I’m Not Investing in this Retailer, Should You?

August 20, 2017

As a special treat, I’m publishing one of my reports publicly that my clients (whom I call partners) get to enjoy. I average 3 such reports each week, some about current investments, others about rejected investments, and a few on macroeconomic events.

Dear Partners,

As you know, great investments can be found in arenas where the market is pessimistic. Retail is one of them, thanks to Amazon and the internet.

While I’ve never been to a Hibbett Sports Store, I imagine it’s just like any regular sports store like Dick’s Sporting Goods. This is not a good business to be in these days, and the market has punished the stock severely. It traded as high as $64 in Nov 2013 and it’s now down to $10.90 as Aug 18, 2017.

Just like an investor shouldn’t buy a great company at any stock price, an investor shouldn’t avoid an unpromising company at any stock price.

There are a few struggling companies that trade at prices so low that a liquidation of the company or some other catalyst can create a sizable profit for investors.

Investing in such companies is called cigar butt investing, because investing in such companies is like picking up a cigar butt on the street and getting one last puff for free.

While I prefer non-cigar butt investments, we are in an environment where there aren’t enough opportunities in quality companies that meet my requirements, so I have to be flexible enough to use a different set of tools.

Hibbett is a potential cigar butt opportunity. It’s stated book value (on Yahoo Finance) of $15.95 is much higher than it’s current price of $10.90.

Book value is usually irrelevant for quality companies, but it is important for companies that may potentially be liquidated, split or privatized at some point in the future.

When using book value as a factor in your investment analysis, one simply can’t rely on what various websites publish. You must usually adjust book value by taking out intangible assets and discount various assets by a certain factor.

For Hibbett Sports, Christopher Speetzen published a report on Seeking Alpha (an investment website) that demonstrates such adjustments. (Note: he published the article in the middle of the trading day, so his price is $10.)

 
8/18/2017        
HIBB        
Shares 20.78      
P/Share $ 10.000      
Mkt Cap $ 207.81     Revised
  Value % of Total Discount Value
Cash and cash equivalents $ 52.76 11% 0.00% $ 52.76
Inventories, net $ 276.43 59% 25.00% $ 207.32
Other Current Assets $ 21.04 4% 25.00% $ 15.78
Total Current Assets $ 350.23      $ 275.86 
Property and equipment, net $ 113.73 24% 25.00% $ 85.30
Other Assets $ 6.02 1% 25.00% $ 4.51
Total Assets $ 469.99      $ 365.68 
Accounts Payable $ 98.88      
Short term capital leases $ 0.61      
Accrued Expenses $ 17.09      
Total Current Liabilities $ 116.58       
Non-Current Liabilities $ 27.57      
Total Liabilities $ 144.15       
Equity $ 325.84      $ 221.53 
Book Value / Share $ 15.68      $ 10.66 
Price to Book 0.64      0.94
 

You can view his full article here: https://seekingalpha.com/article/4100390-buy-retailer-trading-book-value

While others (myself included) would adjust some of the items a little differently, Christopher’s calculations wouldn’t be too far off from those of us who would scrutinize the company’s annual reports.

The question then is “if the current adjusted liquidation book value of Hibbett is $10.66 as shown in the table, why not invest in Hibbett when the price is $10.66 or slightly lower, especially when the company is currently profitable on a full-year basis?”

My answer is that if Sports Chalet, one formerly large sports retailer, went bankrupt, the possibility exists for others in the space. Hibbett is much smaller than Dick’s, so Hibbett has a competitive disadvantage on that front. Moreover, the CEO of Dick’s recently said that retail “seems to be in panic mode with how they’re pricing, and we think it’s going to continue to be promotional, and at times irrational, going forward.”

According to Christopher, Hibbett produced a loss last quarter of $0.15 per share. In the same quarter last year, Yahoo Finance shows a profit of $0.29 per share. While earnings estimates for this year and next year are still very profitable, I believe that there is a possibility for things to change very quickly.

It’s not remotely impossible that Hibbett could be in the red after 2 years. If so, history has shown (Sears and other companies) that managements of these companies tend to fight their demise with vigor and persistence far longer than they should. If such an outcome occurs, the liquidation book value could be significantly lower than today’s price before a liquidation or catalytic event occurs.

On the other hand, if Hibbett can survive and be profitable for the foreseeable future, this could be a great investment.

I do not like investing when the odds aren’t in my favor, and I feel like investing in Hibbett today is a coin flip. As such I will stay away at current prices and may reconsider an investment in Hibbett at much lower prices or if the fundamentals change.

Please note that my analysis above is only based on a very shallow research of the firm. There isn’t enough on the surface to inspire me to dig into Hibbett’s financial statements like I do for all really promising opportunities.

Best regards,

Earl

I hope this letter to my partners gives you a good picture of our firm’s investment process. By illustrating opportunities that I reject, you can get a sense of investments that do make it our portfolios.

If you liked my analysis and looking for an investment manager who really scrutinizes each investment, please contact us.

If you know anyone who is interested to learn more about Wealtharch Investment Services, please share this post with them.

I would love to hear your comments and questions.

Disclosures:

  • This blog post is for illustration purposes of Wealtharch Investment Services’ investment process only. We are not recommending the purchase of these securities. Please consult your financial advisor before taking any action.

  • Wealtharch Investment Services do not own any of the securities mentioned and we do not plan on buying these securities in the near future.

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