HIBB | The Beginning of the End?

Takeaway: We have a hard time modeling a scenario where HIBB does not get cut in half. $1.50 in EPS vs Street at $3.85. Still one of our top 3 shorts.

HIBB, one of our top Retail Shorts, preannounced a miss after the close. There’s a number of things that concern us.

1) Comps came in at -1.1% for the quarter. The company was +low double digits through the first 21 days of May. That suggests that June and July were horrible.

2) This is the first time in 23 quarters where the 2-year comp trend for HIBB went negative.

3)  Even worse is that management notes ‘underlying business softness’ as one of the factors. That’s actually pretty unusual for HIBB. Whether business is good or bad, the company usually has a firm grasp on what’s driving its sales. This time, there’s a notable lack of rationale or understanding for such a significant turn in trends.

4) There was also no guidance provided beyond the quarter. In the past, HIBB would usually provide a full-year update as well.

5) Our sense on this is that HIBB is feeling the brunt of why we’re bearish…

a) It has no e-commerce business, and that’s where the incremental growth in the industry is coming from. Simply put, HIBB is finally starting to lose share to dot.com.
b) It is feeling the pain of overlap with Dick’s, Academy, and Sports Authority as HIBB grows outside of the Bible Belt (bad idea) and as those other retailers grow in HIBB’s home turf.

6) Nike is absolutely killing it just about everywhere in the US -- except at Hibbett? That makes zero sense to us as Nike is about 60% of Hibbett’s footwear wall.

7) The question for us at this point is whether this turn of events will finally cause HIBB to accelerate its decision to start up an e-commerce business.

a) If the answer is Yes, then we think there’ll be about a 3-5 point hit in margins for 2-years before we see any notable revenue benefit.
b) It the answer is no, then expect continued ‘unexpected’ top line weakness and earnings misses.

From where we sit, both outcomes are bad. But knowing this management team, we think they need to get one or two more black eyes before stepping up and making the big investment in e-comm. 

Either way, we think that the end-game is margins getting cut in half, and about $1.50 in earnings in three years. That’s a pretty massive statement given that the consensus is at $3.85. What kind of multiple do you put on a name with shrinking earnings and 60% downside to consensus? Even if we generously say 15x a trough-ish EPS number, we’re talking about a $22 stock. The stock is trading after-hours at $43. If you’re tempted to cover – don’t.