Takeaway: This management team is playing defense in a game it simply cannot win.
Conclusion: The reversal in the stock today says it all. Great quarter. But top line trends are decelerating, costs are accelerating, and capital requirements are going nowhere but up. Any form of growth from here on out – in existing stores, new stores, and online, will all come at a lower margin. This year will be a roller coaster (mostly down) but we think next year’s earnings miss becomes explosive. Still one of our top shorts.
- Comps beat printed Street estimates – which we expected. 5.4% 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.
- Comps 1QTD are down MSD. February comps were up against a tough 7.2% comp last year. That month carries the bulk of the volume in the quarter. We think it’s close to 40%, though management indicated it was 35% of the quarter, the math just doesn’t add up. If we look at the numbers from last year it would mean that weights by month were Feb 35%, March 49%, and April just 16%.
- For the quarter, in order to climb out of the hole and get to flat on the year, HIBB would need to average a 3.3% comp in March and April. To get to 1%, the math works out to a 5% comp in March and April. We don’t think that happens.
Costs Accelerating: The $0.12 in cost pressure in FY16 is just the beginning of a multi-year investment cycle for HIBB. Most of that is driven by investment to build an e-commerce operation from scratch. For the year it’ll cost HIBB somewhere in the range of 50bps-60bps in operating margin. That won’t go away in 2017, in fact it will accelerate (more on that below). We also think it’s important keep in mind that the hurdle rate for HIBB at a 3% comp (which the company has been unable to achieve in over 2yrs) makes it very difficult for the company to leverage fixed cost on both the COGS and SG&A lines.
- Distribution – HIBB currently outsources distribution for about 20% of its stores. With only one DC located in Birmingham, AL it’s extremely difficult for the company to efficiently supply its new stores popping up in states like PA, MN, and WI. That means the majority of new growth comes in at an incrementally lower margin. That will compound itself until the company builds a new DC that can service these markets, which has its own capital and margin implications. But, HIBB has to tap new geographies in order to drive the top line – the company’s core southern markets are tapped and competition for consumers in a market that HIBB has historically dominated looks a lot different than it did 4yrs ago. Academy has increased its unit count in the ‘Bible Belt’ by 93% over the past 4 years, Sports Authority and Dick’s Sporting Goods are +45%.
E-Commerce: It appears as if HIBB will finally start making the push towards e-commerce in earnest. Though no concrete timeline was given, it was clear on the call that there is finally a sense of urgency to start competing on the web. Management said it would cost them $0.05 in this upcoming year. That will accelerate as HIBB gets closer to its launch date. All in it equates to about 3-5 percentage points of margin based on what we’ve seen from other companies (to see our Black Book for more detail CLICK HERE).
- The POS system is step 1a in the rollout of an e-commerce channel. Here is how we are thinking about the HIBB’s e-comm needs and timeline. This would of course mean that HIBB decides to build its capabilities in house rather than outsource which would get the company to market faster but come with an extra margin hit.
- 1a) POS – hardware installation, 2H calendar ’15.
- 1b) POS – software and implementation, 1H ‘16
- 2) DC – Pick and pack capabilities, 2H ’16 – 1H ‘17
- 3) Ship-from-store – 2H ’16 – 1H ‘17
- 4) IT and website construction – now – 1H ’17
- All in we are looking at a minimum of 18-24 months of investment needed just to get the e-commerce systems in place before customers even place an order. And that’s while other competing retailers move just as fast if not faster in accelerating their own dot.com business. In other words, HIBB iwill not be gaining share online – just losing share at a lesser rate until its implementation is complete. And again, we think management is in complete denial as to the negative margin impact.
- Then HIBB will be stuck fulfilling orders for a channel with Gross Margins at least 1000bps below the Brick and Mortar business.
Previous Note on HIBB from Thursday 3/12
03/12/15 06:55 AM EDT
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 dot.com 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
FL Comp Trends Are Off The Chart. Not Identical Businesses, But Close Enough.
Ditto For DKS – Though Less Positive Than FL. Comp Driven By e-Comm (which HIBB does not have), Brick&Mortar Down
HIBB Monthly Comp Trend Shows The This Quarter Goes Against Second Easiest Comp In Over 5-Years
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
Editor's note: This is an excerpt from CEO Keith McCullough's morning research. Click here for more information on how you can become a subscriber.
* * * * * * *
We had an immediate term overbought signal yesterday in the U.S. Dollar – backing off at 99.99 (Wayne Gretzky would have been proud).
Equity markets bounced and then accelerated into the close. Big up day for the markets ... lots of counter-trend moves, plus the things that have been working were trending higher.
But don’t confuse that with the broader trend here: the U.S. Dollar remains your friend.
Immediate term upside to over 100 for USD (finally!), with an immediate term risk range is 97.46-100.31.
