Hibbett Sports: Looking Expensive After Strong Pandemic Performance

Summary

• Hibbett has had a great run since the market bottom in March 2020.
• In the latest fiscal year, comparable store sales grew 22.2%, e-commerce sales jumped 89.3%, and earnings per share ballooned from $1.52 to $4.36.
• Though momentum could carry the stock further and the outlook appears good, valuations look expensive and insiders are significant net sellers.

Photo by vesilvio/iStock Editorial via Getty Images

Introduction

Hibbett (NASDAQ:HIBB) is a sporting goods retailer with around 1,100 stores under the Hibbett Sports or City Gear banners. Geographically, it is in 35 states, with its largest concentrations in Texas, Georgia, Alabama, and Tennessee. The stores tend to be located at strip malls anchored by tenants like Walmart (WMT) in small and mid-sized communities.

The company has strong inventory purchase agreements with well-branded vendors including Nike (NKE) and adidas (OTCQX:ADDYY) (OTCQX:ADDDF). Over the past three years, for example, Nike represented 65.0%, 67.7% and 65.4% of Hibbett’s purchases, while adidas represented 6.6%, 7.2% and 10.0% of Hibbett’s purchases. Publicly traded peers include Dick's Sporting Goods (DKS), Foot Locker (FL), Genesco (GCO), Shoe Carnival (SCVL), and Big 5 Sporting Goods (BGFV), as well as online competitors like Amazon (AMZN).

Here at Contra the Heard Investment Newsletter, we purchased HIBB in December 2018 for $15.01. In October 2020, we unloaded 40% of our position at $43.55 and 30% at $48.19. Then in January the remainder of the position was sold at $55.50. Despite these solid gains, we obviously left too much on the table for other investors and the stock has continued to rally. Though the hot streak could carry the stock further, it now looks expensive and the valuations appear stretched.

Investors interested in more details regarding Contra the Heard’s history with the name can watch a short clip here.

Thesis Recap

In April 2020, I outlined our thesis for owning Hibbett here on Seeking Alpha. Those who are interested can read that article here. In summary, the stock was purchased in 2018 because it had a strong balance sheet, a history of stock buybacks, and the valuations at the time appeared low versus the market, many industry peers, and where HIBB’s valuations had traded historically.

Moreover, the retailer was pushing hard into e-commerce at the time and had an atypical business model. Instead of attempting to compete in all markets, they operate in underserved small and mid-sized communities. Another related prong of their strategy is that the company targets store locations in existing strip malls that are already anchored by a large tenant like Walmart. Being located at centres anchored by reliable tenants like Walmart helps drive traffic and allows smaller retailers to ride the coattails of the bigger player. Finally, Hibbett operates primarily in states with relatively low minimum wages and union participation, which helps them keep a lid on their labor costs.

In short, we felt we had a strong investment thesis for the retailer back in December 2018.

2020 Results and Covid Impacts/Benefits

In the latest fiscal year, comparable store sales grew 22.2%, e-commerce sales jumped 89.3%, and even traditional brick and mortar sales expanded 13.3%. All of this translated into improved gross margins and a sharp increase in annual earnings per share, from $1.52 to $4.36. These results are outstanding and helped cash on the balance sheet swell from $66.1 million to $209.3 million.

In the latest corporate presentation, management noted the performance was driven by stimulus payments, continued omni-channel adoption, and market disruption, including the temporary and sometimes permanent closure of competitors. On the latest conference call, management dove into the competitive environment in more detail and noted the impact of closures of JC Penny and Sage Stores that started to trickle through in the third quarter. Hibbett’s competitive position was aided further in August, when Nike cut wholesale distribution relationships with competitors Belk, Fred Meyer, Zappos, and City Blue. Add in the fact that the surviving mom-and-pop shops lack online distribution capability, and the pandemic has been good for Hibbett and its other large publicly traded peers including DICK’s Sporting Goods, Foot Locker, and Big 5 Sporting Goods.

Outlook and Valuations

Over the next year, executives hope to capture $20 million to $40 million in incremental sales thanks to reduced competition. They also expect to attract and retain new customers and accelerate e-commerce development. Comparable store sales are projected to be slightly negative to slightly positive, gross margins are expected to decline 1.3% to 1.7%, and earnings per share is predicted to land between $5.00 and $5.50 versus $4.36 in the prior year. Investors interested in further details may want to tune into the June 24 Investor Day.

There is no doubt momentum is strong, and the outlook appears good. Moreover, a recent Bank of America report increased HIBB’s price target from $78.00 to $93.00. According to Yahoo Finance, though, 11 analysts rate Hibbett as a hold, while three have it as a sell, and only one has it as a buy. Most importantly, however, the valuations appear lofty.

Data courtesy of Morningstar.

The company’s valuations today are well above 5-year averages on most metrics. The price-to-sales ratio is nearly double the average at 0.97, and is higher now than at any point since 2014. The price-to-book ratio is also at a post-2014 high and is more than double its 5-year average. Meanwhile, the price-to-earnings ratio stands at 18.48 against a historic average of 12.46, and the forward price-to-earnings ratio is 33.11 versus a historic average of 13.73. Enterprise valuation metrics such as EV/EBIT are also lofty.

One could argue that Hibbett’s peers are overvalued as well, but even within its peer group the company looks relatively expensive. Below is a table compiling Seeking Alpha valuation data for HIBB and its peers.

	HIBB	BGFV	DKS	FL	GCO	SCVL	Average
P/Sales	0.94	0.39	0.73	0.81	0.42	0.90	0.70
P/Earnings	18.48	7.45	14.44	19.15	---	55.84	23.07
P/Cash flow	6.61	2.88	4.75	5.74	5.02	13.98	6.50
P/Book	3.40	1.76	3.00	2.21	1.40	2.84	2.44
P/F-Earnings	16.72	---	17.57	12.04	13.57	16.04	15.19
P/F-Cash flow	18.24	---	17.48	12.03	---	12.72	15.12

Click to enlarge

Data amalgamated from Seeking Alpha on May 4, 2021.

As this data suggests, HIBB is more expensive than its nearest peers on a price-to-sales, price-to-cash flow, price-to-book, forward price-to-earnings, and forward price-to-cash flow basis.

Chart and Data courtesy of INK Research.

It appears insiders are wise to the lofty valuations. In March and April of 2020, insiders purchased roughly $665,000 in stock at prices between $9.00 and $12.30. This was astute buying, as the subsequent rally suggests. Fast forward to the present, however, and the story has turned. Over the past year, insider selling has displaced buying, and insiders have been net sellers to the tune of $5.57 million. Will their selling be as good as their buying was in early 2020? Time will tell, but the valuations imply that their decisions to sell are not without merit.

Conclusion

Hibbett has had a great pandemic run, and the stock had an excellent 2020. In the latest fiscal year, comparable store sales grew 22.2%, e-commerce sales flew up by 89.3%, and earnings per share ballooned from $1.52 to $4.36. The outlook for this year is impressive too, with earnings per share expected to land between $5.00 and $5.50. Momentum could carry Hibbett further, but valuations look expensive versus peers and on many metrics when compared to their long-term averages. Analysts are generally lukewarm on the company, and behind the scenes, insiders have been significant net sellers over the past year, to the tune of $5.57 million.

Though we certainly generated a meaningful gain on the name here at Contra the Heard Investment Newsletter, we left too much on the table for other investors. There are lessons to be learned here, such as selling in more tranches, and letting the momentum run its course. In the current environment, the stock appears expensive and the valuations stretched.

Analyst’s Disclosure: I/we 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.

The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. Contra the Heard Investment Newsletter is not an investment advisor or financial advisor. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.