Hibbett Sports: A Retailer with Strong Earnings Growth

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Jan 19, 2015
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Traditional retail has few charms for investors these days, as online merchants keep nibbling away at the edges, and even the core in some cases.

Yet, one small cap retailer consistently posts growing earnings and strong ROE numbers.

Hibbett Sports, Inc (HIBB), based in Birmingham, Alabama has a couple of things going for it in this frosty environment for retail. It sells products that many of us insist on trying on for size before we buy (but I confess, I recently bought my first pair on prescription eyeglasses online). And, it focuses on a key niche —Â counties with populations between 25,000 and 75,000, where it faces less competition from big national chains, and where it can build relationships with customers effectively.

It came onto our radar because of its appearance on the Buffett Munger screener, a screener which pulls up undervalued or fair valued stocks with a history of consistent earnings growth.

This chart shows HIBB’s earnings per share (blue line) and share price (green line):

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You’ll note that while the two lines have tracked fairly closely over the company’s publicly traded history, the current stock price has deviated down and away.

History

1945: High school coach and teacher Rufus Hibbett founds Dixie Supply Company, a retailer of athletic, marine, and aviation equipment, in Florence, Alabama.

1960: Becomes a strictly sporting goods store.

1965: Opens second store; hires Mickey Newsome who becomes a long-time senior executive.

1980: The company is bought by the Anderson family of Florence, which brings in professional management and systems, while continuing expansion; by now the company has 12 stores.

1996: Hibbett goes public on NASDAQ, after having been bought from the Anderson family by investment company Saunders Karp & Co. the previous year.

2007: Hibbett Sports, Inc. becomes the successor holding company for Hibbett Sporting Goods, Inc., which is now the operating subsidiary.

2013: Places 58th on Forbes list of America’s Best Small Companies; Mickey Newsome shifts from Executive Chairman to Chairman.

2014: Adds a 416-thousand square foot wholesaling and logistics center, complete with state-of-the-art automation; it will support up to 1,500 stores (currently the company has just under 1,000 stores).

History based on information in the company’s (combined) Annual Report & 10-K for Fiscal 2014, FundingUniverse, and Forbes.

Takeaways: Hibbett Sports, Inc. is a 70-year old company that has gone through several transformations. It has built itself up with organic growth and good management (making the Forbes’ list of America’s Best Small Companies).

The Hibbett Business

The company has had a variety of names during its history; the official name, as listed on its most recent 10-K is Hibbett Sports, Inc., registered in Delaware and headquartered in Birmingham, Alabama.

It operates two subsidiaries, Hibbett Sporting Goods, Inc., for the retail business, and Hibbett Team Sales, Inc. which specializes in team products.

At the end of fiscal 2014 (February 1, 2014), it operated 927 stores and one separate division:

  • 910 Hibbett Sports stores: about 5,000 square feet and located mainly in strip malls near Walmart stores, which “... offer a core selection of quality, brand name merchandise with an emphasis on team sports. This merchandise mix is complemented by a selection of localized apparel, footwear, equipment and accessories...”
  • 17 Sports Additions stores: dedicated to athletic footwear, some caps, and a limited assortment of apparel. More fashion-based than Hibbett Sports.
  • Hibbett Team Sales: “...customized athletic apparel, equipment and footwear primarily to school athletic programs in Alabama and parts of Georgia, Florida and Mississippi. Team sells its merchandise directly to educational institutions and youth associations. The operations of Team are independent of the operations of our retail stores.”

With its own ecommerce website, Hibbett has moved into a space that has cost many retailers significant chunks of their businesses. Although the company is late moving into this space, it feels confident its local expertise allows it to compete effectively with both traditional and online competitors.

The company has established a moat, of sorts, by focusing on a market space generally ignored by the big national chains: Counties with populations ranging between 25,000 and 50,000. Within these counties, Hibbett looks for leading retail space in the largest town, with emphasis on strip malls and a nearby Walmart.

This strong regional focus, Hibbett says, gives it several advantages:

  • lower corporate expenses
  • reduced distribution costs
  • increased economies of scale from marketing activities
  • “...greater customer, vendor and landlord recognition as a leading sporting goods retailer in these communities. We believe our ability to more effectively merchandise to local community sporting interests differentiates us from our national competitors.

The company has grown around a single distribution center, in Birmingham, Alabama. It expects this facility to provide capacity for up to 1,900 stores.

Revenue

The company reports all results as one segment. However, this excerpt from its 10-K for fiscal 2014 shows how revenue breaks out by product:

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No single customer accounts for more than 5% of sales.

Revenue: Here’s how Hibbett’s revenue has grown since going public (note that the section in yellow and beyond reflects analysts estimates for future revenue growth):

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Competition

HIBB reports in its 10-K that the markets it serves are highly competitive, but adds that “... we believe the competitive environment for sporting goods is different in smaller markets where retail demand may not support larger format stores.”

