Hibbett Sports (NASDAQ:HIBB), one of my favorite sports-related stocks anywhere, reported first-quarter earnings Friday morning, and they were tremendous. For folks who aren’t familiar with Hibbett, it sells sporting goods in small towns across the southern U.S.
Anyway, Hibbett hit all the right notes in the first quarter, and its stock continues to benefit. Though it was down nearly 2% during Friday’s market malaise, it’s up more than 21% for the year.
Dick’s Sporting Goods (NYSE:DKS), its much larger competitor, also announced first-quarter earnings last week, and they were equally impressive. Yet Dick’s stock trades at a far more conservative valuation. I’ll explain why it shouldn’t.
Let’s start with the holy grail of retail — same-store sales. In the first quarter, Hibbett increased sales at stores open a year or more by 11%, compared to a consolidated 8.4% for Dick’s. In addition to its 486 Dick’s Sporting Goods stores, which saw same-store sales increase 7.3%, Dick’s also owns 81 Golf Galaxy specialty golf stores. Those comparable-store sales increased 12.6%, although they represent a small percentage of Dick’s overall revenues.
There’s no mistaking the big brother among this duo. Although Hibbett’s average annual same-store sales growth is higher than Dick’s over the past five years, Dick’s has 11 consecutive quarters of growth compared to 10 for Hibbett. On balance, I’d say Hibbett’s same-store sales history is better, but not by much.
In addition to same-store sales increases, bricks-and-mortar retail grows by opening additional stores and expanding square footage. Over the past five years, Dick’s hiked its store count by 13.8% annually and its square footage by 10.5% per year. That’s 750 and 460 basis points higher, respectively, than Hibbett.
Opening stores costs money, so adding more of them doesn’t necessarily translate to greater profits, although it should if they’re efficiently run. Dick’s stores are approximately 10 times larger than the average Hibbett’s location and generate slightly higher sales per square foot at $187. The trick for Dick’s given the size of its stores is to keep control of its capital expenditures. If not, opening stores becomes an exercise in futility lacking in profitability.
Hibbett has the highest operating margins in the sporting-goods industry. In fiscal 2012, they reached a record 12.8%, 450 basis points higher than Dick’s. Several reasons account for the disparity. The first I alluded to in the previous paragraph. Dick’s stores are 50,000 square feet, compared to 5,000 for Hibbett. The cost to keep the lights on rises dramatically with an increase in square footage.
Then consider that approximately 55% of Dick’s revenues come from sports equipment, commonly referred to as hardlines, which generate lower gross margins than footwear and apparel. In the latest quarter, Dick’s gross margin was 30.8%, 720 basis points lower than Hibbett’s. While Hibbett doesn’t break out its revenue by category, I can say with certainty its margins are higher because it sells more shoes and shirts than balls and bats.
Lastly, it’s virtually impossible to grow to the size of Dick’s (27.6 million square feet versus 4.1 million) and not have higher overhead. These are two businesses at different points in their corporate lives. Someday, Hibbett is going to hit the margin wall, just like Dick’s has.
Dick’s earnings per diluted share increased 50% in the first quarter compare to 29% for Hibbett. Dick’s is still growing, it pays a dividend and is half as expensive as Hibbett’s in terms of price-to-sales, price-to-cash flow and price-to-earnings. Although I’d have no hesitation owning Hibbett at current prices, Dick’s is where value investors should swing their bat because it’s a much better deal.
As of this writing, Will Ashworth did not own a position in any stocks named here.
