Living and learning: We acknowledge that our Feb 2016 thesis of HIBB was erroneous. To some extent, short-term externalities have moved against Hibbett, leading to a few particularly bad quarters. Additionally, there is a more ominous downward shift underway. We accept that a) HIBB has no moat (previous rating: Narrow Moat), b) that it is far too late in joining the e-commerce space, and c) that the company is mature and has now entered the decline phase of its life-cycle.
Market stats: Stock price $13.7, P/BV below 0.9, a historic low EV/NOPAT of 8.6x, P/E of 5.6x.
Thesis: HIBB’s glory days are over. Despite the cutthroat nature of retail, HIBB managed impressive performance on the merit of a sound location strategy and airtight operations. HIBB’s small-box-in-small-town strategy managed to expand ROICs from 14% to 21% from ’08 to ’15. But the lack of a durable moat, the secular e-commerce shift, and an ongoing retail crisis have initiated the beginning of Hibbett’s slow-decline. Despite this, several weak quarters and guidance shortfalls have led Mr. Market to overstate the bad news.
We recommend a buy today for a short hold period of one year. As the adage goes, time is the friend of the wonderful company, the enemy of the mediocre. Hibbett now falls into the latter bucket.
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 is almost always located at strip centers, 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:
- Rapid store-growth from 613 to 1078 – while increasing profitability.
- ROIC has ranged from 13-21% (after accounting for Operating Leases and removing Cash), HIBB’s low CapEx has resulted in growing FCFs.
- Debt-free ROEs have ranged 21-45%.
- BV/sh grew by over 4 times, at a rate of 15% yoy.
- Management has proven to be prudent operators and great capital allocators.
- HIBB is a no-moat business with some operational strengths. It is worrying that management does not consider Amazon.com as a competitor. Instead, the company claims its main competition are countless independent small-town sports retailers. While this is true, Hibbett’s price-sensitive customers will face no switch-cost opting for online stores selling the same items for drastically lower prices. Market studies reveal that sports apparel and footwear can be profitably sold at prices up to 40% below their brick-and-mortar equivalents. It’s safe to assume that customers will accept small inconveniences (say, of not being able to try-out shoes and waiting a few days for shipping) for such large savings.
- Late to the party: HIBB has been half-heartedly discussing launching an e-commerce store since 2012. There were times when management pegged it as ‘not materially relevant’ to their customers. After years of delay, the company has released a full-functioning online store in the summer of 2017. It now faces a learning curve that behemoths Amazon and Zappos have already mastered. HIBB’s online store will also likely cannibalize same-store-sales.
- Hibbett will not perish the way lesser competitors like Sport Authority have. It will take a cut both in store-growth and profitability – indicated by the lackluster FY 2017 performance attributed to price markdowns and reduced sales volume.
- Reliable future trends: Customers in the future will more tech-savvy and therefore more comfortable with ordering online, not less. Customers will always opt for lower prices. Running B&M stores will always be more expensive than online stores. HIBB will not out-compete Amazon in the e-commerce space. Upcoming e-retailing features like Amazon Wardrobe (customers will be shipped apparel for free to ‘try-out’) and same-day shipping will continue to destroy differentiating factors of physical stores.
by Shabbar Husain Kothari