Hibbett: Short-Term Headwinds Offer A Good Entry Price

Summary

• The main strategy of Hibbett has the ingredients for fighting its main challenges: DTC trends in its big key vendors and eCommerce.
• The market price has plunged in the last months but the worst scenario might be already discounted.
• At the current price, and even being more conservative than the management, Hibbett could achieve a 46% CAGR in the next three years.

EXTREME-PHOTOGRAPHER/E+ via Getty Images

Introduction

Hibbett's (NASDAQ:HIBB) market price has experienced a big sell-off in the last months due mainly to poorer results with respect to last year's figures. In the long term, the main challenges it faces are the trend of its key vendors to increase their sales Direct to Consumer (DTC) and the low barriers to entry of new eCommerce competitors. But Hibbett's strategy of targeting underserved areas with high customer service and alignment to local preferences will make it return to considerable growth year over year in the future.

The current market price is reflecting short-term pessimism based mainly on last results comparisons with exceptional results of last year and with current inflation. And this volatility might persist in the coming months, but in the end, and making a quite conservative valuation, this price seems to be a good opportunity to enter.

Strategy

I like that managers of the companies I follow clearly state their primary strategy. In this way, I can evaluate how it has performed in the past, whether they are acting consistently with it, and guess what they will do in the future.

In the case of Hibbett, in the last 10K report, they say:

We target underserved markets with branded products and provide a high level of customer service. This market strategy establishes greater customer, vendor, and landlord recognition as a leading specialty retailer in these communities. We believe our ability to align our merchandising mix to local preferences and trends differentiates us from our national competitors and delivers incremental sales opportunities for our vendor partners.

Regarding underserved markets, in the corresponding call, commenting on these results, they said that approximately 54% of their stores will have no competition within three miles, which offer products from their key brands. And up to 70% with none or only one.

Of course, there are more factors to take into account. But it is a good start, and in the same call, they gave more color talking about a specific market in Natchez, Mississippi. A trade area of approximately 22 miles with no competitors within 50 miles. Where in two stores, they expect a forecasted ROIC well in excess of 20%.

They trade branded products, so they don't need to spend significant amounts on design and marketing. But on the other hand, they cannot expect the same margins as if they marketed their own products, and they are more dependent on their key vendors.

Their strategy is to provide a high level of customer service, consistent with selling branded products in discretionary consumer retail. This approach can also be beneficial when confronted with current trends, like eCommerce. At least, the price will not be the only arena where to fight.

Finally, they also give high importance to personalization. And what is more important from my point of view, they clearly articulated in this statement that in this way, they will add value to their key vendor partners, allowing them to make incremental sales.

Risks

Every strategy approach has its own risks, and as such, we have to decide and make some trade-offs. What is good for one thing might not be so good for others.

As previously said, selling other brands' products makes a company dependent on its key vendors. Following Porter's competitive strategy analysis, we have to be aware of the bargaining power these vendors can have and try to add enough value to be able to deal with them efficiently. In this case, it is especially relevant, taking into account the trend of big sports brands such as Nike (NKE) or Adidas (OTCQX:ADDYY) to integrate their operations vertically and sell Direct to Consumers.

During the last call, Jared Briskin, Executive Vice President of Merchandising, answered a related question in this way:

But again, as far as our positioning with the key vendors, they very clearly understand our strategy. They very clearly understand what we bring in a very, very highly differentiated environment. The focus on the underserved consumer. Our increased investment in consumer experience is continuing to put us in a strong position with all of our strategic vendor partners.

Personally, I think, this vertical integration can bring some benefits to these and other big brands. But these kinds of products, apparel, will always require some physical presence, and with this strategy, they won't be able to reach the whole market. Leaving space in local retailers would allow competitors to take market share and won't help maintain their significant expenses in design and marketing. From my point of view, it makes sense for Hibbett to focus its efforts on a great consumer experience in underserved areas.

This same strategy is valid against the possible rise of competition from eCommerce. In the end, online shopping is the main alternative in underserved areas. It wouldn't make sense to compete with eCommerce only in price when you have to maintain the stores and personnel. But if you focus your offer on good customer experience and we are talking about products that consumers like to touch and try before shopping, we can be confident they will survive to new competition in this area.

Short-term

In the short term, the sentiment about the Hibbett market price seems to be very negative. The price fell from $101 in November 2021 to a current price of around $43 (down approximately 57%). And still, it bears a short interest of about 20%.

