HIBBETT: A Mathematical Nike | Financial Deep-Dive (Part 1)
Why did John Hempton buy 5% of this diamond-in-the-rough? It's a lean, mean ROIC machine with an Outsider CEO management style. This is the financial analysis complement to his "scuttlebutt" analysis.
Highlights:
Hibbett is one of those “diamonds-in-the roughs”. Far from being simply a traditional sporting goods store, it has a unique differentiator in marketing to a very niche customer demographic.
It is also neck-deep in sneakerhead culture, resulting in their business economics resembling fashion (alá Dyson or Stanley) over traditional retail price war economics.
In their last quarter, Nike labelled Dicks, JD Sports and Hibbett as their important North American partners. Dicks’ FY23 sales were about 7.5x larger than Hibbett’s. Hibbett also announced the merger of their loyalty program with Nike’s last quarter.
Hibbett’s management also employs Optimal Capital Allocation to the finest degree, a surprising discovery in a relatively small company. This has driven much of their 13.5% EPS CAGR over the past 10 years.
Table of Contents:
Sneaker Industry Primer: Understanding Sneakerhead Culture & Commercial Implications
Hibbett: 10Y Historical Financial Performance (3-Statement Analysis)
Financial Analysis & Interpretation of Recent Performance (Part 2)
Risk (Part 2)
Valuation (Part 2)
Hibbett: Business Background
A couple of weeks ago, famed Australian value investor John Hempton revealed in his article that he had acquired a sizeable 5% stake in a small, below-the-radar retail company with a roughly $750M market cap called Hibbett HIBB 0.00%↑. In that article, he did a “scuttlebutt” analysis of the company. However, there wasn’t a detailed financial analysis of Hibbett accompanying that article, perhaps for good reason.
This report is meant to be a financial analysis complement to that article for anyone interested in the company. In this Hibbett stock report, we will analyze its business through the lens of its financial performance over the past 10 years.
Hempton’s article linked above provided a great scuttlebutt overview of Hibbett’s business. Without reinventing the wheel, I’ll try to summarize it as best as I can:
Hibbett is not the same as traditional sporting goods chains such as Foot Locker, owing to its niche mindshare amongst the sneakerhead culture in the Black community. 80% of their stores are in strip malls in locations where the customer demographic is 90% African American. This makes Hibbett important to Nike in a way that other sporting gear goods stores like Foot Locker aren’t — especially after Nike decided to capture the middleman margin by expanding its own DTC store presence a few years ago.
Hempton’s scuttlebutt begins with his trip to Adidas’ offices, where management reveals both Nike’s and Adidas’ marketing approach to selling shoes. The general idea is to maximize marketing reach by first getting their shoes onto the feet of important influencers (e.g. Lionel Messi, Kardashians); and then apply a laddered approach towards marketing to different customer demographics in order to gradually increase global market share. This is a marketing-first strategy rather than a traditional retail pricing strategy.
When Nike changed their distribution strategy from selling through wholesalers to selling DTC, it disrupted the traditional sporting goods retail model and introduced market pessimism into the valuations of industry participants like Foot Locker and Hibbett. However, Hempton zigged where the market zagged, and conceived that Hibbett would remain differentiated to Nike owing to its unique customer demographic niche. This has played out accurately so far. If you’d like the full details, I’d recommend reading his entire excellent article in full.
To oversimplify, Hibbett is basically a Dick’s Sporting Goods equivalent of sorts which sells branded sports goods such as Nike shoes, Adidas jeans, etc. However, and as Hempton’s article points out, it has somehow managed to carve out a niche moat of sorts in the hyper-competitive retail middleman industry. As their FY23 Annual Report below shows, 80% of Hibbett’s stores are located “in a strip mall with very low rent in a part of town where the population is 90% African American”. Their crowning achievement was their 2018 acquisition of City Gear, which transitioned Hibbett from a struggling sports goods retail chain to being a fashion business in the sneaker industry.
Wait… did I just say Hibbett was in the fashion business? That’s right, Hibbett and City Gear are actually neck-deep in sneakerhead culture, with the majority of their sales coming from selling branded Nike and Jordan branded sneakers to aspiring young men largely from the Black community. Unlike traditional sports goods retail chains like Foot Locker which sells sneakers to runners largely for utilitarian purposes, sneakerhead culture is largely dominated by a collector’s mindset (similar to baseball cards or expensive watches). Collectors are willing to pay top-dollar for a rare “drop”, and some will even baby their sneakers to avoid creases.
