After Hibbett Sport's (HIBB) second quarter earnings call , I noted that there was a large discrepancy between management's guidance and the analyst community's opinion on earnings for the rest of 2013. At the time, I noted that I thought management was being overly conservative, but that I was staying on the sidelines to see what happened this quarter. To be honest, this "staying on the sidelines" mentality made me miss out on a 20% upside move throughout the quarter.
Management updated their guidance on the most recent quarter and what was the result? Well, it was somewhat mixed. Because of a strong quarter and good visibility into Q4, the company did remove the lower end of their guidance, but the guidance is still below analyst estimates. What's more, analysts slightly raised their estimates after the call. I will say, I was impressed with the quarter and management commentary, but I'm going to stay on the sidelines once again. This probably doesn't mean much to investors considering my previous recommendation led to a miss of 20% gains, but I do not believe that the story has changed that much to justify the move. Additionally, I believe that other sporting goods retailers, like Big Five Sporting Goods (BGFV) and Dick's Sporting Goods (DKS), provide better value at these levels. Let's get into the details of the quarter.
Update from the Last Call
Here are the most important updates from the recent quarter
- Comparable store sales increased 4.8% for the quarter. Sales overall were only up 2.5% due to the calendar shift ($17MM impact).
- Average ticket was up mid-single digits and traffic was slightly positive.
- Gross margins decreased to 36.8% from 37.2% this quarter last year due to increased promotional activity and markdowns associated with inventory. Management noted that these were planned promotions and no changes occurred as a response to competitor activity.
- This year's new stores are performing more than 20% above pro forma. This is a very important item to note. This supports an acceleration of store growth in 2014 (management stated they have more stores in the pipeline next year than this year's 72 to 75) and makes the new stated goal of 1500 stores (up from 1300) more realistic.
- Comps by month were as follows: August, up 8.7%; September, down 2.3%; in October, up 7.3%. The first 2 weeks of November were up low single digits. August makes up 40% of Q3 sales.
- For the quarter, HIBB opened 16 new stores, expanded 4 high performing stores and closed 4 underperforming stores, bringing the store base to 904 locations.
- SG&A increased 122 basis points as a percent of sales in the quarter, mainly due to deleverage in salaries and benefits. Again, this is mostly due to the week shift in the fiscal calendar.
- The Affordable Care Act will impact next year's EPS by $0.11 to $0.12 per diluted share. There will also be some duplicate rent expense next year as the company transitions to its new wholesaling and logistics facility.
- The company was hoping for an Alabama vs. Florida State national championship game in NCAA football, but that doesn't look probable now that Alabama has lost. Analysts noted that there was upside to comp guidance if this occurred. Now you might see a slight reduction in estimates after the loss. Auburn making the national championship would help. NCAA licensed goods are a big piece of the company's apparel business.
The Bear Case - The Low-End Might be Gone, but it's Still Overall Lower Guidance
As we reviewed last quarter, it seemed like management's guidance seemed too low for the rest of the year. During this quarterly call, the company took out the low end of the previous guidance. Fiscal year guidance is now in the range of $2.68 to $2.77. This compares to previous guidance of earnings per diluted share in the range of $2.65 to $2.77. It's good to see the upgraded guidance, but we have to realize that this is still below the range given 2 quarters ago ($2.85 to $3.05) and the stock is now trading at an all-time high. Furthermore, analysts slightly raised their estimates for the company after this quarter to $2.75 for the year. With only one quarter left in the year, one has to think that even if the company is being conservative, they have pretty clear visibility one quarter out. This creates the situation where the company could come in line with their guidance and the stock could sell off on that news.
The Bull Case - Guidance Seems Conservative
As analysts have pointed out, the company's guidance does seem low for the coming quarter. Let's take a look at the breakdown:
EPS Trailing 3 Quarters | $2.06 | |
Q4 2012 Sales | $217,407 | |
2013 Back Half Comps | 0% to 5% | |
Low | High | |
Revenue | $217,407 | $228,277 |
Operating Income | $28,263 | $34,242 |
Net Income | $17,805 | $21,572 |
EPS | $0.69 | $0.83 |
| Total Year EPS | $2.75 | $2.89 |
As you can see, even my low-end guidance (which assumes 0% comps, no benefits from store growth or share repurchases, and margin deterioration) comes in at the high-end of management's guidance. Considering the recent performance of HIBB combined with strength in the sporting goods segment and a projected expansion in holiday spending, I too believe that management's guidance is too conservative, setting up the opportunity for a beat-and-raise quarter.
Nationwide Expansion Plan
The company has laid out an aggressive expansion plan to grow the store base to at least 1300 locations (this may end up being 1500 locations as we noted above). The company will also be closing down underperforming stores during this process, so there will be even more new locations, which provide better returns because of a lower initial investment.
Unit Economics
In the company's recent presentation, management laid out the unit economics of a new HIBB store:
These are pretty impressive returns, mostly attributable to the low initial investment. You could say this is a positive in that it makes sense to expand rapidly with such a low initial investment, but I would also warn, it could become much tough to find enough locations that meet that low-initial investment requirement. If costs increased to open, considering only $80K in store contribution, margins could deteriorate rapidly. For now though, with the commentary that new stores are doing better than pro-forma projections, I think we can believe that the company will do a good job growing the store base.
Balance Sheet/Capital Allocation
The company currently has $70MM of cash (4% of market capitalization) and no debt on the balance sheet. Despite that cash, the company doesn't pay a dividend (and we don't want them to either - with those returns on new units why would they give us back the cash?). During the third quarter, the Company repurchased 134,406 shares of common stock for $7.1 million, for an average cost of $52.80.
Valuation
Let's take a look at the valuation of HIBB compares to its competition
P/E | EV/EBITDA | EV/Sales | |
DKS | 18.0x | 9.0x | 1.0x |
BGFV | 12.5x | 6.5x | 0.4x |
HIBB | 21x | 11.0x | 1.7x |
We see that HIBB trades at a higher multiple than its competition. This makes some sense considering the higher revenue growth due to unit expansion, but the two other companies still provide above-average growth. I am very bullish on the industry, but I believe that BGFV and DKS are better ways to play the trend.
Short Interest is High
One thing I wanted to point out was the fact that HIBB has an almost 20% short interest ratio, most likely due to its higher valuation. This creates a situation where a "short squeeze" could occur if the company were to report strong results. Though I think there are better alternatives, I do not think the business model is flawed. Because of this high short interest ratio, I would not suggest that investors short the stock, even though I do believe the stock could sell off if results came in at the midpoint of the company's guidance.
Risks
Risks for the company include:
- Inability to find new real estate locations to keep up growth
- Worse than expected results - analysts' estimates are still bullish, creating possible downside from performance coming in line with management's guidance
- Poor performance of college and professional sports teams within the company's core regions of operation - now that Alabama has lost analysts may lower their comp estimates (this makes a real difference in their business)
- Loss of a key vendor
Catalysts
Risks for the company include:
- Results that come better than management's guidance (seems very possible)
- Accelerated store expansions
- A strong holiday and winter season
Conclusion
Overall, I thought this was a mixed quarter. I thought the commentary was pretty strong and believe that HIBB should have a good holiday season. But, I am concerned that even with this commentary, the guidance is still lower than it was 2 quarters ago for Q4 and the stock price is at an all-time high. Again, I think there are better alternatives. I will be awaiting company guidance for next year during the next quarterly call.
Disclosure: I am long BGFV, DKS. 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. (More...)
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