Hibbett Sports, Inc. HIBB seems to be well positioned for long-term growth, with initiatives like enhancing omni-channel capabilities, renewing loyalty program and store-expansion plans. Also, solid comparable sales (comps) performance acts as a catalyst for the company. Nevertheless, the company is reeling under dismal margins, owing to high SG&A expenses.
Let’s delve deeper.
A Brief Introspection
Hibbett is riding well on solid comps performance for quite some time. Hibbett’s comparable store sales (comps) inched up 0.1% in the third quarter of fiscal 2019, owing to significant improvement in branded apparel business. Additionally, sportswear and footwear businesses delivered positive comps. This marked the fourth consecutive quarter of positive comps for the apparel business. Moreover, the footwear business reported the fifth straight quarter of comps growth. 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%.
Moreover, the company is making efforts to improve e-commerce penetration. 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, and newly launched “Buy Online, Pick Up in Store” and “Reserve in Store” capabilities are delivering results. Additionally, the company is dedicatedly focused on its loyalty program and strives to increase its loyalty membership base. During the fiscal third quarter, loyalty members reflected about 60% of the company’s sales versus 56% last year.
Moving on, this Zacks Rank #3 (Hold) company is on track with its store expansion and inventory management initiatives. In this regard, Hibbett reiterated its target of growing in more than 1,500 stores in underserved markets. In third-quarter fiscal 2019, Hibbett introduced seven new stores; expanded, relocated and remodeled one store; and shut 24 underperforming outlets. The company 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, the company is stringently working on inventory management initiatives.
Despite such upsides, Hibbett has been witnessing dismal operating margins for a while now, primarily due to higher SG&A expenses. The company’s operating income declined 7.4%, while operating margin contracted 420 basis points (bps) in the third quarter. The decline can be attributed to higher store operating and SG&A expenses. SG&A expenses increased 7.5% and 436 bps as a percentage of sales, driven by increased e-commerce related operating expenses, non-recurring costs associated with the acquisition of City Gear and a deleverage due to lower sales. In fact, e-commerce related expenses hurt margins and the bottom line in the reported quarter. Prior to this, the company’s operating margin contracted 200 bps in the first quarter of fiscal 2019. The metric declined 180 bps and 480 bps in the fourth and third quarters of fiscal 2018, respectively.
Going ahead, the company expects SG&A expenses in fiscal 2019 to increase 7-9%, excluding City Gear acquisition costs, and 8.8-11.2%, including acquisition costs. This may further weigh on operating margins. Such downsides have dampened investors’ sentiments, evident from the stock’s 38.5% decline in a year’s time against the industry’s growth of 2.6%.
Nevertheless, we believe that the company’s efforts to boost sales will help it counter the aforementioned hurdles and aid the stock’s revival.
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