December 12, 2014 Hibbett Sports, Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 06/17/2014 Current Price (12/11/14) $48.16 Target Price $51.00 52-Week High $67.73 52-Week Low $41.57 One-Year Return (%) -24.81 Beta 1.24 Average Daily Volume (sh) 393,077 Shares Outstanding (mil) 25 Market Capitalization ($mil) $1,204 Short Interest Ratio (days) 16.34 Institutional Ownership (%) N/A Insider Ownership (%) 2 (HIBB-NASDAQ) SUMMARY We retain our Neutral recommendation on Hibbett following the company s upbeat performance for the second consecutive quarter. Higher net sales in thirdquarter fiscal 2015, which surpassed the Zacks Consensus Estimate and grew year over year, supported the bottom line results. Further, the company raised its fiscal 2015 earnings guidance. We remain impressed with Hibbett s sustained focus on expanding its store network and improving productivity, which are the key revenue drivers for the stock. We also believe the expansion of its distribution facility will aid the maintenance of its growth momentum in key markets. Moreover, the company s debt-free balance sheet provides it with financial flexibility to drive future growth. However, anticipating competitive risk from DICK s Sporting s strategic move of entering smaller and mid-sized markets, we remain skeptical about the stock s performance. Risk Level * Average, Type of Stock Mid-Growth Industry Retail-Misc/Div Zacks Industry Rank * 25 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 9.0 Earnings Per Share (%) 20.2 Dividend (%) N/A using TTM EPS 17.7 using 2015 Estimate 17.4 using 2016 Estimate 15.9 2013 233 A 165 A 203 A 217 A 819 A 2014 240 A 186 A 208 A 218 A 852 A 2015 262 A 194 A 218 A 236 E 910 E 2016 282 E 211 E 239 E 253 E 985 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $0.98 A $0.30 A $0.71 A $0.73 A $2.72 A 2014 $1.00 A $0.40 A $0.66 A $0.64 A $2.70 A 2015 $1.09 A $0.32 A $0.67 A $0.69 E $2.77 E 2016 $1.20 E $0.36 E $0.73 E $0.74 E $3.03 E Zacks Rank *: Short Term 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 12 * Definition / Disclosure on last page (Note: Qtly. fig. may not add up to annual fig. due to rounding off.) 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Hibbett Sports Inc. (HIBB) operates sporting goods stores in small to mid-sized markets in the South, Southwest, Mid-Atlantic and lower Midwest regions of the U.S. The company typically caters to small counties with population ranging from 25,000 to 75,000 with a merchandise assortment focused on footwear, athletic equipment and apparel. Hibbett sources a major portion of its merchandise from Nike Inc. and distributes through a 220,000 square feet distribution center located in Birmingham, AL., which has the capacity to support about 1,500 stores. The company operates stores under 3 different retailing formats: Hibbett Sports, the flagship format, which on an average spans 5,000 square feet of store space and is located either in strip centers anchored by a Wal-Mart store or in enclosed malls. These stores offer branded merchandise focused on team sports and localized apparel and accessories. Sports Additions are small, mall-based stores averaging 2,500 square feet in size primarily focusing on athletic footwear. Sports & Co. is a superstore format averaging 25,000 square feet and offers a broader assortment of athletic footwear, apparel and equipment than Hibbett Sports stores. Additionally, the company s wholly-owned subsidiary, Hibbett Team Sales is a leading supplier of customized athletic apparel, equipment and footwear to schools, athletic and youth programs in Alabama. REASONS TO BUY Inherent Strength: Hibbett is strongly focused on small towns and counties with population ranging from 25,000 to 75,000. It serves a niche market by strategically aligning its merchandise to regional/local sporting and community interests. We believe that having operations in small markets provide a competitive advantage to Hibbett over larger rivals due to less intense competition and lower operating costs. Positive Earnings Trend and Raised Outlook Drive Estimates Up: Hibbett Sports maintained its positive earnings surprise streak for the second consecutive quarter in fiscal 2015. After beating the Zacks Consensus Estimate by 3.2% in the second quarter, this sporting goods retailer surpassed it again by 8.1% in the third quarter. Higher net sales supported the bottom line. Further, management raised its fiscal year earnings outlook, which triggered an upward trend in the Zacks Consensus Estimates for fiscal 2015 and 2016. Store Expansion Strategy Provides a Strong Upside Potential: The company is undergoing a store expansion program and plans to widen its network by adding approximately 75 to 80 stores during the fiscal year ending on Jan 31, 2015. Furthermore, Hibbett s management has already identified over 400 locations for future stores and has ramped up its distribution centers to support over 1,200 stores against its earlier count of 1,000 stores. We believe that the strategy of expanding its store base provides a strong upside to the company. Augmenting Distribution Facility to Accommodate Increasing Stores: In a long-term strategic move, Hibbett has doubled the size of its distribution facility to 360,000 square feet, by shifting its Birmingham-based wholesaling and logistics facility to Alabaster, AL. We believe this expansion fully supports Hibbett s ongoing store expansion program. The company expects this large distribution Equity Research HIBB Page 2
