Having followed this company for a long time, it appears the current price presents a good entry point. Tax loss selling is in full swing, the stock market is falling, and HIBB shares are getting hammered. As a result, the stock is trading at its lowest valuation over the past decade, including price ratios for sales, book value, earnings, and cash flow. We like investing in profitable companies trading below book, especially when they also have an enterprise value/EBITDA ratio under 5. Better yet, Hibbett has these metrics without a balance sheet fluffed up with goodwill. The company has nominal debt, a net cash position of nearly $120 million, and its current assets exceed all liabilities by better than two to one. This will change slightly given a recent acquisition. It is also what Charlie Munger calls a "cannibal" as it engages in a meaningful and regular share buyback. Over the last decade the share count has fallen from 29 million to 19 million shares. 

The business plan and strategy are also atypical. Operating in underserved small and mid-sized communities means they are in niche markets. There are 1,042 stores, of which 281 operate in towns with no competition and 546 operate with only one other sports retailer. This outfit also operates in states with low minimum wages and weak union laws. Though they only started selling online in mid-2017, they have caught up fast and 8.8 percent of sales came from online in the latest quarter.  

As with all opportunities however there are warts and worries. Insiders have been net sellers over the last twelve months and own only one percent of shares. In the latest quarter, management reduced full year guidance meaning annual EPS is now expected to fall to its lowest level since 2010. Back in 2013 margins used to be in the high single digits but today they are in the low single digits. Part of this fall in profitability has to do with the Amazon tsunami but another has to do with its dependence on suppliers. Nike, Under Armor, and ADIDAS account for the lion´s share of HIBB´s inventory and those big boys have pricing clout. With competitive pricing pressures piling up, Hibbett is closing stores. 

In an attempt to address declining profitability, management recently acquired a much smaller but rapidly growing and more profitable private retailer called City Gear for $88 million. City Gear operates in the US south-east, has 135 stores at strip-mall locations like HIBB, and generated $190 million in sales last year versus Hibbett´s $968 million. The transaction is expected to be competed this month and to be EPS accretive next year. While M&A never goes exactly according to plan, the strategic fit and rationale here appear to make sense.  

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(Last update: January 10, 2021)

Update January 11, 2021