have a material effect on our business or financial condition. We cannot give assurance, however, that one or more of these proceedings will not have a material effect on our results of operations for the period in which they are resolved. At January 28, 2023 and January 29, 2022, the estimated liability is immaterial.
The estimates of our liability for pending and unasserted potential claims do not include litigation costs. It is our policy to accrue legal fees when it is probable that we will have to defend against known claims or allegations and we can reasonably estimate the amount of the anticipated expense.
From time to time, we enter into certain types of agreements that require us to indemnify parties against third-party claims under certain circumstances. Generally, these agreements relate to: (a) agreements with vendors and suppliers under which we may provide customary indemnification to our vendors and suppliers in respect to actions they take at our request or otherwise on our behalf; (b) agreements to indemnify vendors against trademark and copyright infringement claims concerning merchandise manufactured specifically for or on behalf of the Company; (c) real estate leases, under which we may agree to indemnify the
lessors from claims arising from our use of the property; and (d) agreements with our directors, officers and employees, under which we may agree to indemnify such persons for liabilities arising out of their relationship with us. We have director and officer liability insurance, which, subject to the policy’s conditions, provides coverage for indemnification amounts payable by us with respect to our directors and officers up to specified limits and subject to certain deductibles.
If we believe that a loss is both probable and estimable for a particular matter, the loss is accrued in accordance with the requirements of ASC Topic 450, Contingencies. With respect to any matter, we could change our belief as to whether a loss is probable or estimable, or its estimate of loss, at any time.
NOTE 10. INCOME TAXES
A summary of the components of the provision for income taxes is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | January 30, 2021 (52-weeks) |
Federal: | | | | | |
Current | $ | 26,256 | | | $ | 37,013 | | | $ | 23,651 | |
Deferred | 5,888 | | | 7,142 | | | (4,191) | |
| 32,144 | | | 44,155 | | | 19,460 | |
State: | | | | | |
Current | 6,326 | | | 9,128 | | | 5,580 | |
Deferred | 437 | | | 296 | | | (1,354) | |
| 6,763 | | | 9,424 | | | 4,226 | |
Provision for income taxes | $ | 38,907 | | | $ | 53,579 | | | $ | 23,686 | |
A reconciliation of the statutory federal income tax rate to the effective tax rate as a percentage of income before provision for income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | January 30, 2021 (52-weeks) |
Tax provision computed at the federal statutory rate | 21.00 | % | | 21.00 | % | | 21.00 | % |
Effect of state income taxes, net of federal benefits | 3.33 | | | 3.50 | | | 3.47 | |
| | | | | |
| | | | | |
| | | | | |
Other, net | (1.03) | | | (0.99) | | | (0.29) | |
| | | | | |
| 23.30 | % | | 23.51 | % | | 24.18 | % |
Deferred income taxes on the consolidated balance sheets result from temporary differences between the amount of assets and liabilities recognized for financial reporting and income tax purposes. The components of the deferred income taxes, net, are as follows (in thousands):
| | | | | | | | | | | |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) |
Rent | $ | 75,044 | | | $ | 72,452 | |
Inventories | 3,581 | | | 2,795 | |
Accruals | 5,676 | | | 8,175 | |
Stock-based compensation | 2,595 | | | 2,704 | |
Other | 136 | | | 85 | |
Total deferred tax assets | 87,032 | | | 86,211 | |
Rent | (70,418) | | | (66,056) | |
Accumulated depreciation and amortization | (13,067) | | | (10,440) | |
Prepaid expenses | (2,680) | | | (2,336) | |
State taxes | — | | | (192) | |
Other | (5) | | | |
Total deferred tax liabilities | (86,170) | | | (79,024) | |
Deferred income taxes, net | $ | 862 | | | $ | 7,187 | |
Deferred tax assets represent items that will be used as a tax deduction or credit in future tax returns or are items of income that have not been recognized for financial statement purposes but were included in the current or prior tax returns for which we have already properly recorded the tax benefit in the consolidated statements of operations. At least quarterly, we assess the likelihood that the deferred tax assets balance will be recovered. We take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of a realization of a deferred tax asset. To the extent recovery is not more likely than not, a valuation allowance is established against the deferred tax asset, increasing our income tax expense in the year such determination is made. We have determined that no such allowance is required in any period presented.
We apply the provisions of ASC Subtopic 740-10 in accounting for uncertainty in income taxes. In accordance with ASC Subtopic 740-10, we recognize a tax benefit associated with an uncertain tax position when, in our judgment based on technical merits, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management.
We file income tax returns in the U.S. federal and various state jurisdictions. A number of years may elapse before a particular matter for which we have recorded a liability related to an unrecognized tax benefit is audited and finally resolved. Generally, we are not subject to changes in income taxes by the U.S. federal taxing jurisdiction for years prior to Fiscal 2020 or by most state taxing jurisdictions for years prior to Fiscal 2019. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate. Favorable settlement of an unrecognized tax benefit could be recognized as a reduction in our effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit could increase the effective tax rate and may require the use of cash in the period of resolution. Our liability for unrecognized tax benefits is generally presented as non-current. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current.
