The turmoil in the sporting goods industry has forced companies selling athletic goods to scramble for options to gain business. Hibbett Sports Inc. (HIBB – Free Report) is one of the retailers that have been impacted by the situation.
Intense Competition Plagues Sports Industry
The sporting goods industry seems to be in doldrums, as customers are jumping on the dot-com bandwagon, leaving lesser options for brick-and-mortar retailers. Consequently, the sporting goods space has grown extremely competitive and promotional, consequently creating pressure on margins and the bottom line. While most retailers are trying all means to enhance omni-channel capabilities, competition from online giant Amazon.com Inc. (AMZN – Free Report) still remains a major threat.
In fact, this has been a major concern not only for Hibbett, but also for big-wigs in the sporting goods industry. Some of the names that have been hurt by this scenario include DICK’s Sporting Goods Inc. (DKS – Free Report) , Big 5 Sporting Goods Inc. (BGFV – Free Report) , Foot Locker Inc. (FL – Free Report) and The Finish Line, Inc. (FINL – Free Report) . Additionally, vendors like NIKE, Adidas and Under Armour resorting to more direct selling options is likely to plague the top lines of these sporting goods retailers. That said, let’s see how this is impacting Hibbett’s performance.
Negative Sales Surprise Trend
The company has a dismal sales surprise history, which exhibits top-line miss in nine of the past 10 quarters. Coming to recent results, though the company posted narrower-than-expected loss per share for second-quarter fiscal 2018, both the top and bottom lines compared unfavorably with the prior-year period. Sales missed estimates again, continuing with its negative surprise trend.
Moreover, comparable-store sales (comps) were a letdown, marred by sluggish traffic, softness across all categories, increased promotional activities and difficult launch compares. Further, a challenging retail environment played spoilsport.
Lowered View Hurt Sentiment
The company substantially trimmed guidance for fiscal 2018 due to the soft second-quarter results and expectations of the persistence of a tough retail environment. While the company projects soft sales through the rest of the year, it now anticipates comps decline in the mid to high-single digit range, compared with the prior guidance of negative 1% to positive 1%. Additionally, it envisions earnings for fiscal 2018 in the range of $1.25-$1.35 per share, down significantly from the previous forecast of $2.35-$2.55.
Strained Margins Still an Impediment
In addition to the soft sales trend, Hibbett is witnessing strained margins for quite a while now. This is clear from the fact that the company has witnessed reduction in gross and operating margins in the past few quarters. Notably, its gross margin contracted 160 basis points (bps), 180 bps and 70 bps, respectively, in first-quarter fiscal 2018, and the fourth and third quarters of fiscal 2017. Similarly, operating margin fell 330 bps, 350 bps and 330 bps, in the aforementioned quarters respectively.
Coming to the recently reported second-quarter fiscal 2018, the company’s gross margin contracted 440 bps, while it reported operating loss of $5.2 million. The decline in margins was due to unfavorable impact of promotions as well as markdowns related to clearing of excess and aged inventory, along with logistics and store occupancy cost deleverage.
Looking ahead, Hibbett anticipates gross margin to contract 250-285 bps in fiscal 2018, compared with its previous guidance of 55-75 bps reduction. Gross margin in fiscal 2018 is anticipated to be hurt by increased markdowns to lower aged inventory, continuation of the highly promotional retail environment, along with persistent logistics and store occupancy deleverage stemming from lower comps.
Growth Strategies Raise Hopes
While the external environment remains challenging, Hibbett is encouraged by the progress it is making on internal initiatives, particularly the launch of its new e-commerce site. The company observes that initial results from the website launch have exceeded expectations. Further, it has successfully re-launched loyalty program to re-engage existing customers while attracting new ones. The initial response to the refreshed loyalty program has also been positive. The fact that these initiatives were well-received by customers is evident from the acquisition of new customers, which is crucial for future growth. The company revealed that these initiatives have attracted new customers from locations where it does not have stores.
However, more pronounced growth in its top line will be a clear indication that the company’s initiatives are paying off. For now, the troubles in the sporting goods industry discourage investment in the stock.
