Friday, March 22, was a weird day for athletic retail stocks. On one end, secular athletic retail winner Nike (NYSE:NKE) reported a double-beat third-quarter earnings report that just wasn’t good enough for investors, and Nike stock dropped 5%. On the other end, secular athletic retail loser Hibbett Sports (NASDAQ:HIBB) reported a double-beat fourth-quarter earnings report that was more than good enough for investors. Subsequently, HIBB stock popped more than 20%.
Investors shouldn’t be fooled by this odd stock price action. It won’t last. The selloff in Nike stock is overdone. Shares will fall, consolidate, and then reverse course and continue on a longer-term path higher. Meanwhile, the pop in Hibbett stock is also due for a correction. It will rise some, consolidate and then reverse course and continue on a longer-term path lower.
Why am I not buying into the big rally in HIBB stock? Because what I see is a heavily-shorted company that reported just good enough numbers to get the bears to scramble and cover. But the numbers aren’t good enough to keep longs from selling at these new highs, nor are they good enough to bring in new buyers outside of the shorts. In other words, the quarter was good enough to get HIBB stock out of the dumps, but the long-term growth narrative here remains bleak.
Overall, then, I wouldn’t recommend chasing this post-earnings rally in HIBB stock. Big picture, this is an organization still struggling in a competitive, athletic retail environment that is rapidly changing. Furthermore, that change is making Hibbett increasingly irrelevant.
Don’t Be Fooled By the Rally
It’s easy to look at the 20%-plus slingshot in HIBB stock and say that the Hibbett Sports turnaround is well underway.
Some merit exists to this claim. Hibbett smashed both revenue and profit estimates for the first time in a year. It was also the biggest double-beat over the last several years. Comparable sales rose 3.8% — analysts had been expecting a decline — while comps rose just 0.1% the previous quarter. The e-commerce business continued to grow at a 60%-plus rate. The fiscal 2020 EPS guide came in well above Street estimates.
But in the big picture, the numbers here still aren’t good. Fiscal 2019 comparable sales increased just 2.2%, against a down 3.8% lap in fiscal 2018; therefore, comparable sales are negative on a two-year basis. Meanwhile, analysts expect fiscal 2020 comps to flatten, so there isn’t any top-line momentum here. Also, gross margins continue to fall, and the operating-expense rate continues to rise. Both of those dynamics (gross margin compression and opex deleverage) are expected to continue next year.
In other words, Hibbett was able to top depressed fourth-quarter estimates. That got the bears to cover. Heading into the print, roughly 30% of the float was short. Thus, short-covering sparked this huge post-earnings rally in Hibbett stock.
However, this dynamic won’t last forever. Eventually, most of the shorts will have covered. At that point, the stock needs new buyers to push it higher. I don’t see where those new buyers will come from. This is a flattish revenue growth company with deteriorating margins. Moreover, HIBB stock now trades at 12-times forward earnings, which isn’t terribly attractive for such bleak growth prospects.
As such, I think this enthusiasm toward HIBB stock will ultimately be faded.
Long-Term Challenges Remain
Zooming out, the long-term growth narrative underlying HIBB stock remains dour. Plus, fourth-quarter numbers didn’t do anything to improve that narrative in a way that mitigates ownership risks.
The athletic retail scene is changing. Specifically, in order to better manage brand equity and increase reach, major athletic brands like Nike are emphasizing direct channel sales over wholesale channel sales. This means that Nike and others are decreasing the amount of product they push through wholesale channels. They are also becoming more selective about which wholesale channels they commit product and resources to. Essentially, they’re trying to increase product share into high-quality wholesale channels.
Net result? The wholesale athletic retail channel is shrinking, and low-quality players in that space are losing market share. Hibbett Sports, with a small presence and a largely undifferentiated brand, is one of those low-quality players. As such, this company is losing share in a shrinking market.
Nothing about HIBB’s fourth-quarter earnings report changes this narrative. Comps rose 3.8%, sure, but they will likely go flat next year. Gross margins are still falling. Opex rates are still rising. In other words, Hibbett is still struggling to simultaneously grow sales and profits.
These struggles will remain for the foreseeable future. So long as they do, HIBB stock should be avoided.
Bottom Line on HIBB Stock
Hibbett Sports managed to top depressed fourth-quarter estimates in a big way, and that scared the shorts into covering. But this rally won’t last because HIBB stock isn’t that cheap anymore. Additionally, the narrative and numbers broadly remain negative.
As of this writing, Luke Lango was long NKE.
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