Oil is getting sacked in the backfield for another loss, down almost a full percent to 46.63. This is actually a big move in standard deviation terms - we have it at 3.6 standard deviations oversold which establishes a lower-high of resistance inside of 50 (49.64 to be exact).
The two important points today are that the USD has a 100 handle in its risk range and oil at the top end of its risk range is inside of 50….that’s very deflationary.
Client Talking Points
We had an immediate term overbought signal yesterday is the U.S. Dollar – backing off at 99.99 (Wayne Gretzky would have been proud). Equity markets bounced and then accelerated into the close. Big up day for the markets - lots of counter-trend moves, plus the things that have been working were trending higher - but don’t confuse that with the broader trend here: the U.S. Dollar remains your friend. Immediate term upside to over 100 for USD (finally!), with an immediate term risk range is 97.46-100.31.
Oil is getting sacked in the backfield for another loss, down almost a full percent to 46.63. This is actually a big move in standard deviation terms - we have it at 3.6 standard deviations oversold which establishes a lower-high of resistance inside of 50 (49.64 to be exact). The two important points today are that the USD has a 100 handle in its risk range and oil at the top end of its risk range is inside of 50….that’s very deflationary.
You don’t need someone at the Fed to give you inside information, you just need the risk ranges U.S. equity market volatility signaled an immediate-term overbought SELL signal on Wednesday. The current immediate term risk range for the VIX is 13.03-17.36. We would suggest you risk manage this by taking off some of your U.S. equity exposure that you put on on the down moves. Buy low. Sell high. Rinse. Repeat.
|FIXED INCOME||21%||INTL CURRENCIES||11%|
Top Long Ideas
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.
Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.
Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.
Three for the Road
TWEET OF THE DAY
GREECE: don't tell mainstreamers, but since they claimed Greece was fixed on FEB 24, Greek stocks have crashed 15%
QUOTE OF THE DAY
A thankful heart is not only the greatest virtue, but the parent of all other virtues.
STAT OF THE DAY
A strike at a Chinese factory that makes shoes for Nike, Timberland, Kenneth Cole and other well-known brands grew on Tuesday to about 5,000 workers.
Takeaway: HIBB - As Good As It Gets. KATE adding Singer to BOD, Big Win.
HIBB - As Good as it Gets
Quick thoughts on the HIBB Print...
- Comps beat printed Street estimates – which we expected. 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.
- Gross Margins were down 30bps on a 5.4% comp. There are some added cost pressures this year due to the new DC in Birmingham, but this isn’t the HIBB of old where it could leverage occupancy on flat to down comp numbers. 1) Occupancy is going up, 2) distribution costs in non-core markets (where most of the growth is coming from) is done by a 3rd party vendor, ie more costly solution, and 3) merch margins which have been down in the past 3 quarters don’t appear to have helped in the quarter.
- Guidance – The company guided to LSD to MSD comp growth for the year. Reading between the lines on February, it appears the quarter is off to a slow start. Comps get easier for the rest of the Month going up against a 2.9% in March and 0.9% in April, but February (due to the NBA All-Star Game) carries the bulk of the quarter.
- Inventory – Inventories came in the lightest they’ve been in 7 quarters with the sales to inventory spread at 3.8%. We read nothing in the press release to indicate that the company has seen any disturbances in product flow due to the West Coast port issues, but we don’t see how HIBB walked through that unscathed. We’ve seen it cited from a number of companies to-date including BGFV, and think it contributed to HIBB’s cleaner inventory position.
For our prior note on HIBB from 3/12 CLICK HERE
KATE - KATE SPADE & COMPANY ANNOUNCES NOMINATION OF JAN SINGER FOR ELECTION TO BOARD OF DIRECTORS
Takeaway: This is a big win for KATE. Singer has one of the best resumes in the business and gets how to take a powerful brand/product and scale it across an international platform. We'd argue with anyone that KATE's share of voice is much higher than its actual share of wallet. Now the brand needs to grow into a footprint to capitalize on its wide consumer acceptance. Bernard Aronson and Kay Koplovitz (the two outgoing Directors) have been with the company for 17yrs and 23yrs respectively. They both have impressive resumes in their own right, but KATE is a much different animal than LIZ was 20 years ago. We think the company will benefit from some new blood, especially with Singer's pedigree.
ULTA - 4Q14 Earnings
ARO - 4Q14 Earnings
ZUMZ - 4Q14 Earnings
Sir Philip Green Sells BHS to Retail Acquisitions Ltd.
AMZN - Amazon Has Quietly Acquired 2lemetry To Build Out Its Internet Of Things Strategy
PLCE - Children's Place increases store closures
COLM - Columbia Awarded $3.3M for Faulty Heating Technology
Metro on the lookout for acquisitions
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.