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Hibbett (HIBB) Research Report: Q1 CY2024 Update


Full Report / June 05, 2024

Athletic apparel and footwear retailer Hibbett (NASDAQ:HIBB) missed analysts' expectations in Q1 CY2024, with revenue down 1.8% year on year to $447.2 million. It made a GAAP profit of $2.67 per share, down from its profit of $2.74 per share in the same quarter last year.

Hibbett (HIBB) Q1 CY2024 Highlights:

  • Revenue: $447.2 million vs analyst estimates of $453.9 million (1.5% miss)
  • Gross Margin (GAAP): 35.8%, up from 33.7% in the same quarter last year
  • Locations: 1,169 at quarter end, up from 1,143 in the same quarter last year
  • Same-Store Sales fell 5.8% year on year
  • (4.1% in the same quarter last year)
  • Market Capitalization: $1.03 billion
  • JD Sports will acquire the company for $87.50 per share in a $1.1 billion transaction, expected to close in 2H24

With a focus on small and mid-sized markets, Hibbett (NASDAQ:HIBB) is a specialty retailer that sells athletic apparel and footwear as well as select sports equipment.

The core customer is anyone who prefers wearing athletic-inspired clothing and footwear. It could be a fitness enthusiast who needs workout clothes, a basketball team fan searching for a team sweatshirt, or a high school softball player who needs a new uniform. At a typical Hibbett store, these customers will find clothing and sneakers from brands such as Nike, Adidas, and Under Amour as well as fan gear.

What sets Hibbett apart from peers is its focus on smaller markets that may be underserved by larger retailers. The company is also known for curating its store to fit local tastes. For example, a store in a football-oriented market might carry more football-specific apparel and accessories than a store in a market that is dominated by basketball. Team apparel also reflects local pro teams.

A Hibbett store is fairly small, averaging 5,000 square feet, located in strip malls or shopping centers in small and mid-sized markets. Hibbett also sells online, having launched its e-commerce platform in 2008. Customers can either shop for Hibbett products and have them delivered to their home or shop online and pick up in store on the same-day.

Sports & Outdoor Equipment Retailer

Some of us spend our leisure time vegging out, but many others take to the courts, fields, beaches, and campsites; sports equipment retailers cater to the avid sportsman as well as the weekend warrior. Shoppers can find everything from tents to lawn games to baseball bats to satisfy their athletic and leisure needs along with competitive prices and helpful store associates that can talk through brands, sizing, and product quality. This is a category that has moved rapidly online over the last few decades, so these sports and outdoor equipment retailers have needed to be nimble and aggressive with their e-commerce and omnichannel presences.

Retailers offering athletic apparel and footwear include Dick’s Sporting Goods (NYSE:DKS), Big 5 Sporting Goods (NASDAQ:BGFV), and private company Modell’s Sporting Goods.

Sales Growth

Hibbett is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.

As you can see below, the company's annualized revenue growth rate of 9.8% over the last five years was mediocre as it opened new stores and expanded its reach.

Hibbett Total Revenue

This quarter, Hibbett missed Wall Street's estimates and reported a rather uninspiring 1.8% year-on-year revenue decline, generating $447.2 million in revenue.

Same-Store Sales

Hibbett's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 0.2% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Hibbett Year On Year Same Store Sales Growth

In the latest quarter, Hibbett's same-store sales fell 5.8% year on year. This decline was a reversal from the 4.1% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.

Number of Stores

When a retailer like Hibbett is opening new stores, it usually means it's investing for growth because demand is greater than supply. Since last year, Hibbett's store count increased by 26 locations, or 2.3%, to 1,169 total retail locations in the most recently reported quarter.

Hibbett Operating Retail Locations

Over the last two years, the company has generally opened new stores and averaged 3.1% annual growth in its physical footprint, which is decent and on par with the broader sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Gross Margin & Pricing Power

Hibbett has subpar unit economics for a retailer, making it difficult to invest in areas such as marketing and talent to grow its brand. As you can see below, it's averaged a paltry 34.4% gross margin over the last two years. This means the company makes $0.34 for every $1 in revenue before accounting for its operating expenses.

Hibbett Gross Margin (GAAP)

Hibbett's gross profit margin came in at 35.8% this quarter, marking a 2.1 percentage point increase from 33.7% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Hibbett generated an operating profit margin of 9.2%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Hibbett Operating Margin (GAAP)

Zooming out, Hibbett has done a decent job managing its expenses over the last eight quarters. It's produced an average operating margin of 8.6%, higher than the broader consumer retail sector. However, Hibbett's margin has slightly declined by 1.7 percentage points year on year (on average). This shows the company has faced some small speed bumps along the way.

The company's operating profitability was particularly impressive because of its low gross margin. This margin is mostly a factor of what Hibbett sells and takes fundamental shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Hibbett).

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Hibbett's EPS grew at a remarkable 34% compounded annual growth rate over the last five years, higher than its 9.8% annualized revenue growth. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.

Hibbett EPS (GAAP)

We can take an even deeper look into Hibbett's earnings quality. A five-year view shows that Hibbett has repurchased its stock, shrinking its share count by 34.4%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, Hibbett reported EPS at $2.67, down from $2.74 in the same quarter last year. This print was close to analysts' estimates. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Although Hibbett hasn't been the highest-quality company lately, it historically found a few growth initiatives that worked out wonderfully. Its five-year average ROIC was 29.9%, splendid for a consumer retail business.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Hibbett's ROIC has decreased over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable business opportunities.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Hibbett is a well-capitalized company with $28.68 million of cash and $7.55 million of debt, meaning it could pay back all its debt tomorrow and still have $21.14 million of cash on its balance sheet. This net cash position gives it the freedom to raise more debt, return capital to shareholders, or invest in growth initiatives.

Key Takeaways from Hibbett's Q1 Results

We were impressed by how significantly Hibbett blew past analysts' gross margin expectations this quarter. On the other hand, its revenue unfortunately missed analysts' expectations. None of this matters, however, as JD Sports will acquire the company for $87.50 per share in a $1.1 billion transaction. The deal is expected to close in the second half of 2024, and the stock is flat after reporting. It currently trades at $86.55 per share.

Is Now The Time?

Hibbett may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Hibbett, we'll be cheering from the sidelines. First off, its revenue growth has been mediocre over the last five years. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its shrinking same-store sales suggests it'll need to change its strategy to succeed. On top of that, its brand caters to a niche market.

Hibbett's price-to-earnings ratio based on the next 12 months is 10.0x. While we've no doubt one can find things to like about Hibbett, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $83.88 per share right before these results (compared to the current share price of $86.55), implying they didn't see much short-term potential in Hibbett.

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