Capital Ladder Advisory Group's Closer Look At Hibbett Sports' First Quarter Earnings

| About: Hibbett Sports, (HIBB)
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Hibbett Sports' growth trends remain encouraging.

Shift in product launch cycles proves to have impact on results.

New facility will benefit operating profits in the future.

Product gross margins expected to improve through remainder of the year.

On May 23rd Hibbett Sports Inc. (NASDAQ:HIBB) reported mixed results and worrisome same store sales comparisons that were trending negative during the early months of May. For the first quarter, total sales increased 21.9 million to 261.9 million and increase of 9.1% over the prior year. Comparison sales were up 4.1% with monthly comparisons coming in at 7.2% in February, 2.9% in March and 0.9% in April. Gross profit rate decreased 38 basis points in the quarter. Product margin decreased 44 basis points mainly due to markdowns associated with managing inventory. Diluted earnings per share came in at $1.09 per share versus $1 last year which is represents an increase of 9 percent year-over-year.

Capital Ladder Advisory Group recently invested in shares of HIBB prior to the most recent quarterly release at $53 a share and liquidated most of our position at roughly $57 per share prior to the company releasing Q1 2015 results. We had great concerns over the trends being felt in the retail industry, which were further highlighted in Dick's Sporting Goods' (NYSE:DKS) results, which missed analysts' expectations for Q1 2014. Capital Ladder has retained a small position in shares of HIBB, which we plan to hold going through the back-to-school shopping season. We are currently weighing our options to recapture our larger position below the current market price.

Hibbett Sports' most recent quarterly performance was somewhat tempered by dramatic weather events during the quarter, which resulted in nearly 1,000 more store days of closures versus the prior year and most of that was weighted in February. Without the impact from weather, management believes February would have been even better as they outlined on the conference call. From a comp standpoint it would have added little more than one point of comp had these store closures not occurred.

During Q1 2015, Hibbett opened 16 new stores, expanded four high performing stores, and closed four stores; putting the company at 939 stores at the end of the quarter, netting 12 new stores in the 1st quarter. This achievement puts Hibbett on track to net 65 new stores by the end of the year.

Another operational achievement, which occurred during the 1st quarter was the company fully transitioning to their new wholesale and logistics facility with very few issues or concerns. With Hibbett's e-commerce and omni-channel business languishing behind its peers, the company has also begun executing on the first phase of their omni-channel road map. This phase is centered on two important areas that will be needed as they lay down the foundation right through 360 degree customer experience.

Upon releasing quarterly results, shares of HIBB tumbled largely due to comments surrounding early May comparison sales figures, which were trending down. Given the direction of sales comparisons through the first quarter, which were trending down from a February sales comparison of over 4%, investors were greatly concerned over the continuation of this direction in the early May comparison sales data. What many investors may not have realized about the early May comparison sales data is how important product launches are with regard to sales. This year, the company's launch cycle is roughly two weeks behind the prior year's product launch schedule which adversely affected early May comparison sales. When questioned about the product launch cycle and its early effects on May sales management stated the following:

"We have a pretty good size launch that will be tomorrow and I think that that's going to level things out a little bit for us comparatively for and then we'll go forward in to the quarter after that."

Another concern which weighed on investors was the 44 basis point decline in product gross margins during the 1st quarter. However, the company did state that they anticipate a recovery in product gross margins in the remaining three quarters of the year as identified in the following statement by management:

"We actually think that from a margin perspective going forward that we'll probably see a little bit of improvement in every quarter going forward. MDO (Markdown Optimization) we really wanted it to address some of our older inventory in the first quarter, so we took advantage of that and we did clear out some clearance that we needed to get rid of. So our inventories are in pretty good shape and because of that we think it will be alright."

All categories in branded apparel comps positive, both men's and women's business remained as growth opportunities for the company during the quarter. In Hibbett's fashion stores, Jordan and KB apparel led the way and Levi's also had positive comparison sales. Compression was softer compared to last year's Under Armor compression program launch. In the footwear business, basketball had a tremendous quarter fuelled by Jordan as well as Nike Signature, LeBron, Kobe and KD.

The company noted that inventory levels on a buy-store basis are down when compared to last year and that they are in a healthy place going into the summer. Back-to-school assortments are plentiful with receipts planning to arrive late June, early July and marketing initiatives are in place to connect with the consumer. The company is gearing up for a strong back-to-school shopping season.

From a balance sheet perspective, the company ended the quarter with $110.3 million in cash versus $103.2 million last year with no bank debt. Inventories increased 0.4% over last year, although 6% lower on a per store basis. The firm spent $8.6 million in CapEx for the quarter, including approximately $5.2 million for the new wholesale and logistics facility. Also for the quarter the company bought back 198,000 shares for a total of $10.8 million. At quarter end, Hibbett has approximately $219 million remaining under the existing purchase authorization.

Hibbett Sports has raised its upper-end earnings guidance for fiscal 2015. The company now expects earnings per share to come in the range of $2.75-$2.98 compared with the earlier guidance range of $2.78-$2.96. Sales comparisons for the fiscal year are still projected to grow in the low-to-mid single digit range. The company anticipates flat to slightly positive gross margin in the upcoming fiscal year.

Hibbett expects to further expand its store base in fiscal 2015 by opening about 75 to 80 new stores. In the future, the company plans to shift more of its new store openings to the front half of the year as opposed to the back half of the year. Additionally, the company plans to expand nearly 10-15 high-performing stores and close about 15 to 20 stores during fiscal 2015.

Disclosure: I am long HIBB. 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.