We first published an article on Hibbett Sports (HIBB) back in March of 2018 when the share price was in the low $20s. The stock proceeded to go on a roller-coaster ride, bouncing in between $15 and $24 per share before settling closer to $26 following strong recent results. We flagged buying opportunities with additional articles in November of 2018 and January of 2019 when the stock price was near $16 per share, but ultimately our investment case has not changed. Our investment case was always based on strong fundamentals and predicated on a number of key pillars including the successful development of an omnichannel business, improving key supplier relationships, especially with Nike and stabilization and eventual improvement in margins and same-store sales.
Many investors may conclude that Hibbett Sports is no longer a buy after the stock price has moved up substantially from its recent lows, but the company has only strengthened its position in the past years and is still materially undervalued. This article will detail how the company has improved its position and the current valuation opportunity, as well as give a view into our trading history and strategy. Ultimately, Hibbett remains a buy and potentially one of the best values in the market.
Hibbett Sports has a leading omnichannel solution
At the beginning of 2017, many investors dismissed Hibbett as being behind the curve regarding critical trends in online shopping, and they were likely correct. But later in the same year, the company would launch a comprehensive and highly effective omnichannel offering that allowed it to leapfrog many of its peers and return to revenue growth. Hibbett not only developed a fresh and easy to use website, but also an app and the supporting infrastructure to offer the services most desired by consumers.
The omnichannel solution offers buy-online-pickup-in-store (BOPIS) which drives traffic to physical stores and is a service online-only competitors cannot offer. Once in store, consumers often make add-on purchases. BOPIS also drives last-minute purchases (think Christmas Eve) as consumers can pick up goods almost immediately and cut-out the risk of packages arriving too late. And, of course, Hibbett saves on shipping costs. The omnichannel solution also allows for an effective loyalty program, makes it possible for customers to see availability on a store-by-store basis and includes value-adding features such as a launch calendar for new shoe models. Hibbett is even rolling out same day delivery via Shipt and flexible payment options with Klarna Pay.
Critically, a leading omnichannel solution like Hibbett also provides the company with valuable customer information and preferences. The information allows for more effective marketing, better product placement and improved inventory management. But more importantly, it also helps improve the company’s standing with key suppliers such as Nike (NKE). Hibbett can easily communicate on-demand levels for specific models in different markets to help both companies improve allocations and efficiency, leading to an improved supplier relationship.
It’s hard to argue that Hibbett’s omnichannel launch has not been a huge success. In a relatively short period of time, the e-commerce business has risen to over 10% of total sales with a growth rate currently over 50% and loyalty enrollments increasing at a rate of nearly 70%. And, the online business is nicely profitable. The company has clearly executed effectively on this pillar of our investment case.
Ultimately, a leading omnichannel platform gives Hibbett clear competitive advantages over smaller players that have little chance of offering a competitive online presence due to scale and the needed capital investment. Hibbett can leverage its offering to survive and ultimately be a leader in the sports apparel industry longer term and also to improve its communications and relationships with customers and important vendors.
Suppliers going DTC is a positive for Hibbett, not a negative
Retail news flow has been full of articles on leading companies such as Nike looking to grow their direct-to-consumer business, leading some to conclude that the situation was hopeless for distributors such as Hibbett. There’s no doubt that technology is changing the retail landscape in drastic fashion, but that doesn’t have to be a bad thing for companies able to adapt to the new reality. In fact, it is a huge opportunity to gain market share and improve industry positioning. With key suppliers like Nike doing more direct-to-consumer business, it’s tempting to think that companies like Hibbett will lose relevance and ultimately market share. But that conclusion is too simple. When we look deeper into what is actually happening, we see quite a different story.
It’s true that online shopping allows competitors or even suppliers to steal sales from companies like Hibbett that were once protected by their geographic positioning. It’s also true that suppliers like Nike want to be closer to the customer and control the data that can be collected by selling directly to customers online. But suppliers like Nike will not open physical locations in smaller markets where Hibbett is active and can still benefit from the marketing and distribution efforts partners like Hibbett offer. What the direct-to-consumer transformation has done, is make Nike much more selective about who they work with in distribution.
Nike has dramatically reduced its number of key distributors down to essentially five, including Hibbett. That ultimately means that Nike will no longer closely work with smaller players that cannot offer what they want, which is likely scale and a leading online presence with all the value-adding customer metrics it brings. So instead of Nike shunning Hibbett and taking their market share, Nike is helping Hibbett take market share from the hundreds of smaller players unable to compete with its omnichannel offering. It’s a huge positive for Hibbett in the short and long term. We already see beneficial symptoms in Hibbett’s results with improved allocations from suppliers helping sales, and critically, improving pricing power. Online shopping does pressure Hibbett into competitive pricing, but exclusive allocations offset that effect to some extent.
