Closing shop on Hibbett Sports, Inc.

Ticker: HIBB | Price as of Dec 18th, 2017: $20.90

First, a quick update on the expectations embedded in today’s price:

Sales growth rate CAGR: -2%

Operating profit margin: 7%

Reinvestments over the next five years: 65m

Tax rate: 35% (statutory)

WACC CAP period: 10%

WACC Steady-state: 8%

Inflation: 1.9%

Analyst note: We have come a long way with Hibbett Sports HIBB since Jan 2016 ($30). My initial thesis asserted an intrinsic value of $43 – stressing on a over-reaction to short-term pessimism about the retail industry. I put great faith in HIBB’s operational excellence, its superior ROIC track record, and its clustering small-box store expansion strategy. Most worryingly, I pegged Dick’s Sporting Goods DKS as HIBB’s most formidable threat and gave only a passing mention to Amazon, Inc AMZN.

For the following nine months, the market concurred with the thesis and the price rose to exactly that of my valuation – $43. Instead of following due process and selling the stock, I decided to hold on a little longer.

That’s when the story took a nosedive. Over the following nine months HIBB consistently underperformed quarterly guidance, saw the bankruptcy of one of its key peers, and delayed its e-commerce launch – all in the backdrop of an ever more harrowing environment for brick-and-mortar retail. The stock crumbled to $10 in August 2017.

That is when I decided to review & revise the thesis. Having originally assigned a narrow-moat to HIBB, I was forced to change my mind and concluded that HIBB’s moat has been eliminated by e-commerce, a fast-adapting customer, and its own complacency to move with the times.

In August 2017, we looked at HIBB with fresh eyes – protecting myself from the sunk-cost fallacy. At $13.5 & $11.8, our implied expectations model showed that the market was wildly irrational about Hibbett’s future, even after accounting for the absence of a moat and the many threats facing B&M retail. I chose to BUY once again in light of this. My Aug 2017 valuation asserted a fair value of $26.

Today (Dec 2017) HIBB has observed another significant correction in its price to ~$21 – owing largely to the success of its new e-commerce platform. I have since lowered my fair value to $23. The capital gains we enjoyed since Aug 2017 have entirely offset the losses we suffered from the Feb 2016 purchase. It will not be long before we sell all of our shares in Hibbett (when it hits ~$22) – and receive little more than a breakeven. This stock reminds me of Buffett’s immortal words – “Time is the friend of the wonderful company, the enemy of the mediocre.” I foresee Hibbett as a well-run business that enjoyed great returns in its heyday but has now begun a slow-decline while it flounders to online behemoths.

What I earned most from our investment in HIBB were the following lessons in investing:

  1. When a stock corrects and enters in the ballpark of your fair value, do a fast revision of your thesis. If all of your original arguments hold true, do not hesitate and SELL the stock. Keep faith in your process. Fight the temptation to jump the thin line from investing to speculation.
  2. Remember that retail is among the most cut-throat industries known to man. It requires managers to be smart every day, with typically low customer switch costs, and know that most customers will often adapt quickly to the prospect of paying much less for an equivalent or even slightly inferior product. In retail, the sharks never really stop circling you.

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