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Why Hibbett Sports, Inc. could be the next Sports Authority (NASDAQ:HIBB)

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Hibbett Sports fell 10% after posting poor earnings results.The share price correction was not overdone–results were poor with no reason to believe they will improve.I would rather buy Finish Line or

Source: Don’t Buy The Hibbett Sports Pullback – Hibbett Sports, Inc. (NASDAQ:HIBB) | Seeking Alpha

Hibbett Sports has always been a southern sports chain. They were small and courteous and capable of getting your sports team the cleats, sports gear or apparel needed to head into the season without having to walk into the oversized behemoths of Sports Authority, Dick’s, or Academy. Hibbett Sports also placed its stores in storefront strip malls and this has served the company well. Watching them rise from a low of 33.90/share in Sept. 2011 to a high of 67.15 in December 2013. This growth was due to a very conservative approach and the stores entry into footwear in a bigger way. Nike was doing well and the majority of the wall in any Hibbett Sports was dominated by the brand. In the words of Earth, Wind and Fire, “Something happened along the way,” and Hibbett Sports instead of remaining small and conservative, ramped up and began opening more locations, in riskier areas and they began an expansion out of the south. This expansion West will not be a smart move for the southern chain and it could lead to the closing of stores as margins decrease due to the expansion and the failure to diversify their shoe inventory as they are no longer the go to for small towns looking for sports equipment and apparel.

Hibbett Sports sits at 40.41 at the close of market Friday. I think when the market opens on Monday, although we are entering a traditionally strong sales period, Hibbett Sports will drop to the mid 30s. This will trigger a sell off and the expansion will turn into the catalyst for store closures and potentially turn Hibbett Sports into TSA part 2. Why all of the doom and gloom?

Three Reasons:

  1. Diversification of product. Hibbett Sports got into the footwear game late. Because of this they leaned heavy into Nike. Their product offering in footwear is limited and to increase the size of their shoe wall and diversify the offerings they will have to spend more money decreasing margins, but they also have an abundance of inventory and I’m not certain of how RTVs work for Hibbett Sports, but a few years back they had the ability to liquidate inventory quickly with a variety of sales strategies. With sales lagging, they won’t be able to implement sales as they did in the past.
  2. Merchandising. Hibbett Sports was an apparel company that offered sports equipment. This was a great strategy but a clothing store is laid out differently than a store that is primarily footwear. The layout of HS is bad and with apparel sales and footwear lagging, the stores are cluttered. They are in serious need of a facade and interior makeover. I don’t know for certain, but the store has to be suffering serious loss prevention issues and due to the layout there isn’t a clear line of site from the back of the store to the front of many of their locations. Combine this with leftovers from their sports equipment days and you get a mess of a layout and some very confused customers.
  3. The California expansion is a HUGE mistake. I learned the hard way that you have to stay in your lane. Hibbett Sports is attempting to enter into some very deep waters. California is the home of outlets. In San Diego, my old stomping grounds, I can literally say that trying to place a Hibbett Sports there is a big, big mistake. I don’t know if they are going into Southern Cali, but from San Diego up to Riverside which is basically the lower half of Southern Cali, there are at least 6 different outlet malls. Add to this some very high end malls with Footlocker and Footaction stores along with a very strong Shiekh retail in Los Angeles and the multitude of boutique shops, the only reasonable place for Hibbett Sports would be Central California (Bakersfield to Fresno) and above the Bay Area in Humboldt. Those territories are not strong enough to carry an expansion. Someone made a terrible decision in expanding West.

If Hibbett Sports doesn’t reconsider its expansion they could be setting themselves up to go the way of The Athletes Foot and The Sports Authority. They will have to open distribution centers out West and this still doesn’t account for the absolutely horrible merchandising of the stores. Instead of expanding, the company needs to take that money and reinvest in the redesign of its stores and look into developing a stronger online platform which integrates into its individual store inventory.

What do I know though? I’m just a sneakerhead who looks too deeply into footwear.