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Hibbett Sports – Rapid-Growing Retailer with Consistent 10-Year Double Digit ROE

December 15, 2011 | About:
In my effort to search for the micro-small cap high quality businesses that have the potential to advance over the long run so that investors can keep holding them for the long run, I found one retailer operating sporting goods stores in small to mid-size markets in the Southeast, Southwest, Mid-Atlantic and lower Midwest regions in the U.S. That company is called Hibbett Sports (HIBB). Historically, it has been a good stock for investors to hold for more than 10 years as well. If any investors bought into the stock for $3.3 per share in the beginning of 2000, it reached $43 in 12 years, making the compounded annual rate of return for investors very high, nearly 24.84%.

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As of Jan 2011, HIBB is operating 779 Hibbett Sports stores as well as 16 smaller-format Sports Additions athletic shoe stores and 3 larger-format Sports & Co. superstores in 26 states. Around 76% of HIBB's store base is located in strip centers, including free-standing stores, and the rest is located in enclosed malls.

Regarding the firm’s expansion strategy, HIBB already identified 350 to 375 potential markets for future Hibbett Sports stores within the states that the company is operating in. It believed that the current distribution center can support over 1,200 stores. The company has a single distribution center in Birmingham, Ala., with its operations centrally managed from the corporate headquarters which is located in the same building as the distribution center.

Nike in the fiscal year of 2010 was the largest vendor, taking nearly 48% of total purchases, whereas the next largest one represented only 8.3%. As with any retailer’s seasonality pattern, HIBB customer buying activity focuses mainly on the spring sales period and the holiday seasons, making the first and fourth quarter sales higher than the rest two quarters.

Looking back at the 10-year history, HIBB has done a pretty good job of delivering profit as well as generating cash flow for itself.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenue 241 279 321 378 440 512 521 564 593 665
Operating Income 19 23 32 39 52 62 48 48 52 74
Net Income 12 15 20 25 34 38 30 29 33 46
Operating Cash Flow 13 18 34 46 38 36 48 39 37 62
Free Cash Flow 4 11 26 33 23 20 32 25 27 51


The top line has been increasing over time, and the same trend is spotted in operating income as well as net income. And it has NO year of negative operating cash flow or free cash flow, although cash generation has been fluctuating a little bit, but it is on an increasing trend as well.

So the business has been very consistent and quite rewarding for itself and its investors looking at its fundamentals. Any value investors would feel very satisfied about the consistency in net margins, asset turnover and the level of leverage, especially with the double digit and growing return on equity.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Margin % 4.8 5.3 6.3 6.7 7.6 7.4 5.8 5.2 5.5 7.0
Asset Turnover 2.2 2.3 2.2 2.0 2.2 2.5 2.4 2.5 2.3 2.3
Financial Leverage 1.4 1.3 1.4 1.6 1.6 1.6 1.8 1.7 1.6 1.6
Return on Equity % 15.8 16.6 18.5 19.9 26.4 29.1 23.7 23.0 20.9 24.7


For the balance sheet strength, the D/A is nearly 38%, whereas the main component is accounts payable, taking 27% of the total assets, while the firm is employing very little interest-bearing debt. However, like any other retailer, it has off balance-sheet contractual obligations such as operating leases, purchase obligations and other liabilities. The total contractual obligation ranging from one year to more than five years totals $170 million, with this year figure of around $47 million. Adding this back into balance sheet, the total liabilities reached $288 million, over the equity of $195 million. However, the low equity is affected by the increasing amount of share buy backs, making the treasury stock to date of $263 million.

On the asset side, the inventory is the largest item, accounting for 63% of its total assets, and it has been the convention for 10 years of operation. HIBB has inventory concentration from the purchases from Nike, taking around 50% of total purchases for the last three years.

Along with those impressive operating performance and cash flow generation over time, HIBB is trading at quite rich valuations. It was trading at 21.7x P/E, 5.9x P/B and 17.9 P/CF. I think the market does not undervalue HIBB. If we assumed the long-term ROE at 30% consistently, in order to have 5% yield, the investor should pay at maximum 6x book value, otherwise the yield would be much lower. ROE 10 years average of HIBB staying at nearly 22%, and to have 5% yield, the P/B maximum is around 4.4x, and now the company is trading at nearly 6x book value.

Regarding guru trades, Joel Greenblatt bought into the company with the price range of $32 to 37 per share, holding 0.05% of total outstanding shares with 0.08% total assets managed.

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However, it was contrasted with the insider trades, the executive chairman, director, CEO and president of HIBB selling out substantial amount of stocks since the second quarter of this year, when the price was from $37 until currently.

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In short, HIBB is definitely worth watching and seems to have potential for a long-term holding. However, I would not consider buying into HIBB at the current price, with very high valuation along with consistent selling out of its insiders. I would rather wait for a significant price drop to begin to take action.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 4.4/5 (23 votes)

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