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.

Valuation

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.