Yahoo! Finance lists competitors as Foot Locker, Inc. (FL, Financial), privately held Sports Authority Inc., and Walmart (WMT, Financial). However, the company does not consider Walmart a competitor (in fact it tries to locate in strip malls anchored by Walmart) because it carries a different product mix.

A Motley Fool article on Hibbett lists Dick’s Sporting Goods (DKS, Financial) and Big Five Sporting Goods (BGFV, Financial) as major competitors.

Other: the dates of Hibbett’s fiscal year vary from year to year, as noted in its 10-K:

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Unless otherwise noted, this section is based on information provided in the 10-K for Fiscal 2014 report.

Takeaways: While it may not enjoy complete moat protection, Hibbett has found a Goldilock’s solution: Markets big enough to generate decent revenues, but not big enough to attract the big national chains. Sports shoes bring in the biggest single portion of revenue.

Growth Prospects

First, here’s how Hibbett has grown its top and bottom lines (green line for revenue, blue for earnings per share; yellow section indicates analysts’ estimates):

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Looking ahead, it has several productivity improvement projects underway which should increase customer satisfaction and boost the bottom line:

  • a new labor scheduling system
  • a markdown optimization system
  • a new business intelligence system
  • an upgrade to its merchandise allocation system, and as noted
  • a new distribution facility.

Mainly, though, the company will rely on new stores and expansion of some of its existing stores. For fiscal 2015, it expects to add 75 to 80 new stores, expand 10 to 15 stores, and close 15 to 20 underperforming stores (Annual Report & 10-K for fiscal 2014).

By fiscal 2019, it expects to operate about 1,300 stores. In its Annual Report for 2014 it says expanding into the rest of the country should not be a problem as long as it keeps targeting counties of 25,000 to 75,000 population.

Takeaways: Hibbett Sports has quietly grown itself from 12 stores in 1980 to nearly a thousand now, successfully using the same model over and over (much like Walmart in its early days).

Management

Chief Executive Officer and President: Jeffry O. Rosenthal, age 56, has held these positions since 2010; he also served as Vice President of Merchandising from 1998 through 2009. Earlier, he was an executive with Champs Sports, a division of Foot Locker, Inc. from 1981 to 1998.

Senior Vice President and Chief Financial Officer: Scott J. Bowman, age 47, was hired in July 2012. Previously he held senior financial and IT positions at The Home Depot.

Chairman of the Board: Michael J. Newsome, age 75, joined the company in 1965; previously served as CEO and Executive Chairman.

Board of Directors: a board of 10 with two related directors (CEO and Chairman), and eight independent directors. Their experience and expertise includes retail, finance, merchandising, accounting, manufacturing & distribution, sporting goods, private investment (formerly a major shareholder), and banking.

ISS Governance QuickScore: a score of 4, which indicates a medium level of governance risk (1 indicates low risk, 10 indicates high risk). It receives one red flag, for Use of Equity, and one green star for Other Issues.

At the beginning of fiscal 2014, Hibbett employed about 2,900 full-time and some 5,200 part-time staff, none of whom are unionized. The company operates an employee development plan and special training for new managers. (Mangement and Governance based on information at the company website)

Takeaways: Hibbett Sports has a well qualified team of senior managers and a board with a wide range of connections. Together, senior management and the board should be capable of continuing the company’s growth.

Ownership

Gurus: Four of the leading investors followed by GuruFocus own shares in Hibbett: Jim Simons (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), and Joel Greenblatt (Trades, Portfolio). The biggest holding belongs to Greenblatt, with 536,572 shares.

Institutional Investors: Three large mutual funds own almost 30% of the company:

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Short interests: Despite the strong record, Hibbett has a sizeable number of shorts: 15.5%, but as the following chart shows, the short trend has been generally downward from a high of almost 30% in 2008:

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Insiders: Only about 1% of shares are owned by insiders, but senior management and board members do have significant stakes:

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Takeaways: Ownership data suggests the market is somewhat nervous about this retailer.

Hibbett by the Numbers

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Takeaways: A small cap trading well below its 52-week high; strong ROE: no dividend and modest share buybacks.

Financial Strength

The GuruFocus system awards Hibbett high scores for both Financial Strength and Profitability and Growth: 8/10 for each:

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We see one red icon in the chart: Cash to Debt. That comes as a surprise since Hibbett has no current long-term debt, and that its long-term debt topped out at $2.9 million a year ago.

In fact, this metric flagged because of relative numbers. The following table from GuruFocus shows why:

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Cashflow: as a retailer, and a sports retailer at that, Hibbett has pronounced seasonal cash flows:

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On a longer-term perspective, we get some assurance from information in the Annual Report for 2014, “We ended the year with $66.2 million in cash and cash equivalents and no debt. For Fiscal 2015, we anticipate fully funding another year of growth investments and share repurchases with our strong cash flow.”

