Tuesday, September 5, 2017

Hibbett Sports

Hibbett Sports (HIBB) sells footwear, sports equipment and apparel, among other things. The entire industry has gotten crushed lately - there is blood in the streets. HIBB is down almost 70% in the last year alone. Competitors like Dicks and Foot Locker are also getting crushed.

The main narrative in the media is that Amazon is eating the industry's sales. But Amazon is only 8.5% of the retail market, and has existed for many years. HIBB's 2nd quarter same-store sales however were down 11%+, so something else is going on.

The most recent product launches (e.g. Nike runners) did not captivate consumers, and as a result there is too much inventory in the pipeline. Inventory that has to be moved ends up being marked down, and that's why everyone is suffering, as they rush to clear product to make room for what's next.

Like in all industries, when the inventories are cleared from the channel, I would expect the price wars to end, and the situation to return to normal. But in my experience, if you wait until that happens, you no longer get to buy the stocks at fire sale prices.

Management seems to agree that the market reaction is a little overblown, as four separate insiders have purchased shares in the last couple of weeks, including both the company's CEO and CFO.

Despite losses in Q2, HIBB still expects earnings for the full year of $1.25 to $1.35, which gives it a P/E of 9. (In the last four years, the company has averaged EPS of almost $3 per share!) In addition, the company has a cash balance (and no debt) of 20% of the company's market cap!

Like other retailers, however, HIBB does have operating leases. But they are much shorter than those of its competitors: about 1/3 of HIBB's store leases expire every year, giving the company a lot of operating flexibility relative to competitors.

HIBB also has room to cut capex and stop opening new stores if present market conditions persist for a long time. Management has suggested that based on the company's current stock price, they intend to become more aggressive with share repurchases. This is abnormal behaviour, as normally companies repurchase more shares when their stock prices are high and stop repurchasing when they are low, the opposite of what they should do!

HIBB was also late to the game with its e-commerce product. This could act as a tail-wind going forward as over time they may go on to generate online sales matching those of their brick-and-mortar competitors.

Overall, HIBB looks to me to be very undervalued with a strong operating history and good management, that operates in a risky industry. Hence I bought shares as part of a basket of other risky companies (e.g. financials) where I believe the odds are in my favour, but where the downside risks are still high.

For a deeper dive on the company, this is a very good article, though you may have to suppress giggles at the author's unconservative downside risk estimate.

Disclosure: Author has a long position in shares of HIBB


V Shah said...

Hi Saj,
Thanks for sharing this holding.
I've compared the last 15-years share return of HIBB & DKS, and DKS has performed better on share price and also giving out Dividend.
Any thoughts on DKS vs HIBB? Or are both buys at this stage?

Saj Karsan said...

Hi V,

I think they are probably both cheap. However, I put little to no emphasis on either share price performance nor dividend when making an investment decision.