HIBB – As Good As It Gets

Takeaway: This quarter should be as good as it gets for HIBB. Don’t get used to it.

We think that HIBB is one of the most structurally challenged retailers out there. But we’re definitely not counting on the company showing its true colors with the print this Friday. This quarter is literally as good as it can get for HIBB. 1) Wal-Mart, from which HIBB draws traffic in its core market, just printed the first positive traffic comp in nine quarters. 2) Athletic retailers like Dick’s and Foot Locker both printed solid comps in the last two weeks (DKS +3.4%, and FL +10%). 3) HIBB went against its second-easiest comp in over five years in the month of January. All-in, the comp for 4Q14 will more likely than not come in ahead of the Street’s 3.2% expectation. Somewhere in the mid-single digits is more likely, with EPS closer to the low $0.70s vs. the Street at $0.68.


So…what does this mean? It means that HIBB is our least favorite type of call. The kind where we say it’s a short, but where estimates in the upcoming quarter are too low. When we hear someone make that kind of pitch, it usually ends up being a really lousy call.  


So how and why can we stick with a short call on a name in the face of a likely positive event?  A few reasons... 


1) Smoking Required. HIBB absolutely positively has to smoke this quarter due to factors above (see charts below). Again, the climate has never been more favorable for a retailer like HIBB. The stock is up 10% relative to the market over the past month. If it does NOT smoke numbers, then it spells big trouble for this company.


2) e-Commerce Hit Inevitable. It’s no secret the company needs to install an e-commerce platform. It should be very expensive – costing 3-5 points in margin over 12-18 months before a dollar in revenue is recognized. Will HIBB announce that initiative on Friday? We don’t know. It will be some time this year. They’re just prolonging the inevitable.


3) Huge Estimate Gap. The gap in margin between our estimates and the Street’s are simply colossal. This year, we’re 7% below. That’s not huge. But in ’16 we’re at $2.06 vs the Street at $3.33. By the time we get to year 5 of our model, we have HIBB earning $1.35 vs the Street at $4.74.  The point here is that if we’re calling for estimates to come down next year by nearly 40%, we’re hardly going to be spooked by a few pennies on the upside.  


WMT Traffic – Key For HIBB Comp – Positive For The First Time In Nine Quarters

HIBB – As Good As It Gets - hibb wmt comp traffic


FL Comp Trends Are Off The Chart. Not Identical Businesses, But Close Enough.

HIBB – As Good As It Gets - FL Comp Trend


Ditto For DKS – Though Less Positive Than FL. Comp Driven By e-Comm (which HIBB does not have), Brick&Mortar Down

HIBB – As Good As It Gets - dks comp trends


HIBB Monthly Comp Trend Shows The This Quarter Goes Against Second Easiest Comp In Over 5-Years

HIBB – As Good As It Gets - hibb monthly comps


HIBB – Hedgeye Financial Summary

HIBB – As Good As It Gets - hibbfinancials



  • 5% of employees (450 positions) eliminated by end of 2014
  • Gaming consolidation underway in Las Vegas
  • Highly confident in seeing improvement in FCF starting in 2H 2015
  • Gaming ops:  Average daily revenue/footprint increased 10% YoY in 2014
  • Lower installed base: One single customer reduced slots by 259 in 4Q 
  • $18.5m not added to Attributable EBITDA -consisting of $6.2 million of impairment charges associated with the Monopoly Millionaires Club™ game (of which $5.7 million impacted cost of instant games and $0.5 impacted depreciation and amortization), $5.2 million of impairment charges related to inventory obsolescence (of which $3.1 million impacted cost of services and $2.1 million impacted cost of sales), $4.0 million write-down of certain receivables from international customers included in selling general and administrative expense and an incremental $3.1 million charge in earnings (loss) from equity investments related to the additional shortfall payment booked by the Northstar Illinois joint venture for the lottery's fiscal year ended June 30, 2014.
  • No significant maturities until 2018.  Paid down $18m in revolver to fund Bally acquisition. 
  • Currently liquidity of $538m
  • FCF: priority is to pay down revolver
  • 2015 Capex: $320-$350m (15-25m integration related capex)
    • Spending mainly on lottery side of business
  • SG&A:  $85m of charges previously described; $11m restructuring expenses ($1m WMS-related)
  • 7% increase revenue in UK installed base
  • 4Q: 228 IL VGT units shipped
  • 4Q replacement: 4,511 (848 units YoY increase)
  • Maintenance revenue virtually flat
  • Table revenue down $1m 
  • Lottery services revenue declined $5m (low performance of Powerball and MegaMillions). 2015 better start due to large Powerball in February.
  • Lottery: benefited from lower OpEx and lower termination expenses  
  • Interactive: $3m from Bally
  •  Key priorities:
    • 1) customers
    • 2) focused on integration initiative
    • 3) discipline in management of deployment of capital

