We visited with Hibbett Sports’ management team last week at their headquarters and came away feeling more confident that same store sales continue to improve and margins continue to expand in the near-to-intermediate term. Our sense is that following a positive start to the quarter there was little if any deceleration in comps, which management highlighted were up ~14% including Saints and Alabama sales through the first 39 days on the March Q4 earnings call (core up 11%-12%). With near-term results remaining positive, comps getting substantially easier next quarter, and full year results likely to shake out closer to $1.50 versus the Street at $1.30, we expect near-to-intermediate term outperformance to continue. In addition to incremental company specific highlights, there were several notable observations:
- When pressed on the company’s ability to meet or exceed prior peak operating margins (last achieved in 2007 with or without a 53rd week in that year), management responded with a confident “yes”. Key to driving margins higher are productivity gains ($200/foot goal driven by 3-5% annual same store sales), gross margin gains driven by systems enhancements (auto-replenishment, store level allocation) and resumption of growth over time to a 5-7% unit growth rate.
- Enthusiasm for “toning” goes way beyond the shoes themselves. While HIBB chief merchant was bullish on Reebok and a potential resurgence in the brand, she was also broadly enthusiastic about the prospects for a pick-up in women’s overall. The marketing spend and excitement surrounding toning has given the women’s category new life, after three years of negative comps. Importantly, it appears that the vendors are working hard to make this trend last by going beyond selling as many shoes as possible. Apparel and youth rub-off sales have been picking up as the female traffic has picked up.
- There is no question that HIBB still views itself as a formidable growth retailer, with over 350 potential sites identified in existing markets. However, the near-term outlook for store growth remains tempered by a lack of new development in the company’s target markets. There has been no sign of credit easing for HIBB landlords and strip-mall developers, which is the key reason why HIBB will only open 15-20 stores this year (net of 10-15 closings). Re-use properties are plentiful, but not often in the right centers or the right size. Movie Gallery is likely the biggest source of opportunity for re-use over the next 12 months. We also got a sense that given tight supply in existing markets, the company might branch out to contiguous states providing further upside.
- Underlying recent positive trends is a simple fact. The customer is responding to newness and innovation, with little price resistance. HIBB best selling shoe is currently the $160 Nike Air Max 2010. This is the first time in over three years we have heard of sell-throughs being this strong for a $100+ silhouette.
- As it relates to unemployment, there is a very high correlation between unemployment and comps at the state level. During our meeting, management noted that its best performing states also happened to be those with among the lowest level of unemployment. For example, Nebraska, Iowa, and Kansas have all reported comps north of 20% while posting unemployment of 4%, 6%, and 6% respectively.
- Gas prices are critical to the sun-belt consumer, particularly at the $3/gallon level. Management highlighted this is a particularly important confidence level for sun-belt consumers and one where there is a notable correlation with sales growth. At the time of our trip, prices were ~$2.80.
- Tax refunds have not had a material impact so far on sales results. If anything, the effect has actually come a couple weeks later than last year. Moreover, the broader ramp in consumer spending is having a far greater impact than any tax related benefit. In other words, management was a bit dismissive that this factor alone has been a key contributor to nearer-term strength.
- Casey Flavin & Eric Levine