facility to help increase its store count to over 2,000. Further, the new facility will aid Hibbett s continued growth in mid-sized and smaller markets, which are the company s primary focus. Healthy Balance Sheet & Strong Cash Flows Driving Growth: Hibbett boasts of a debt-free balance sheet, with cash and cash equivalents of $71.5 million at the end of third-quarter fiscal 2015, which provides it with the financial flexibility to drive growth. The company s ability to generate a strong operating cash flow has helped in the execution of its long-term strategies such as store expansion, enhancing product and brand offerings as well as building operational infrastructure. Furthermore, Hibbett s strong balance sheet position facilitates it to take shareholder-friendly decisions such as share repurchases and dividend payments. REASONS TO SELL Risks from DICK s Sporting s Strategy to Enter Smaller Markets: We remain apprehensive about Hibbett s growth prospects as its competitor and leading sporting goods store retailer, DICK s Sporting Goods Inc., has decided to enter smaller and mid-sized markets. The company s strategy will not only increase competition for Hibbett but also raise store occupancy costs and operating expenses. Further, the growth of peers, such as Sport Chalet Inc. and The Sports Authority Inc. in the small store format could hurt Hibbett s sales, affecting overall results. Increasing IT Costs May Weigh on Bottom Line: Hibbett is losing its market shares to competitors who are entering its market with omni-channel business operations. The company is in the early stage of developing an e-commerce platform, which we believe will take over one year to start functioning. Furthermore, the start-up expenses related to this will push up the company s IT expenses in fiscal 2015, which will ultimately drag its bottom line. Macroeconomic Headwinds: The sporting goods retail industry is consumer-driven, and is hence, sensitive to the health of the economy as sports are majorly leisure activities. Spending on sporting goods is heavily dependent on the disposable personal income of consumers. The current macroeconomic challenges such as high household debt and increasing unemployment levels may restrain consumer spending on sporting goods. Seasonal Risk: Hibbett s business is seasonal in nature and typically generates stronger sales during fiscal first and fourth quarters, which are characterized by the spring and holiday seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver. RECENT NEWS Hibbett Q3 Earnings Surpass Estimates, Ups Outlook Nov 21, 2014 Hibbett Sports Inc. continued with its positive earnings surprise streak for the second consecutive quarter in fiscal 2015. After beating the Zacks Consensus Estimate by 3.2% in the second quarter, this sporting goods retailer surpassed it again by 8.1% in the third quarter. The company posted earnings of $0.67 a share that outdid the Zacks Consensus Estimate of $0.62 and also came a penny ahead of the prior-year quarter figure. Higher net sales supported the bottom line. As a result, management raised its fiscal year earnings outlook. Net sales grew 5% year over year to $218.3 million but fell short of the Zacks Consensus Estimate of $222 million. Comparable-store sales inched up 0.6% compared with 4.8% in the year-ago period. Management stated that after soft comparable-store sales in October, the sales trend began to portray an Equity Research HIBB Page 3
improvement in November. The company remains optimistic about the final quarter, given favorable weather conditions and product launches. Hibbett s gross profit increased 3.5% to $79.2 million, while gross margin contracted 50 basis points (bps) to 36.3%. The contraction in margin was due to higher markdowns to get rid of the sluggish inventory and increase in store occupancy as a percentage of net sales. Operating income during the quarter fell 2.3% to $26.8 million, whereas operating margin shriveled 90 bps to 12.3%. Other Financial Aspects Hibbett ended the quarter with a strong balance sheet comprising $71.5 million in cash and cash equivalents, no outstanding bank debt and full availability under its $80 million credit facility. During the quarter, Hibbett bought back 371,589 shares for $16.7 million. As of Nov 1, 2014, Hibbett had nearly $179.7 million remaining under its share repurchase program. Store Update During the reported quarter, Hibbett increased its store count to 969 in 31 states by opening 26 stores and expanding 2 high-performing stores, while it shut down 7 underperforming stores. Square footage grew 6.5% to about 5.6 million square feet as of Nov 1, 2014. Fiscal 2015 Guidance Management now foresees fiscal 2015 earnings between $2.72 and $2.77 per share, up from its previous forecast of $2.63 to $2.73. The current Zacks Consensus Estimate for fiscal-year 2015 is $2.71, and could witness an uptrend in the coming days. However, Hibbett continues to expect comparable-store sales growth in the low single-digit range. The company also remains on track to open 75 to 80 stores during the current fiscal year. Equity Research HIBB Page 4
VALUATION Currently, Hibbett s trailing 12-month earnings multiple is 17.7x compared with the 24.2x industry average and 18.6x S&P 500. Over the past 5 years, Hibbett s shares have traded in the range of 15.7x to 25.4x, trailing 12-month earnings. Moreover, the stock trades at a discount to the industry average, based on forward earnings estimates. Our target price of $51.00, 16.8x 2016 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Hibbett Sports, Inc. (HIBB) 17.4 15.9 13.1 14.5 17.7 25.4 15.7 Industry Average 27.1 21.5 15.8 19.3 24.2 74.1 14.2 S&P 500 17.3 16.1 10.7 15.9 18.6 19.6 12.0 Big 5 Sporting Goods Corp. (BGFV) 17.0 14.4 13.5 5.8 15.8 23.3 7.5 Regis Corporation (RGS) N/A 74.5 8.0 8.8 N/A N/A 9.4 Steiner Leisure Ltd. (STNR) 15.4 13.2 12.5 8.8 15.5 17.8 11.7 Five Below Inc. (FIVE) 41.4 32.6 29.8 40.1 49.5 88.6 49.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Hibbett Sports, Inc. (HIBB) 4.1 7.2 3.4 22.6 0.0 0.0 8.8 Industry Average 4.3 4.3 4.3 8.7 N/A 0.5 11.1 S&P 500 7.2 9.8 3.2 23.3 N/A 1.9 N/A Equity Research HIBB Page 5
Earnings Surprise and Estimate Revision History Equity Research HIBB Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of HIBB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1138 companies covered: Outperform - 16.1%, Neutral - 77.6%, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research HIBB Page 7