Hibbett Sports Upgraded With A Tax Cut, New Products And E-Commerce As Catalysts

In a dramatic reversal, Hibbett Sports, Inc. HIBB has received an upgrade from Canaccord Genuity.

After suffering over a 30-percent decline in 2017, Canaccord said Hibbett is now in a "sweet spot of improving fundamentals," with new catalysts driving a possible reversal in the sporting good retailer's outlook.

The Analyst

Camilo Lyon of Canaccord Genuity upgraded Hibbett Sports from Hold to Buy with a price target increased from $17 to $30.

The Thesis

Many sportswear brands and retailers that suffered a brutal 2017 are receiving upgrades to start the New Year.

Struggling performance from a weaker product lineup has forced sportswear companies to up their innovation and product pipeline. As retailers essentially put old products on a fire sale, the industry is making way for new product assortments that are leading analysts to turn more bullish in their future outlook. 

Lyon outlined four catalysts that he said will drive earnings power "well north of $2 in fiscal 2019" for Hibbett: 

• Significant tax reform benefits that create potential for incremental buybacks.
• Hibbett exiting fiscal 2018 with a clean inventory position that should result in improving margin trends in fiscal 2019.
• E-commerce is rapidly gaining scale with improving margins.
• A sequentially improving product pipeline from key vendor partners.

Hibbett Sports is expected to be a "significant beneficiary" of the sweeping new tax legislation signed by President Donald Trump last month. The company is expected to see its tax rate lowered from 37 percent to 21.6 percent in fiscal 2019, Lyon said. (See the analyst's track record here.) 

The incremental cash flow benefit is expected to be deployed into buybacks, providing some support for shares moving forward, the analyst said. A cleaner inventory outlook is also a promising sign for the upcoming year.

“HIBB has made significant progress in working down slow turning footwear platforms, and we believe the company will be in a much cleaner inventory position as it enters fiscal 2019,” Lyon said.

Although aggressive markdowns weighed on margins throughout 2017, Hibbett is nearing a completion of this effort, the analyst said.

“ ...  [With] greater allocations of newer on-trend products increase as a part of [Hibbett's] mix, coupled with more innovation from NKE, we expect to see sequentially improving comps, more full-price selling and richer margins,” Lyon said. 

Hibbett is likely moving toward strong brands like Nike Inc NKE and adidas AG (ADR) ADDYY and away from struggling Under Armour Inc UAA.

E-commerce has been another encouraging sign for Hibbett in 2018, with nearly 20 percent of online traffic coming from states that do not have a physical store presence, according to Canaccord. 

With the NCAA football championship set to kickoff Monday night, an all-SEC matchup also bodes well for the company; 18 percent of Hibbett Sports' store base is in Alabama and Georgia.

Price Action

Hibbett Sports was trading up nearly 4 percent at $22.50 at the time of publication. 

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