Description

Hibbett Sports (HIBB) is an athletic-inspired fashion retailer headquartered in Alabama operating under two banners- Hibbett Sports and City Gear. It was last written up by TallGuy in 2018 as a short. Since then, a new management team and major structural changes by its primary supplier Nike have resulted in a stock that I believe is attractively valued. At the current stock price of $45 the company has a market capitalization of $585m, has $17m of cash, no financial debt, and $280m of operating leases for an enterprise value of $850m.  The company ended FY22 (fiscal year-end 1/31) with 1,096 stores comprised of ~900 Hibbett’s, 175 City Gears, and the 20 Sports Additions athletic Shoe Stores. Footwear represents 2/3 of revenues, apparel 25%, and the remainder is sports equipment. While one can look online at the different stores in general they are similar to a Foot Locker but more fashion-forward and tailored to the specific regions where they are located.  

I initially looked at the stock when I learned of the structural changes Nike was undertaking to rationalize their distribution partners. In 2021 Nike announced they would stop selling shoes and apparel to third tier partners such as DSW and JCP. The decision was made to gain tighter control over the shopper experience and pricing and refocus on digital distribution. Furthermore, last month Foot Locker came out on their earnings call and announced that they would be receiving less product:

“Our guidance includes a meaningful vendor mix shift. Beginning in the fourth quarter of 2022 and going forward, we do not expect any one vendor to comprise more than 55% of our product spend. By comparison, this is down from approximately 65% in the fourth quarter of 2021. This change reflects Nike's accelerated strategic shift to DTC and Foot Locker's ongoing brand and category diversification efforts. For the full year of 2022, this would equate to approximately 60% Nike concentration, down from 70% for 2021 and 75% for 2020.”

This immediately caused all athletic retail stocks to drop precipitously. 

While amorfati wrote up Dicks Sporting Goods in October and baileyb906 wrote a compelling pitch for Academy Sports in December I believe Hibbett has been overlooked as a beneficiary of Nike’s strategy. My conviction was strengthened last week when Nike said on their call: 

“Now continuing with the theme of growth, John said earlier that our marketplace strategy is a growth strategy. And so I'd like to go a little deeper on where we are in our journey to create the marketplace of the future, including how we have managed our wholesale portfolio. Over the past 4 years, we have reduced the number of wholesale accounts worldwide by more than 50% while delivering strong revenue growth through NIKE Direct and our remaining wholesale partners. We are now moving into the next phase of our marketplace strategy. We have finished communicating the big account pivots. And our go-forward growth plans are aligned with our wholesale partners. Wholesale partners play an integral role in our future marketplace, first, to authenticate our brands and then to create scale of distribution through a consistent consumer experience across a larger retail footprint. We will drive healthy wholesale growth with our remaining wholesale partners and recapture dislocated demand by elevating our partner's retail environment and digitally connecting NIKE membership with their retail experience. “

So why Hibbett’s? My thesis has 3 key points – the core HIBB customer can’t be reached directly by Nike either online or proprietary retail, management is doing an excellent job ensuring product availability and relevancy and lastly the stock is cheap. Guidance for F23 is for earnings of $9.75-$10.50 per share with free cash flow in line. Haircut that 20% to be conservative (fading stimulus, inflation, etc.) and you still get $7.50- 8 per share. At 8-9x EPS I think you can reasonably get a $60 stock, or +30% from current prices. Furthermore, 21% of shares are short which hopefully someone on reddit picks up on.

The Hibbett Consumer:

I think the primary reason why Nike has decided to partner with the retailer is that the HIBB customer is not one who buys online or has easy access to a Nike store yet really value the product. According to management 80%+ of customers are debit and non-bank cash customers and HIBB provides a way for them to access Nike product. Furthermore, 54% of retail locations have no competitor within 3 miles and 70% of stores only have 1 competitor within 5 miles. Stores are strategically located in the South and East Coast and largely in mid-tier markets with very low overlap. As the CEO said at the analyst day last year:

“Many of the locations we're in do not have large populations and are not considered metropolitan areas. We're in areas like Philadelphia, Mississippi, not Philadelphia, Pennsylvania; or Paris, Texas, not Paris, France. We're often considered the leader of our industry and sometimes the only option for fashion-focused, athletically inspired product in these neighborhoods, making Hibbett significantly important to the local area. We believe by providing a compelling assortment of highly desired footwear, apparel and accessories through superior customer service and best-in-class omnichannel performance to underserved communities, we are creating value for our customers and for our vendor partners. On our complimentary distribution slide, we further highlight the underserved aspects of our locations. Approximately 70% of our stores have 2 or fewer competitors within a 15-minute drive. And when looking at the total distribution footprint for sneakers and athletically inspired apparel, less than half of these markets have what we would consider true competition for our customer base. Each of these factors underscore the advantage of our positioning in underserved markets. Our customers are able to access product they would not otherwise have in an environment that connects them with other fashion-focused and athletic enthusiasts. Our vendor partners appreciate our geographic footprint and store locations because we are consistently presenting their product in an attractive manner to a customer base that they would have a difficult time reaching otherwise. “

This slide from the investor day last year is helpful:

Management:

Mike Longo took over as CEO in 2020 after having sold City Gear to Hibbett’s in 2018. Importantly, prior to City Gear (which he bought in 2006 after AZO and ran as a private investment) he was head of distribution at AutoZone (keep this in mind when we discuss financials and buybacks). He is an ex-military guy and research checks indicate he is a very straight shooter who sets clear goals for the organization and expects to achieve them. He does not sit in an office in Birmingham but rather is out visiting stores and keeping in touch with suppliers. He likes to move quickly.

Since taking over the company he has transformed the business. Gross margins improved from ~30% to 38%, EBIT margins from 4% to 13.5% and over the last two years the company has generated $357m of cash from operations while spending $105m in capx. He has significantly improved the supply chain and in fact brought in extra inventory late in 2021 as he saw dislocations occurring (which should be a benefit to cash flow in 2022). Two year comp sales are +44%.  

While one can argue that the stimulus checks and COVID benefited the company (and retailers in general) I believe the company has structurally improved. Loyalty members now represent 56% of all shoppers and VIP (the premier tier) grew 16% y/y. Furthermore, traffic to their websites increased 30% y/y last quarter with e-commerce sales representing 17% of total revenue. Recall their average customer is unable to check out online given banking constraints but uses the website to know when to come in.

The Financials: 

In F20 HIBB reported revenues of $1bn, EBIT of $44m and adjusted EPS of $1.77 on 19m shares outstanding. Fast forward to F22 and the company just reported $1.7bn in revenues, $228m in EBIT and adjusted EPS of $11.19 and ending shares of 14.1m. The company has used the AZO model and aggressively repurchased shares – buying back nearly $300m or 5m shares in the last two years. 

While the company benefited significantly from the stimulus checks my contention is that a large part of those gains in financial performance are structural and will be maintained. Furthermore, with the support of Nike they should grow again with plans for 30-40 new stores within their current regions.

At the analyst day the company guided to F25 revenues of $2bn, EBIT of ~$300m which would imply EPS of $15-17 per share (depending on one’s assumptions for share repurchases). 

However, there is a long time between now and then and guidance for F23 is for $9.75-$10.50 on flat net sales and some margin give back. Sustaining capital is equal to D&A though the company will invest an incremental $30m to build new stores and improve their distribution logistics. On the 4Q call in March the company gave the example of Natchez, MS where they built 2 new stores in the past year with ROIC exceeding 20%. I believe HIBB has an important role to play in providing access to their target customer with the relevant athletic fashion-inspired product with the support of Nike. Haircutting their guidance by 20% implies earnings of $7.50 - 8 per share, the majority of which will come back to investors through share repurchases. At 7-8x earnings, I think the stock could trade to $60 by the end of the year. 

Lastly, my primary risk would be any change by Nike to reduce distribution. Nike is their largest supplier at over 60%. Other risks include consumer headwinds from rising inflation though I believe that their core customer between 17 and 30 years old views fashion, and particularly athletic-inspired fashion as a core good and should be more resilient to shopping at HIBB.  

Catalyst

Valuation

Resilient Earnings in F23

Continued Share Repurchases