Q & A

  • Feedback from customers: similar budgets as last year
  • Believe increased wallet share in Q4
  • Leverage:  Q4 included $135m of cash-based charges. Continue to invest wisely and get appropriate returns. 
  • 2015 Gaming:  relatively flat with a slight increase in share 
  • 2015 Lottery: Europe doing better
  • Gaming systems:  long lead time. Expect some big sales.  ALH rollout is very exciting - for the smaller-end market.
  • NOL balance at end of 2014: will be in the 10K (will be filed on Monday)
  • Cash taxes:  tens of millions from foreign results
  • Q4 Replacement units:  Bally had a stellar performance with Wave cabinet and Shuffle products. 
  • Gaming ops: customers are used to operating in 'new' environment. Mixture of luck, lower gas prices, and better weather also playing impact.
  • Salesforce integration:  training session. So far, so good.
  • Pro-forma 12mth ended: Cash based interest expense was $615m 
  • In purchase accounting, eliminated deferred revenues that Bally had ($27m). $5m of that $27m would have been in Dec Q. The other $22m will be impacted in 1H 2015.
  • Greece (OPAP):  contract being finalized now. SGMS was selected as a contractor. 
  • Can you get Interactive margins to 30-35%?  Rolling out mobile part of interactive.  Spending more there which has adversely impacted margins. 
  • Area of disappointment:  non-WAP premium units declined in 2014.  Customers had to reduce costs in that sector.  
  • Good performance with Wonder Woman and Flintstones 
  • S23 Cabinet will be launched this year and a couple of more products
  • The $15-25m of integration capex is in addition to the $70-80m disclosed previously
  • Low Gas price impact:  instant ticket sales are up but don't know definitely if there is an impact
  • Attributable EBITDA from Equity investments: $70.8m in FY 2014
  • Writedown in receivables:  related to Gaming business in Latin America

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Takeaway: Stocks are down a lot but still at July 2013 levels – a time when estimates were higher, the outlook brighter and risks greater.


It’s been a year since we made the first call of our three pronged short call and we remain bearish on Macau stocks. Yes, the sell side has caught up and most analysts are bearish. While the stocks have fallen a lot, they have only reached July 2013 levels. We’ve made the bear case in many ways over the past year but the purpose of this note is to show that there is downside precedent. In July of 2013, 2015 Street EBITDA estimates were much higher than they are now and the short, intermediate, and long term growth forecast was much greater.


Please see our detailed note:

Keith's Macro Notebook 3/11: Euro | Yields | Sentiment

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

What is the Risk of Oil Storage Capacity Constraints?

Takeaway: If current trends can continue (which would be a stretch for the bull case), we could likely see a problem by June in Cushing, OK.

The domestic production machine goes on for now, but a sequential deceleration in production growth is well underway.

The EIA released its monthly drilling productivity report Monday which showed more of the same. Production levels and efficiency continue to increase as storage capacity dwindles:

  • Rigs continue to come offline at an ACCELERATING rate
  • Production levels are still delta positive on both a m/m and y/y but  DECELERATING
  • Production per rig is also delta positive on a m/m and y/y basis but DECELERATING

What is the Risk of Oil Storage Capacity Constraints? - Rig Table


What is the Risk of Oil Storage Capacity Constraints? - Baker Hughes Rig Count Chart


In the recent past we have been producing approximately ~1MM B/D in excess of what we’re consuming domestically. And now the question becomes… When will this present a big problem? The case that an infrastructure lag will put a floor in prices is straightforward, but considering we’re only 2/3rds full in aggregate, there is plenty of pain between now and the point in time where the production surplus will be at a critical state.

  • For 9 consecutive weeks the EIA has reported an AGGREGATE crude oil inventory build to new all-time highs
  • For 14 consecutive weeks, the country’s main trading hub in Cushing, OK has reported a positive inventory build

Cushing, OK remains a focal point because of the transportation constraints that excess crude flow could cause if pipelines are forced to be utilized in a storage capacity. Storage capacity at Cushing is also being filled much faster than the country’s storage availability in aggregate as it is a main crossroads for crude flows to the Gulf. 


What is the Risk of Oil Storage Capacity Constraints? - DOEvf vs. Cushing Change in Inventory Build


Inventories in Cushing remain well short of full capacity, and well short of levels reached as recently as 2013.


In January of 2013, Cushing had 51.675MM barrels of Oil in storage and only about 65MM barrels of capacity which translated to:


  • January 2013: 80% capacity utilization (Spot WTI moved -12% peak to trough from January to April after capacity utilization peaked)
  • March 2015: 66% capacity utilization (using the methodology outlined below)

Cushing inventories have only recently turned positive on a Y/Y rate-of-change basis and remain below 2013 levels (a point in time where storage capacity was much lower). 


What is the Risk of Oil Storage Capacity Constraints? - Cushing Inventoriesvf


What is the Risk of Oil Storage Capacity Constraints? - Cushing Capacity Tablevf


Should current trends continue, which we peg as unlikely, storage capacity in Cushing may be full by June. The EIA only reports storage capacity data semi-annually (September 30th and March 31st), so we have assumed the average increase in 6-Month storage capacity above since the shale revolution started. 


WTI crude oil remains in a BEARISH FORMATION (TRADE, TREND, TAIL) with our intermediate-term TREND duration price deck in a range from $36.38-$58.02. 


Please feel free to ping us with comments or questions.


What is the Risk of Oil Storage Capacity Constraints? - levels chart


Ben Ryan











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