Hibbett’s runway mis-priced by Mr. Market (Feb 12th 2016)
Thesis: At the current price of $31, the base-case valuation of $43 indicates a BUY with a 30% margin of safety. HIBB’s slip in margins and short-term pessimism about the retail industry has led to a mispricing.
What does it do?
Hibbett Sports Inc. (HIBB) operates small-box (5000 sq. feet) Sporting Goods retail stores in small counties in the United States with a population ranging from 25-75 thousand. It sells premium branded apparel and equipment, and almost always is located at strip centres, where a Wal-Mart store is the crowd-puller.
How has it done so far?
HIBB has had a stellar performance over the past 10 years:
- Number of stores near-doubled from 527 to 988 – while maintaining profitability.
- ROIC has ranged from 13-17% (after accounting for Operating Leases), WACC ~10%. HIBB’s low CapEx has resulted in growing FCFs.
- Debt-free ROEs have ranged 18-30%.
- Owners Value Creation of $9.3/sh via growth in BV/sh, which is 2.5x 2006 BV/sh.
- Management has proven to be prudent operators and exemplary capital allocators.
Does it stand out?
HIBB is a narrow-moat business with operational strengths:
- Focused locations in small counties in the U.S. allows them to exploit lack of competition and tailor product- mix according to local interests.
- Small-box store strategy allows for flexible and efficient store growth.
- Laser-focus on inventory management and distribution helps cutting costs.
- Highly trained staff – especially important for advanced athletic equipment. This is a moat that cannot be encroached by e-commerce giants such as Amazon.
- GCO, FINL and BGFV are competitors most like HIBB. They fare much poorer to HIBB in overall profitability.
- Threat: DKS, a Sporting Goods Superstore, has indicated plans to enter smaller-market locations.
What does the future have in store?
- HIBB has at least 5-7 years of growth with its existing strategy. Continue building new stores and expanding existing stores within small counties within the U.S. There are over 3,000 counties in the U.S.
- Intends to grow store-count by 30% (1,300 stores) by 2019.
- Clustered expansion program allowing for Economies of Scale.
- Continued attention to logistics management
- Continued focus on its own e-commerce platform.
- No plans for international growth.
Estimated Intrinsic Value/sh range: Worst-case $27, Base-case $43, Best-case $60.
FCF growth CAGR has been 16% over the last 10-years. There is no evidence of a loss in HIBB’s quality as a business – nor any major threats from competition. Even so, Price-implied expectations are 0% FCF growth in the future – a rather unlikely scenario.
Total Return to Shareholder
Based on the assumptions above and a buy-price of $31, we project a TRS of 21% CAGR (2.1x initial investment), for a 4-year time horizon.