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Summary

  • After being pulled down by 20% year-to-date, now could be an attractive buying opportunity for shares of HIBB.
  • Its "small town" focus gives it an advantage over the likes of top comp DKS.
  • HIBB's operating metrics also outranks the likes of DKS and WMT.

Most bricks-and-mortar retailers tend to flock to markets where there are many people. This means that many small and rural towns are out of luck when it comes to shopping. The retailers that can carve out niches by serving small and rural towns find loyal customer bases with no place else to shop. Sam Walton used this strategy when he started Wal-Mart Stores (NYSE:WMT).

Today, a company that is following this same strategy is Hibbett Sports (NASDAQ:HIBB). Hibbett Sports has managed to carve out a niche in the small-town market setting where its competitors Dick's Sporting Goods (NYSE:DKS) and Big 5 Sporting Goods (NASDAQ:BGFV) lack a presence. This makes Hibbett Sports the only game in town.

Store expansion makes Hibbett a compelling growth story

With the help of one of the worst winters we have seen in decades, Hibbett Sports managed to miss on earnings for the January-ended quarter. This has helped push its shares down nearly 20% year-to-date. However, this is an enticing buying opportunity, as Hibbett remains an impressive growth story.

Over 75% of its stores are in small towns, isolated from larger markets and larger competitors. Hibbett's store base, at over 900 stores, is about 60% larger than that of Dick's. However, given the geographical markets that it targets, Hibbett runs less of a risk of saturation. Hibbett's has already identified another 500 markets in the 31 states it operates that would be ideal for Hibbett stores. It plans to open another net 65 stores this year, and management wants to have over 1,300 stores by the end of fiscal 2019.

Despite its somewhat-large store base, room remains for growth

Hibbett is already generating margins and returns that dwarf those of its major competitors; however, its e-commerce platform is almost non-existent. Hibbett has the highest profit margin among its major peers. The returns on the business from a return on investment standpoint are very compelling. Hibbett's return on investment is 23%, while Dick's is 19% and Wal-Mart's is 14%.

Hibbett is looking to make a greater shift into the e-commerce space. It is still early in the process of building out its Omni-channel operation. Shopping on the Hibbett Sports website involves redirecting to the manufacturers' (i.e. Nike or Rawlings) website to complete the purchase.

While the company does trail some of the other major sports retailers by not having an e-commerce platform, this is just another growth opportunity that it can explore going forward. In 2015, it should start to invest more heavily into developing the infrastructure and platform.

Hibbett also has a new logistics facility that will not only support its 1,300-store goal; it will also help support its eventual e-commerce platform. The new distribution facility also has expansion opportunities.

The biggest risks for Hibbett

The biggest risk for Hibbett is that the competition is heating up. Dick's Sporting Goods is its biggest direct competitor, and investors cannot forget about Wal-Mart. Dick's Sporting Goods already has a strong e-commerce platform. In addition, while Hibbett does focus on smaller towns where the competition is not as fierce, the e-commerce space is much more competitive.

There is also the worry that its e-commerce platform will cannibalize its retail-store sales. While this could be an issue, it may not be a big one for Hibbett. Its retail model focuses on small towns, but its e-commerce platform gives Hibbett the potential to reach customers in larger cities. Thus, the money spent on Hibbett's website should result in new revenue rather than cannibalization.

Bottom line

the free cash flow margin of Hibbett has made it very easy for the company to continue to buy back shares. It also allows the company plenty of cash flow to invest in its Omni-channel strategy. For investors who are looking for an investment in the growing sports-retail business, Hibbett Sports is worth a closer look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.