Stock of the Month: HIBB
Unless you live in the Southern and Mid-Atlantic United States, you may not be familiar with Hibbett Sports (HIBB).
This regional chain of sporting goods stores can fly under the radar due to its size and location; however, this small-but-mighty company recently ranked #50 on Forbes‘ list of top small businesses and continues to experience solid growth in the face of a shaky economy and fickle consumer.
Hibbett’s 848 stores are located predominately in rural areas in the South and the southern Mid-Atlantic states. The company also has a presence in the Midwest and its stores stretch as far west as Arizona. To differentiate itself from other non-mainstream sporting stores, HIBB offers a wider variety of merchandise than its competitors, which tend to be local operators that do not have Hibbett’s financial strength. It also positions itself as the “store of the community,” by offering merchandise of both college and professional teams that have intense local interest. The store also tends to concentrate on providing gear for team sports and personal fitness, and prides itself on exceptional customer service that comes from a management training program known as Hibbett U.
Positioning is everything to Hibbett, starting with the first rule of real estate: location, location, location. The company tends to piggy-back on the success and traffic generated by one of the kings of retail, Wal-Mart. In the states where Hibbett operates, there are 2,613 WalMarts, and you will often find the two stores sharing the same locations at strip malls.
But Hibbett doesn’t rely on others to get its name out there. The company has a multi-faceted marketing program that embraces new ways of advertising. While the old standard of direct mail accounts for 45% of marketing dollars spent, digital advertising, including mobile and social networks, accounts for 30%. Grass roots advertising, which includes local TV and billboards, accounts for the remaining 25% of advertising dollars.
It also embraces technology in more ways than just advertising. Hibbett invests in state-of-the-art infrastructure for its merchandising, warehouse, payroll and point-of-sale systems. The company just has one distribution center, which is located in the same building as its corporate headquarters in Birmingham, Alabama. For its outlying stores, the company relies on third-party logistics experts. Recently, the company announced it would open a new distribution facility in Alabama in the first quarter of fiscal 2014.
So these are some of the things I really like about HIBB: The company does business in smaller markets, where costs are lower and competition is less intense. It specializes in team sports, fitness and footwear, in a relatively small retail box of 5,000 square feet. It embraces modern marketing, and invests in infrastructure to keep the costs low. What does this all add up to? Significantly high returns on investment, which leads to high returns on invested capital. An initial investment for a typical store is $181,000, and in its first full year of operations, the store on average has sales of $681,000 and operating profit after depreciation of $79,000. By year two, sales generally increase to $721,000 and operating profit is $122,000. That’s an outstanding 67.4% return in its stores in just two years.
These high returns have enabled the company to enjoy solid growth. Despite the shaky U.S. economy, sales have grown from $520 million its 2008 fiscal year to $732.6 million in its 2012 fiscal year. Owing to Hibbett’s great efficiency, margins have expanded, with earnings rising in the same period from $0.96 to $2.15 a share. Earnings have also benefitted from the company’s stock repurchase programs, as total shares outstanding declined 13% from fiscal 2008 through fiscal 2012.
Growth has continued through the first nine months of fiscal 2013, with sales up 9.9% to $601.3 million and EPS grew a robust 27.6% to $1.99 from $1.56. For all of fiscal 2013, the company has given earnings guidance of $2.66-$2.71 per share, which includes a benefit of $0.09 to $0.11 a share from an extra week in the fourth quarter.
Even with all this progress, the company is well positioned to keep growing in the future. Management has plans to expand its store base not just in the South, but also in the Midwest and Southwest. They also plan to eventually move into the Northeast, targeting locations in Pennsylvania and New Jersey.
With a minimum goal of 1,300 stores under its belt in the future, it is more than reasonable to expect its base to expand another 50%. If the company manages to keep the new stores’ return on investment close to historical averages, more profitable growth is straight ahead.
HIBB has recently corrected from mid-2012 prices around $63, giving us an attractive entry point to get in below $57. I believe the company is likely to earn a little over $3.00 a share in fiscal 2014, which should be strong enough to support a $65 target.