The results of the last quarter didn't help. Sales increased 1.7% with comparables sales of minus 1%. Michael Longo, Hibbett CEO, attributed these poor results to four main causes: a surge in COVID-19 cases, inventory, inflation, and income.

Obviously, a pandemic is not the best friend of a brick-and-mortar retailer. Inventory issues were caused by supply chain disruptions which affected especially footwear. Inflation, especially in fuel, food, and housing, affected the available income to purchase goods. And finally, the removal of the stimulus can also have had some impact.

The big question for me is if these causes will persist and if they can cause some impact in the long term. I guess that most of the shorts are expecting further weakness in the price in the coming months driven by more inflation (affecting especially discretionary consumption) and by next quarters comparisons with last year's quarters, where the stimulus was still in place.

In any case, given the financial position of Hibbett, with no debt, and the flexibility they have in deciding if open the new forecasted stores, it seems they will be able to survive if the economic conditions don't go much worse or don't last much more.

For this year, 2023 for them, as the start of their period is the 30th of January, they expect no growth in net sales versus last year. And comparable sales negative low-teen in the first half, and high single-digit in the second half. But they still see it attainable to get $2B in sales by 2025. Historically, since 2005 they have achieved a CAGR of 9%.

Historical Performance (Presentation Call Q4 2022)

Valuation

The other big question is if the price is already discounting the worst possible scenario and if therefore, it is a good moment to initiate a position in Hibbett.

Suppose we assume no growth in sales for this year, as they have predicted. With an increase of 2.5% in the next one and then 5.0% in 2025, they would achieve $1.8 billion, still below their outlook of $2 billion in sales for that year.

Their outlook also said they expected a gross margin in the range of 36.7% and 36.9% for next year and an operating margin in the low double-digits, which is in line with what they achieved in the past. Let's be conservative, as we are assuming they won't get their target and sales, and consider an operating margin of 7.5%.

With these data, they would get an operating income of $136.5 million by 2025 (still below last year's result). Using a multiple of 10, we would get an enterprise value of $1.36 billion. And finally, removing the cash they would have generated with these assumptions ($393.4 million), we would get a target price of $135.58 in 2025, which would make a CAGR of 46% from the current price ($43.18) in these three years.

Rough Valuation - Hibbett (Created by Author)

Conclusion

Of course, even being conservative and not taking the management's outlook for granted, the results could be much worse, and the price could not get to that level in many years.

In any case, I think with the current valuation, there is a wide margin for taking positions with a long-term view. Even with the threat of some further volatility in the short term, we cannot be sure if the price will decrease much from this low level. So I think it is worth initiating a position or even increasing it if it is already in our portfolio.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HIBB either through stock ownership, options, or other derivatives. 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.

Comments

[DCF All Day]

Great article! One thing I would add is the continued buyback activity. Based on the recent Proxy statement, they have reduced the share count to 12,972,162. This equates to a ~467K shares repurchased in Q12023 through April 7th, 2022. That equates to 3.476% of the shares outstanding at the end of FY2022.

Compare that to DKS, where a few analysts expect $450MM of buybacks for this full year or ~5.625% of their market cap. Which means if HIBB kept up the pace in Q12023, they would almost hit the same % reduction in the first 3 months of the fiscal year.

Share Count
January 29th, 2022: ~13,439,364
March 22nd, 2022: 13,139,364
April 7th, 2022: 12,972,162 (~467,202 reduction)

From the 10-K

"Subsequent to January 29, 2022, we repurchased 0.3 million shares of our common stock as of March 22, 2022 at a cost of $12.6 million, including 8,277 shares acquired from holders of restricted stock unit awards to satisfy tax withholding requirements of $0.4 million."

"The number of shares outstanding of the Registrant’s common stock, as of March 22, 2022, was 13,139,364."

From the Proxy

"Percent of class is based on 12,972,162 shares of Company common stock outstanding at April 7, 2022."

[Ricardo Naya]

@DCF All Day Thank you. Yes, good point. And as more time the price stays at these levels more shares they will be able to buy.

[benet1800]

Thanks for the article on this company. I do own a small chunk of it as I love their balance sheet and the strategic placement of their stores. I do recall reading that Nike is going to continue to use them as a preferred provider because of their small-town strategy serving so-called underserved markets. In any event, I think three years from now I will average at least 20% per year and probably. I just cannot sell this one although I’ve tried to.

[Ricardo Naya]

@benet1800 Thank you for your comment. Good news that Nike appreciates their strategy. It is difficult to know where is going to go in the next months, but in the long term I think it will go up.