Hibbett has improved its relationships with key suppliers like Nike and gained an important competitive advantage over smaller players, which should ultimately result in market share gains and improved profitability. In any case, the company has also executed effectively on this pillar of our investment case.
Valuation and financial metrics de-risk the investment case
Hibbett’s strategic initiatives are just starting to pay off. Critically, margins have stabilized and are returning to growth, greatly de-risking the investment case. Overall revenue growth is impressive due to the City Gear acquisition, but perhaps more importantly, same-store-sales growth has returned to admirable levels, aided by the success of the company’s online business. In the most recent quarter reported, total net sales increased 27% and overall same-store sales increased 10.7%. It was the sixth consecutive quarter of positive comparable sales. Progress on margins and comparable sales growth is also an important pillar of our investment case, and the company has again executed effectively.
The company has a number of growth drivers going forward as well. The City Gear business has only recently been added to the online platform while strong growth in loyalty enrollment should support sales going forward. Many omnichannel features such as same-day shipping have only recently been rolled out and should have a positive effect. Also, the company is likely to improve the efficiency of marketing spend as it adjusts to the learnings of its omnichannel launch and leverages the data collected after its first couple years of operation.
Earnings per share has an additional growth driver with the company’s healthy buyback policy which has resulted in the re-purchase of 6.5% of shares per year on average over the last 5 years. Return metrics should also benefit from the optimization of the company’s store base, partially made possible by the clear success of the online business. The balance sheet has been returned to near-pristine condition as the City Gear-related debt has been largely repaid and the cash balance now sits close to $77 million. The company certainly has financial flexibility to drive growth going forward. We might also flag the announcement of Michael Longo as the new CEO. He was previously the CEO of City Gear, and his appointment as CEO of Hibbett Sports likely means that the City Gear acquisition and company integration is going well, helping to de-risk the investment case.
Most importantly perhaps when we discuss a de-risked investment case, is the attractive valuation of Hibbett Sports. Since forming our initial investment case several years ago, little has changed from our perspective regarding the intrinsic value of the company, despite the up and down stock price journey. Some investors might view the heavy appreciation from the stock price low as reason to sell, but we keep returning to the stable fair value of the company and continue to conclude that Hibbett Sports offers significant upside to patient investors.
Intrinsic value estimates are always imprecise, but we think many investors are underestimating how easily Hibbett Sports could be worth $40 per share or more, which would imply around 50% upside. If we just look at the mid-point of Hibbett’s underlying and sustainable earnings per share guidance for the end of the company’s current year, we see a level of $2.53 per share, which the company itself describes as conservative. Even if the company has absolutely no revenue growth or margin improvement from there, it will probably grow earnings per share by 5% or more just through buybacks. In just one year, that’s an earnings per share of $2.60-2.70. An earnings multiple as low as 15x produces a share price of about $40, or close to 50% upside. Our conservative discounted cash flow model builds in revenue growth of just 2% and results in a fair value closer to $50 per share. It’s not easy to find a more attractive valuation for a quality company in today’s markets.
We actually trimmed our Hibbett position at close to $29 per share after recent results. The reduction does not reflect a weakening of the investment case however, and only served to adjust for position sizing and overall fund composition, while also taking some profits. We bought the majority of our shares below $15, and the position size was deemed too large after the run-up to $29 per share. We maintain a sizable position in the company based on the improving investment case and attractive valuation. As a side note, dividend-focused investors may want to look at peer Foot Locker (FL).
Conclusion: Hibbett Sports is still one of the best values in the market
Hibbett Sports has performed well regarding the key pillars of our investment case including launching a leading omnichannel offering, improving key supplier relationships and returning to margin and same-store sales growth. It appears to us that the strategic investments the company has been making, including its recent City Gear acquisition, are just starting to pay off. There are several drivers for continued revenue growth as well as margin improvement, and the company sits on a strong balance sheet. The valuation is attractive, even with conservative estimates. There are certainly risks to the investment case including the possibility of a recession or increased trade friction, and investors may want to control position sizing as the company only has mild barriers to entry. But the company remains one of the best values in the market for those able to handle some volatility.
Disclosure: I am/we are long HIBB, FL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed to or by the author. This article reflects Oyat’s views and does not constitute investment advice.