Hibbett Sports - The Little Wal-Mart Of Sports Retailing

| About: Hibbett Sports, (HIBB)

Summary

Hibbett is a sports retailer with a strong competitive advantage.

Domination of regional markets leads to superior operating metrics.

Shares trade historically cheap although plenty of growth still lies ahead.

Introduction

Hibbett Sports (NASDAQ:HIBB) is a US sports retailer in small and mid-sized markets in the South, Southwest, Mid-Atlantic and the Midwest. They operate 1031 stores with the majority (80%) in strip-centers often close to a Wal-Mart store (NYSE:WMT) with the remainder located in enclosed malls. The target markets are counties with populations between 25 and 75 thousand. The typical store is 5,000 square feet in size. The stores sell premium sport brands like Nike (NYSE:NKE), North Face, Under Armour (NYSE:UA), Reebok and Adidas (NYSE:ADS). Merchandise categories are footwear (47% of sales), apparel (31%) and equipment (22%).

Share Price

$30

Shares Out

22.79mio

Market Cap

684mio

EPS ttm

3.20

Click to enlarge

Business

Compared to other sports retailers, Hibbett has the highest operating margin, is the most profitable and beats most of the competitors on revenue growth.

HIBB

DKS

BGFV

FINL

FL

Trailing P/E

10.1

12.03

19.62

13.9

16.98

Forward P/E

9.65

11.28

16.09

10.39

13.35

Enterprise Value/Revenue

0.72

0.65

0.32

0.4

1.11

Enterprise Value/EBITDA

5.15

6.02

6.67

5.56

7.68

Profit Margin

7.80%

4.96%

1.38%

3.16%

7.23%

Operating Margin

12.22%

8.15%

2.60%

4.94%

12.49%

Return on Assets

15.97%

9.49%

3.66%

6.73%

15.62%

Return on Equity

24.10%

21.07%

7.08%

10.35%

20.55%

Qtrly Revenue Growth

4.60%

7.60%

1.90%

-3.50%

3.60%

Click to enlarge

Source: Yahoo

Hibbett achieves these superior economics by executing a well-balanced strategy. The main pillar of the strategy is regional concentration. They focus on local markets with populations too small to support big box retailers and locate stores in convenient locations often close to a Wal-Mart store. New stores are then opened in adjacent markets. This concentration of stores in small markets drives down costs. First logistic costs are reduced since freight load capacity of trucks can be better utilized. They have their own leased fleet of trucks to supply 80% of their stores. This improves inventory management by allowing the stores to exchange goods more efficiently. Second, customer acquisition costs are lower. Since regional marketing costs for TV or newspaper advertising is usually fixed, a higher density of stores converts more of the marketing dollars into sales. Third, management oversight can be more effectively executed since travel time between stores is reduced. This leads to better gross margins of 35%, compared to 31% for Dick's (NYSE:DKS) and 32% for Big Five (NASDAQ:BGFV). SG&A costs are also lower at 21% of sales, compared to 23% for Dick's and 29% for Big Five.

The strategy of focusing on smaller markets limits competition. Hence ~30% of the stores don't have any competitors within a 15 minutes drive, ~55% of the stores have 1 competitor or less and ~70% have 2 competitors or less.

Still, between fiscal 2013 and 2015 EBITDA margin has contracted by around 1% while revenues have increased by 11.5%. Breaking down EBITDA margin contraction into components shows that the majority of the contraction comes from an increase in SG&A costs followed by lower profitability from stores younger than 5 years and an increase in rental payments.

2013-2015

Revenue increase

11.5%

Ebitda margin decrease

1.07%

Rental increase

-0.25%

New stores contribution

-0.27%

Net advertising costs

0.00%

Price / Inventory

-0.18%

SG&A

-0.38%

Click to enlarge

Minimum rentals jumped by 5.7% in fiscal 2014 and by 2.9% in 2015, while increases in 2013 were only 0.6%. Presumably this was caused by the renewal of rents which have been negotiated on favourable terms during the recession in 2008/09.

According to management, it takes around 5 years for a young store to mature. In year 1, a young store produces $725 thousand in sales with a contribution margin of 16%. After 5 years, sales improve to $950 thousand and the contribution margin improves to 22%. The percentage of stores younger than 5 years therefore impacts overall margins. The percentage of stores younger than 5 years has increased from 15% in 2013 to 19% in 2015. This has impacted EBITDA margin by around 0.27 percentage points.

SG&A costs have increased by 0.38 percentage points over the period. SG&A in relation to sales at 21.1% is slightly above the long term average of 20.9%.

Price reductions or inventory write-offs seem to account only for a small part of the contraction in EBITDA margin. Increased competition doesn't seem to be the cause for the decline.

Why has the share price come down?

Same store sales for the first 9 months of the year are down 0.5%. This could be due to exposure to states which are impacted by the decline in oil prices. In the recession of 08/09, same store sales were down 3.1%. Since approximately 30% of the stores are currently located in states with oil exposure, a decline of 1% could be expected on a like-for-like basis.

Valuation

At $30 per share FCF yield approaches 12%.

NI

73

as reported

D&A

17

as reported

less MCX

-9

estimated at 1% of sales

FCF

81

Market Cap

684

FCF yield

11.8%

Click to enlarge

Historically Hibbett has traded at a P/E multiple above 17. With a 17 multiple, shares would be worth $54.

EPS reported

P/E

Target

Upside

Historically above 17 and in line with Foot Locker (NYSE:FL)

$3.20

17

$54

81%

Dick's Sporting Goods

$3.20

12

$38

28%

Click to enlarge

Growth

Management sees potential to increase the store base to 1,500 over the next years. With 50 new stores per year this could be achieved within the next 10 years. That would imply roughly 4% pa sales growth from store expansion. If you add 1% of annual demand growth, that's 5% pa.

Risks

Deep recession in oil states

Around 30% of the stores are located in states where consumer spending might be impacted from lower oil prices. Assuming the oil decline having no worse effect on these states than the 08/09 recession, a 1% decline in comparable store sales should be expected. Obviously if the oil impact would be larger the decline could be much larger.

E-commerce

Penetration of rural markets with e-commerce suppliers could threaten the competitive advantages of the business. Management has indicated that they are planning to overhaul their internet strategy. This could mitigate some of the competition from e-commerce channels. Also omni-sales channels, i.e. e-commerce + bricks and mortar stores, might have an advantage over pure ecommerce plays.

Supplier concentration

Suppliers are heavily concentrated. Nike, for example, is responsible for 55 % of the inventory purchases.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HIBB over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article does not constitute investment advise. I might initiate, add, reduce or liquidate the position at any time without giving any notice. Please do your own research.