A reconciliation of the unrecognized tax benefit, excluding estimated interest and penalties, under ASC Subtopic 740-10 follows
(in thousands):
| | | | | | | | | | | | | |
| January 28, 2023 (52-weeks) | | January 29, 2022 (52-weeks) | | |
Unrecognized tax benefits - beginning of year | $ | 455 | | | $ | 616 | | | |
Gross increases - tax positions in prior period | 76 | | | — | | | |
Gross decreases - tax positions in prior period | (48) | | | (51) | | | |
| | | | | |
| | | | | |
Lapse of statute of limitations | (111) | | | (110) | | | |
Unrecognized tax benefits - end of year | $ | 372 | | | $ | 455 | | | |
We classify interest and penalties recognized on unrecognized tax benefits as income tax expense. We have accrued interest and penalties in the amount of $0.1 million, $0.1 million and $0.1 million as of January 28, 2023, January 29, 2022 and January 30, 2021, respectively. During Fiscal 2023, Fiscal 2022 and Fiscal 2021, we recorded a benefit of $15,000, $18,000 and $28,000, respectively, for the accrual of interest and penalties in the consolidated statement of operations.
Of the unrecognized tax benefits as of January 28, 2023, January 29, 2022 and January 30, 2021, $0.3 million, $0.3 million and $0.4 million, respectively, if recognized, would affect our effective income tax rate.
NOTE 11. RELATED-PARTY TRANSACTIONS
Active related parties at January 28, 2023
Preferred Growth Properties, LLC ("PGP")
The Company leases one store under a lease arrangement with PGP (formerly AL Florence Realty Holdings 2010, LLC), a wholly owned subsidiary of Books-A-Million, Inc. ("BAMM"). One of our Directors, Terrance G. Finley, is an executive officer of BAMM. Minimum annual lease payments are $0.1 million, if not in co-tenancy, and the lease termination date is February 28, 2027. Minimum lease payments remaining under this lease at January 28, 2023 were immaterial.
T.I.G. Management, LLC ("TIG")
TIG performs certain new store and store remodel construction for the Company and is owned by a close relative of the Company's President and CEO. In Fiscal 2023, Fiscal 2022 and Fiscal 2021, payments to TIG for their services were $10.2 million, $6.7 million and $6.1 million, respectively. The amounts outstanding to TIG included in accounts payable on our consolidated balance sheets at January 28, 2023 and January 29, 2022, were immaterial.
Retail Security Gates, LLC ("RSG")
RSG provides specially manufactured store front security gates and, as of Fiscal 2022, is 50% owned by a close relative of the Company's President and CEO. In Fiscal 2023 and Fiscal 2022, payments to RSG for their services were $1.0 million and $0.3 million, respectively. The amounts outstanding to RSG included in accounts payable on our consolidated balance sheets at January 28, 2023 and January 29, 2022, were immaterial.
Inactive related parties at January 28, 2023
Memphis Logistics Group ("MLG")
MLG provided logistics and warehousing services to City Gear. Our President and CEO owned a majority interest in MLG through January 29, 2021, at which time he fully divested his ownership interest in MLG and no longer has any involvement with its management. MLG subsequently reorganized as Riverhorse Logistics, LLC. In Fiscal 2021, payments to MLG under the contract were $7.9 million.
Merchant's Capital ("MC")
Merchant's Capital owned the office building where City Gear had its corporate offices in Memphis, Tennessee. Our President and CEO is a 33.3% partner in MC. The extended lease term ended on April 30, 2020 which allowed for the transition of City Gear's corporate office to the Company's Birmingham, Alabama location. In Fiscal 2021, minimum lease payments to MC were immaterial.
Contingent Earnout ("Earnout")
Our President and CEO had a membership interest in an Earnout related to the acquisition of City Gear based on City Gear's achievement of an EBITDA threshold for the 52-weeks ended January 30, 2021. Pursuant to the Membership Interest and Warrant Purchase Agreement dated October 29, 2018, and based on Fiscal 2021 financial results, the former members and warrant holders of City Gear were entitled to and were paid the Earnout payment of $15.0 million in April 2021. The share of the Earnout payment made to our President and CEO was approximately 22.8%, or approximately $3.4 million.
NOTE 12. FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurement, establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than quoted prices included in Level I.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial assets and liabilities measured at fair value are considered immaterial individually and in the aggregate for the periods presented.
NOTE 13. DEFINED CONTRIBUTION BENEFIT PLANS
We maintain the Hibbett, Inc. 401(k) Plan (the "401(k) Plan") for the benefit of our employees. The 401(k) Plan covers all employees who have completed one year of service. Participants of the 401(k) 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 401(k) Plan and which operates under the Safe Harbor provisions. For Fiscal 2023, Fiscal 2022 and Fiscal 2021, we matched 100% of the first 3% of eligible compensation and 50% of the next 3% of eligible compensation for a total possible match of 4.5% of the first 6% of eligible compensation. Contribution expense incurred under the 401(k) Plan for Fiscal 2023, Fiscal 2022 and Fiscal 2021 was $1.9 million, $2.0 million and $2.1 million, respectively.
We maintain the Hibbett, Inc. Supplemental 401(k) Plan (the "Supplemental Plan") for the purpose of supplementing the employer matching contribution and salary deferral opportunities available to highly compensated employees whose ability to receive Company matching contributions and defer salary under the 401(k) Plan was limited because of certain restrictions applicable to qualified plans. The non-qualified deferred compensation Supplemental Plan allows participants to defer up to 40% of their compensation. Contributions to the Supplemental Plan are not subject to matching provisions; therefore no contribution expense was incurred under the Supplemental Plan for Fiscal 2023, Fiscal 2022 or Fiscal 2021. The Supplemental Plan is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
NOTE 14. SUBSEQUENT EVENTS
Subsequent to January 28, 2023, the following events occurred which are discussed further in the related footnote:
•New credit facility as discussed in Note 4, "Debt," of these audited consolidated financial statements;
•Stock repurchases as discussed in Note 7, "Stock Repurchases," of these audited consolidated financial statements; and
•Dividend declaration as discussed in Note 8, "Dividends," of these audited consolidated financial statements.