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Hibbett Q2 Earnings Fall 20%, Retains Lowered FY15 Outlook

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Hibbett Sports Inc. (HIBB - Free Report) came up with disappointing financial results for the second quarter of fiscal 2014 on Friday, in line with its preliminary results announced on Aug 7. Further, the company reaffirmed its recently lowered fiscal 2015 earnings guidance.

Though the sporting goods retailer’s second-quarter earnings of 32 cents per share witnessed a 20% fall from the year-ago comparable quarter’s earnings of 40 cents per, it came at the higher end of the company’s recent cautious forecast of 30 – 32 cents per share. Moreover, it surpassed the Zacks Consensus Estimate by a penny.  Bottom-line results for the quarter were let down by weak comparable store sales (comps) and gross margin performance compared to last year.

Highlights of the Quarter

Net sales increased 4.1% year over year to $193.9 million but fell short of the Zacks Consensus Estimate of $196 million. Sales results missed our estimate mainly on weak comparable store sales due to lower-than-expected traffic trends as customers are still cautious with their purchases as revealed in the company’s preliminary results earlier this month. Comparable-store sales for the quarter increased 0.1%.

While the company failed to impress with its second-quarter comps performance, it remains optimistic about the future, given the improved traffic trends since the latter half of July, which has continued into the back-to-school season. Currently, the company’s comps are in the low single-digit range.

Hibbett’s gross profit increased a marginal 0.8% to $64.4 million from $63.9 million in the year-ago comparable quarter. However, gross margin contracted 110 basis points (bps) to 33.2% during the quarter. The contraction was due to higher markdowns to get rid of the sluggish inventory. Another factor weighing on the company’s gross margin in the second quarter is the projected increase in store occupancy and logistics expenses, as a percentage of sales, due to weaker comps.

During the quarter, store operating, selling and administrative expenses increased 6.9% to $46.6 million, while as a percentage of revenue it expanded 20 bps to 21%.

Gross margin contraction impacted the company’s operating margin. Hibbett’s operating margin for the quarter contracted 200 bps to 7.1% compared with 9.1% in the year-ago quarter.  In dollar terms, operating income fell 19.4% year over year to $13.7 million.

Hibbett ended the quarter with a strong balance sheet comprising $81.4 million in cash and cash equivalents, no outstanding debt and full availability under its $80 million credit facility.

During the quarter, Hibbett bought back 423,263 shares for $22.5 million. As of Aug 2, 2014, Hibbett had nearly $196.4 million remaining under its share repurchase program worth $250.0 million, authorized on Nov 15, 2012.

Store Update

During the quarter, Hibbett enhanced its store network by opening 16 new stores and expanding one high-performing store, while it shut five stores. As a result, the company’s total store count at the quarter-end was 950 in 31 states. Square footage grew 6.4% to 5.5 million square feet as of Aug 2, 2014.

Fiscal 2015 Guidance

Following the second-quarter results, the company reiterated its recently cut fiscal 2015 guidance that estimates earnings per share of $2.63–$2.73 with comps growth in the low single-digit range. Earlier, the company had projected earnings to be in the $2.78–$2.98 per share range, while comps were expected to improve in the low-to-mid single-digit range.

Hibbett now expects earnings per share to come in the range of $2.75–$2.98 compared with the earlier guidance range of $2.78–$2.96. Comps for the fiscal are still projected to rise in the low-to-mid single digit range. The company anticipates flat to slightly positive gross margin in the upcoming fiscal year. Further, SG&A expense as a percentage of sales in fiscal 2015 is expected to increase by a couple of cents based on higher health care costs and marketing and IT costs.

However, Hibbett remains on track to expand its store base in fiscal 2015 by opening about 75 to 80 new stores.

Despite the weak quarterly results, the company remains confident of incremental revenue contributions from its new stores, as results in these stores have been encouraging, reflecting improved new store productivity.

Other Stocks to Consider

Currently, Hibbett carries a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the related sector include Barnes & Noble Inc. and Jumei International Holding Limited , both carrying a Zacks Rank #2 (Buy). Another stock worth considering in the broader retail space is The Men’s Wearhouse Inc. , which has a Zacks Rank #1 (Strong Buy).

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