Hibbett Sports Inc. (HIBB - Free Report) stock is displaying mixed sentiments, owing to near-term headwinds, offset by long-term potential. While growth of omni-channel capabilities, renewed loyalty program and inventory management initiatives place it in an advantageous position, the company’s recent quarterly performance and soft margins trend keep us on the sidelines.
The company’s shares have declined 23.7% year to date against the industry’s growth of 15.7%. This decline can be attributed to Hibbett’s dismal surprise trend. It reported third straight earnings miss in third-quarter fiscal 2019 while sales were almost in line with estimates, after missing estimates in the preceding two quarters. Further, this Zacks Rank #3 (Hold) stock has declined 13.4% since reporting dismal results on Nov 27.
Dismal Surprise Trend & Soft Margins Remain Deterrents
As stated, Hibbett has been delivering dismal top- and bottom-line performances for the past few quarters. Apart from negative surprises, the company’s top and bottom lines declined year over year in third-quarter fiscal 2019. The sales decline was attributed to strong comparisons from last year due to the additional 53rd week as well as an impact from the sale of Team Division in December 2017. Furthermore, higher operating expenses due to e-commerce related expenses hurt margins and the bottom line.
Following the soft quarterly results, management trimmed its earnings guidance for fiscal 2019. Excluding non-recurring costs associated with the acquisition of City Gear, management now envisions adjusted earnings of $1.55-$1.65 per share, down from $1.57-$1.75 expected earlier.
Additionally, Hibbett is witnessing strained margins for quite a while now. Higher SG&A expense has taken a toll on operating margin for the last few quarters. Notably, operating income declined 7.4% while operating margin contracted 420 basis points (bps) in the fiscal third quarter. The decline is attributed to higher store operating costs and SG&A expenses, somewhat mitigated by an increase in gross margin.
The company now expects SG&A expenses in fiscal 2019 to increase 7-9% (excluding the City Gear acquisition-related costs) and 8.8-11.2% (including the acquisition-related costs). This may again weigh on operating margins.
Can Strategies Aid Growth?
Despite dismal third-quarter fiscal 2019 results, Hibbett’s comparable store sales (comps) inched up 0.1% in the fiscal third quarter, owing to significant improvement in the branded apparel business. Additionally, sportswear and footwear businesses delivered positive comps. The branded apparel business reported a high-single-digit increase, driven by gains in men’s and women’s apparel. This marked the fourth consecutive quarter of positive comps for the apparel business. Moreover, the footwear business reported fifth straight quarter of comps growth. Month-wise, comps grew 2.8% in August and 1.6% in October, which was mostly offset by a 5% decline in September.
Furthermore, the company raised its comps guidance for fiscal 2019. Comps are now anticipated to be flat to up 1% versus the earlier projection of negative 1% to positive 1%.
Additionally, Hibbett’s store expansion and inventory management initiatives, coupled with improving e-commerce penetration, look encouraging. The company remains focused on expanding customer base by connecting with more customers through e-commerce and selective store expansion. Notably, e-commerce sales increased 62.2% and accounted for nearly 8.8% of total sales in the fiscal third quarter. The company expects continued growth in the e-commerce business as enhancements in mobile app, as well as its newly launched “Buy Online, Pick Up in Store” and “Reserve in Store” capabilities, are gaining acceptance.
The company is also gaining from small market strategy as it continues to strengthen presence across the country. It targets expansion in markets that offer increased potential for future growth. The company reiterated its expansion target of more than 1,500 stores in underserved markets. It now expects to open nearly 30 stores and close 82 outlets in fiscal 2019 compared with 30-35 store openings and 55-60 closures planned earlier.
Additionally, Hibbett is stringently working on inventory management initiatives despite a challenging environment. Its inventory declined 3% year over year at the end of the fiscal third quarter. Moreover, product margin improved due to cleaner inventory and more full-priced sales during the quarter, which aided gross margin.
Although Hibbett’s dismal quarterly performances and trimmed fiscal 2019 view are hurting the stock, the aforementioned strategies clearly profess that Hibbett still has significant growth potential in the long term. Further, a VGM Score of A and long-term earnings growth rate of 8.1% reflect growth potential attached to the stock.
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