Be Careful Trying To Time A Bottom At Hibbett Sports

| About: Hibbett Sports, (HIBB)
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Sporting goods retailer Hibbett Sports has struggled to find profit growth in FY2014, due in part to margin pressure from a greater use of product discounting.

The company's relatively weak financial performance has led to a sell off for its stock price in 2014.

With a forward P/E multiple of roughly 18, the company seems to have more downside risk than upside potential and investors should probably avoid the story at current prices.

Shareholders in sporting goods retailer Hibbett Sports (NASDAQ: HIBB) are probably not too happy with the company's stock price trajectory in 2014, down more than 20%. The company has been hurt by a drop in its operating profitability during FY2014, a performance that management attributed to an increase in overall product discounting activity, culminating in a 0.8% decline in operating income. On the upside, though, Hibbett Sports has continued to post respectable top-line growth, thanks to a healthy expansion of its store network, providing hope for a return to profit growth in the future that would be capable of supporting a higher market valuation. So, at its discounted price, is the company a good bet for investors?

What's the value?

Hibbett Sports is a growing player in the retail trade of sporting goods products, operating a network of roughly 1,000 stores around the country that sell a diverse assortment of apparel and equipment, with a particular focus on team sports. The company has anecdotally benefited from consumers' increasing utilization of sports-related apparel as everyday attire, a trend that has helped to keep its sales on an upward growth trajectory over the past five fiscal years. Not surprisingly, Hibbett Sports' operating income has also risen sharply during that time period, up 117.4%, funding a steady expansion of its overall store base.

Unfortunately, Hibbett Sports' favorable profit growth story took a bit of step back in its latest fiscal year, evidenced by a 1.8% drop in its operating income. The company was negatively impacted during the period by a slowdown in its sales momentum, with its comparable store sales rising 1.8% compared to a 6.9% gain in the prior year period, a downward trend that management partially blamed on weather-related factors. The reduced sales momentum forced Hibbett Sports to employ a greater use of marketing tactics in order to move merchandise, leading to a decline in its operating margin, down roughly 80 basis points. The net result for the company was lower operating cash flow, bringing into question the company's ability to continue expanding its store base at such a fast clip.

Looking into the crystal ball

The question for investors is whether Hibbett Sports can find its way back to profit growth in the future, thereby providing a foundation for a higher market valuation. On that score, things aren't looking great, judging by the company's aforementioned decline in operating income during FY2014. Much like the situation in the prior-year period, Hibbett Sports has been hurt by a relatively elevated level of product discounting in the current fiscal year, as well as from the rising overhead costs of supporting a further geographic expansion of its store base, including recent moves into the states of Delaware and Pennsylvania.

Of course, Hibbett Sports isn't the only sporting goods retailer struggling to manufacture profit growth in the current operating environment. Category kingpin Dick's Sporting Goods' (NYSE: DKS) results have told a fairly similar story in FY2014, evidenced by a 3.8% decline in its adjusted operating income. Despite solid overall top-line growth during the period, up 9.1%, the company has been negatively impacted by notably weak sales in the golf and hunting categories, focus areas for the company through its specialty store segment. The net result for Dick's Sporting Goods has been a need to increase its level of discounting activity in order to generate customer transactions, culminating in generally lower-than-expected profitability, a performance that has led to downward pressure for its stock price in 2014.

The bottom line

Hibbett Sports is certainly cheaper than it was at the start of the year, after a double-digit, stock price decline to-date in 2014. However, with a forward P/E multiple of roughly 18, the company doesn't seem to be particularly cheap, given its operating profit decline in the current fiscal year. While management recently raised its earnings per share forecast for the current fiscal year, the forecast equates to a modest 1.7% increase versus the prior year period, a performance that wouldn't seem to support a higher market valuation. As such, Hibbett Sports appears to have more downside risk than upside potential at current prices and investors should probably avoid the story.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.