We think margin pressures will intensify in 2012, and estimates are too high. It's premium multiple is fine when it's printing 20-30% growth. Not 0-10%.
We think that HIBB, once one of the most attractive growth stories in retail, is setting up to be a good short. For those who don’t know Hibbett, it is one of the least known, but most successful, retailers in the Sporting Goods space. The company operates 825 stores throughout the South. It is unlike Dick’s Sporting Goods and Sports Authority in many ways, one of the most notable of which is the size of the store. DKS and TSA run at about 46,000 square feet, while HIBB is about 5,000.
But the biggest differentiating factor is its strategy, which is to find a shopping center where there is a Wal-Mart, and dirt cheap rent in the shopping center (because WMT puts the prior tenants out of business). Then HIBB comes in and sells Nikes, UnderArmour, and $250 baseball bats. In other words, it feeds off of Wal-Mart’s traffic much like a remora does a Great White.
The biggest concern we have with this story is that it is structurally different than it was in prior years, but the multiple does not know it yet – and we think it will in 2012.
Back in 2003-2005, this was the ultimate ‘cult stock’. UnderArmour was driving traffic into the market, Nike was playing catch-up and turning the product engine into overdrive. At the same time, HIBB had 12% square footage growth, with seemingly unlimited upside. 12% square footage growth + MSD comp growth on top of the lowest SG&A hurdle in Sporting Goods retail = 30-40%+ EPS growth. Heck…it was worthy of being a cult stock.
Margins Topping Out
After a lackluster 2008-10 when HIBB missed square footage growth targets and consistently put up negative comps for the first time in a decade, FY11A and FY12E (Jan) are back to 30-40% EPS growth. But the growth and margin characteristics are almost definitely topping out.
- First off… With square footage, we’re looking at the law of large numbers. Even if store growth accelerates to 40 stores NET of closures, assuming that the company can execute, then we’re still only looking at 4%-5% square footage growth. The recent management changes certainly won’t help execution.
- We have no reason to think that comps will decline, but we think the upside surprise and benefit from another Alabama football championship is already reflected in the stock. Recall that it was only two years ago when both the Tide and Saints won their respective titles it added 3.5pts to HIBB’s Q4 comp and then another 2pts in Q1. We expect the combination of an Alabama/LSA title game to add roughly 2pts to Q4.
- In December, both CEO Jeff Rosenthal and Chairman of the Board Micky Newsome sold stock.
- Then today we saw news of CFO Gary Smith leaving the company come across the wire. He’s leaving behind a perfectly capable team, but there’s something about a 12 year veteran walking away without a successor lined up that just doesn’t smell right. Let’s respect the fact that Mr. Smith is only 64 years old, and has at least several years left in him. Having been passed over two years ago for the top job might have left a bad taste in his mouth. Regardless, he probably is not leaving ‘bc 2012 looks so dang good’.
- Gross margins are at peak (36%) and further expansion from current levels is getting incrementally tougher, particularly with Nike getting so aggressive with price increases, incremental competition coming down the pike in the Department Stores (thanks to the dominoes that are set to fall from Ron Johnson’s actions at JC Penney), and Foot Locker moving into the next phase of its turnaround adds competition in the mall. If FL does not pressure HIBB directly, Finish Line will.
- Of companies with exposure to the growing online threat that is AMZN, HIBB is among the most vulnerable due to the fact that it is the only retailer we know of that doesn’t have an ecommerce business.
With the stock now trading at over 20x and 11x our 2012 EPS and EBITDA estimates, respectively at the very high end of the range over the last four years, it appears to be pricing in a significant reacceleration in square footage growth, further gross margin expansion, or both. DKS trades at 17x; FL 13x; FINL 12x.
Slowing Growth, Slowing Turns = Dramatically Lower Multiple Support
We have earnings growth going from 30%+ over the last two years driven by 4 points of operating margin expansion to LSD over the each of the next two years as store related expenses increase in an effort to drive top-line growth. It might be tough to maintain its current multiple if growth expectations need to come down.
Check out our SIGMA and Management Scorecard for HIBB
SIGMA: HIBB has pulled a complete 180, and now has inventories building on the margin, which is very gross margin bearish. Ordinarily, when we see moves like this, the stock acts accordingly. HIBB has not – YET.
Management Scorecard: This measures Asset Turnover (x axis) by tax-adj EBIT margins (y axis). Simply put, its easy for a stock to trade at 20x+ earnings when both turns and margins are headed up simultaneously. But HIBB no longer has that on its side. Not only that, if our model is right, then we’ll see a reversal in this trend over the next two years, which – as noted above with EPS growth, has obvious implications for HIBB’s premium multiple.