Takeaways: All signs (some when examined more closely) indicate good financial strength, profitability, and enough free cash flow to fund its expansion plans and share buybacks.

Valuation

Hibbett Sports gets a high predictability rating from GuruFocus, 4.5 Stars (out of 5). That means it has consistently grown its revenue and earnings in the past five years. In turn, this makes its future earnings (and arguably, its share price) more predictable than the vast majority of other stocks.

This consistency is considered a mark of a ‘quality’ company, a company with a strong management team. Uncertainty is the bugbear of most investors, so managers who can deliver relatively predictable results are themselves highly valued.

In its backtesting, GuruFocus has found that the more predictable the company, the better the return to shareholders. Highly predictable companies deliver better returns to investors than less predictable companies.

Turning to objective valuation, the Buffett Munger screener uses PEPG or PEG. That is, the P/E ratio divided by average EBITDA growth over the past five years.

As of the close of trading on Jan.16, 2015, Hibbett had a P/E ratio of 17.40 and a five-year EBITDA growth rate of 22.00%. Dividing the former by the latter gives us a PEG ratio of 0.79, which is deemed undervalued. PEG ratios of less than 1.0 are considered undervalued, those between 1.0 and 2.0 are fair valued, and those above 2.0 are considered overvalued.

Investors will also be watching HIBB’s strong Return on Equity (ROE) numbers. The following chart shows its ROE since becoming a public company:

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Seasonality

Investors buying into a seasonal business, such as retail, may want to time their purchases of shares.

As we’ve noted and seen, Hibbett’s results vary with the seasons. As it reports in its 10-K for fiscal 2014, “Customer buying patterns around the spring sales period and the holiday season historically result in higher first and fourth quarter net sales.” The first quarter normally begins in late January or early February.

The following chart, from StockCharts.com, shows the percentage of months in which HIBB stock closed higher than it opened.

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The chart suggests that the odds of getting off to a good start are best in early March, April, October, and November. Based on data from 2011 through the end of 2014 (note that this is a limited amount of data on which to base conclusions), you might consider timing your entries and exits by the seasons.

Takeaways: Hibbett Sports offers an undevalued company with a history of strong earnings growth.

Opportunities & Risks

Hibbett’s opportunities essentially focus on finding counties with appropriate populations, 25,000 to 75,000. Currently, it operates in 31 contiguous (next to each other) states, a bit more than half the states on a simplistic count.

It has not yet opened stores on the west coast or across the northern states. In all of these states, there are areas that might suit its strategy and format. In addition, backfilling in some states currently served may present opportunities that fit with its tactic of clustering around the single distribution center.

In a broader context, there’s an ongoing emphasis on staying active for better health. And just about everyone who exercises to any degree needs appropriate shoes.

At the same time, it sells for manufacturers and marketers such as Nike and Reebok, which means an ongoing flow of new footwear products (a shoe is never just a shoe in this world), along with lots of advertising to get consumers into new and different models regularly.

The company still has an opportunity to grow into online sales; it’s a new area--the subject isn’t even mentioned in Annual Reports or 10-Ks before fiscal 2014. Whether that will turn out to be a profitable growth option or a money sink remains to be seen.

Risks

Since new shoes and athletic wear represent discretionary purchases, Hibbett will feel the effects of depressed economic conditions.

Similarly, bad weather can cut into sales in a material way, something with which many retailers have experienced in the past year. As a regional, rather than national, chain Hibbett is more exposed to this risk.

It depends on a single distribution center - if that center were forced to close, the company could be seriously affected.

Hibbett sells quite a bit of licensed team sports merchandise, which means it depends on those teams posting winning enough to keep fans on side.

While some 1,000 stores provide some clout, the company still does not have as much buying leverage as some of the bigger chains.

Walmart has experimented in recent years with smaller footprint stores, allowing it to expand into areas not previously feasible. Can major, national sports retailers do the same?

Outlook

In the short term, the analysts covered by Yahoo! Finance expect good earnings growth. The average estimate for these 19 analysts is $3.03 for fiscal 2016 (which ends about a year from now), compared to $2.76 for fiscal 2014 which is about to end. That’s about a 10% increase.

Looking at the longer term, Hibbett appears to have a proven strategy for growth, a well-understood niche, and a management team capable of delivering on their market’s potential.

While erosion to online retailers remains a real possibility, the need for fitting of sports shoes and clothing should keep lights on in Hibbett’s brick and mortar stores for some years to come.

Conclusion

Given the healthy short-term and long-term outlook, Hibbett Sports is perhaps an anomoly among retail stocks, and deserves more attention.

The company pays no dividend, so it won’t work for income investors. But it can finance its new store growth through its own cash flow. In turn, that means a healthy balance sheet and an ability to weather crises brought on by external events.

With its record of strong EBITDA growth and Return on Equity, Hibbett Sports should be a candidate for investors seeking capital appreciation in a small cap.