Hence, Hibbett’s business economics of selling sneakers to sneakerhead collectors rather resembles selling Stanley tumblers or Lululemon pants — in stark contrast to traditional race-to-the-bottom retail. There is a very active secondary market that the primary market relies on for demand, and there are seasonal ebbs and flows in demand that fluctuate with new releases or trends. There is also an inherent price inelasticity in the business, as demand is driven by emotional factors rather than purely logical ones. To sum the business model into one word, it is Marketing.
Of course, Hibbett merely distributes Nike’s sneakers and does not benefit from the outsized margins of being a brand owner like Nike. But as Hempton points out, City Gear (and by extension Hibbett) has somehow managed to carve a niche in terms of its locations as well as its customer demographic. Unlike traditional sporting gear goods stores like Foot Locker, Hibbett owns a precious piece of mindshare amongst the Black sneakerhead community which Nike cannot do without — for reasons we’ll explore in this report. This is perhaps further emphasized by recent developments, where management announced in the latest quarter that they have merged their loyalty program directly to Nike’s loyalty program — with encouraging results. Their loyalty program drove 60% of Net Sales YoY, and most of their sales growth came from recurring customers.
But wait, there’s more. Peeling back the covers of Hibbett’s financial statements reveal that it is so much more than “just another retail company”. Perhaps due to their sales performance being tied to Nike’s and out of their control, management has resorted to imposing an iron grip on the things within their control — namely costs and ROIC. This is a management team which describes the breakdown of their Gross Margin decline in their earnings calls in basis points.
And perhaps because their revenues are so greatly impacted by seasonal trends and Nike’s own performance, management has turned their attention towards Optimal Capital Allocation instead. Over the past 10 years, the company has reduced its outstanding share count by 55% — increasing their EPS at a markedly higher rate than Net Profits, with share buybacks implemented at a relatively high earnings yield. There’s also plenty of other evidence of optimal capital allocation throughout their historical three statements, which we’ll explore in detail below. Hibbett’s management style resembles the Outsider CEOs, indeed.
The sum of all this results in Hibbett being run like a bean counter. They have stable but boring revenue growth and robust cash flows, which enables management to translate their nitty-gritty understanding of retail industry operations into surprising financial acumen — by managing margins to the basis point level and allocating capital in the most shareholder-friendly way possible.
This is highly relevant because Hibbett’s shares have consistently traded at around 10x PE for most of the past decade, turning share buybacks into an incredible growth engine that simulates operational growth. This is evident by their 13.5% EPS CAGR over the past 10 years — a surprising outperformance for what amounts to a “mere” Nike middleman distributor, and beating even Nike itself (9.8% 10Y EPS CAGR). They have also achieved this while being consistently Net Cash for most of the past 10 years.
This is also why I described Hibbett as “A Mathematical Nike”. Cynics might accuse management of MBA-fying the business; but I can think of nowhere better to implement this sort of formulaic management style than a boring business gushing free cash flow with limited reinvestment opportunities trading at low multiples. Hibbett’s formulaic financial model also allows us to project its future cash flows far out into the future, thus reducing risk (i.e. Nike clone). This is financial engineering at its finest — found in the most surprising place of all.
Highlights from John Hempton’s article: (emphasis mine)
The business is working out. Nike has several times called Hibbett out as an important partner. We asked them once why they thought Hibbett was such an important partner and they pointed to the “urban market”. This is odd because Hibbett is largely a small-town and rural brand – but then of course “urban” is code for “African American” and it becomes clear to us that they value City Gear for the reasons we do.
In the last quarterly conference call (a call where Nike guided sales down) Nike labelled Dicks, JD Sports and Hibbett as their important North American partners. They did not mention Foot Locker. And that is deeply confirmatory because Dicks is huge ($12.7 billion in sales). Foot Locker (who are on the outer) is even larger in shoes. Hibbett is less than 10 percent as large in shoes – but is mentioned by name.
We also (randomly) met a Nike executive on the train from Amsterdam to Paris. His responsibility was small distributors in a largish part of Europe. His remit was clear – he was to kill any retailer who was not additive to Nike’s brand – and he was to shower with love a retailer who was additive to the brand. He could organize one-off drops of rare shoes for a special retailer. What he wanted was a retailer that approached important and style-setting niche markets – and his example would be say a skateboard shop that ran skateboard lessons for both elite skaters and 15-year-old girls.
Table of Contents:
Sneaker Industry Primer: Understanding Sneakerhead Culture & Commercial Implications
Hibbett: 10Y Historical Financial Performance (3-Statement Analysis)
Financial Analysis & Interpretation of Recent Performance (Part 2)
Risk (Part 2)
Valuation (Part 2)
🧠 400-word AI-generated summary of this report
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