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We downgraded our long-term recommendation on Hibbett Sports Inc. (HIBB - Analyst Report) to Neutral from Outperform on Apr 17, anticipating competitive risk. Our recommendation is also well supported by the stock’s Zacks Rank #3 (Hold).

Why the Downgrade?

We remain apprehensive about Hibbett’s growth prospects as its competitor and leading sporting goods retailer, Dick’s Sporting Goods Inc. (DKS - Analyst Report), has decided to enter smaller and mid-sized markets. We believe that Dick’s strategy will not only heighten competition, but will also pose challenges for Hibbett’s retail space acquisitions. This may increase Hibbett’s store occupancy costs and operating expenses.

Moreover, Hibbett fears that Dick’s recent initiative may negatively impact its operating performance in the current fiscal. Following this, the Zacks Consensus Estimates for fiscal years 2014 and 2015 fell 0.7% and 2.8% to $3.00 and $3.42, respectively in the last 60 days.

However, we still remain constructive on the stock, given Hibbett’s strong operating performance over the last several quarters. We expect it to continue posting earnings as well as revenue growth in the coming quarters. The company anticipates fiscal 2014 earnings between $2.85 and $3.05 per share compared with fiscal 2013 earnings of $2.72.

Moreover, we remain impressed by the company’s store expansion program. The company plans to augment its network by adding approximately 65 to 70 stores during fiscal 2014. Furthermore, Hibbett’s management has already identified over 400 locations for future stores and has ramped up its distribution center to support over 1,200 stores from its earlier 1,000 stores. We believe that the strategy of expanding its store base provides a strong upside potential to the company.

Additionally, we believe that the strategy of doubling the size of its distribution facility will bolster growth in mid-sized and smaller markets, on which the company is focusing.

Other Stocks Worth Considering

While we prefer to remain on the sidelines on Hibbett there are other stocks in the sporting goods retail industry that warrant a look, such as Big 5 Sporting Goods Corp. (BGFV - Analyst Report) and Cabela’s Inc. (CAB - Analyst Report). Currently, both the companies hold a Zacks Rank #1 (Strong Buy).

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