Are Hibbett's (HIBB) Margins Likely To Recover Anytime Soon?

Hibbett Sports Inc. (NASDAQ:HIBB) is going strong, when it comes to price performance, with the stock gaining 11.4% in the past month against the industry’s decline of 4.4%. The company’s positive earnings trend, improved e-commerce penetration and loyalty program, as well as stringent inventory management aided this outperformance. However, the company’s soft-margin trend is a key concern, which keeps our rating for the stock at Zacks Rank #3 (Hold).

Promotion & Markdowns Impact Margins

Hibbett Sports is witnessing strained margins for quite a while now. This is clear from the reduction in gross and operating margins in the past few quarters. Notably, gross and operating margins contracted 153 basis points (bps) and 180 bps, respectively, in fourth-quarter fiscal 2018. The decline in gross margin was due to increased promotions and markdowns undertaken to improve inventory along with higher e-commerce penetration. Additionally, higher SG&A expenses due to additional operating expenses associated with the 53rd week and increased marketing expenses related to the e-commerce business took a toll on the operating margin.

Notably, this was the sixth straight quarter of negative gross and operating margins. Gross margin declined 337 bps, 440 bps, 160 bps, 180 bps and 70 bps, respectively, in the preceding five quarters. Meanwhile, the company recorded operating margin decline of 480 bps, 330 bps, 350 bps and 330 bps, respectively, in the third and first quarter of fiscal 2018 along with the fourth and third quarter of fiscal 2017. Further, it reported an operating loss of $5.2 million in second-quarter fiscal 2018.

Higher SG&A Expenses to Hurt Operating Margins

Going into fiscal 2019, Hibbett seems to have put in place constraints related to gross margins. It expects gross margin to increase about 70-100 bps, mainly due to rise in realized product margins because of a better inventory position.

However, SG&A expense is expected to increase 6-8% due to higher operational and marketing costs related to e-commerce business, investments in employees and omni-channel initiatives as well as higher compensation costs linked with more normalized incentive payments. This is likely to have a bearing on the company’s operating margin and profitability for the year.

Consequently, the company envisions earnings for fiscal 2019 to be $1.65-$1.95 per share compared with $1.71 earned in fiscal 2018.

Estimates Roll Down

The company’s overall soft outlook for fiscal 2019 led to a downtrend in the Zacks Consensus Estimates in the last 30 days. Estimates for the first quarter and fiscal 2019 have declined by 3 cents and 6 cents, respectively, to $1.13 per share and $1.87 per share. Moreover, estimates for fiscal 2020 have dipped 1 cent to $2.08 per share.

Other Stocks Witnessing Margin Pressures

Notably, Hibbett is not the only retailer plagued with margin constraints. We see many retailers grappling with lower margin graphs due to higher costs related to strategic initiatives along with increased operating expenses.

One of Hibbett’s closest peers DICK’S Sporting Goods Inc. (NYSE:DKS) is witnessing margin pressures due to shrinking sales and increased promotions among others. Going forward, it expects greater product innovation from its key partners and further expansion of its private brands business to lower margin pressures than previously anticipated. However, the company still expects margins to remain negative.

Abercrombie & Fitch Company (NYSE:ANF) has been witnessing strained margins due to soft traffic at stores as well as a highly promotional environment. Additionally, its ongoing strategic initiatives to improve profitability have been weighing on the margins. The company’s gross margin is likely to remain under pressure in first-quarter fiscal 2018. It also carries a Zacks Rank #3.

Further, Ross Stores Inc. (NASDAQ:ROST) projects soft operating margin for the first quarter and fiscal 2018 due to soft merchandise margin and the impact of competitive wage along with benefit-related investments.

All three stocks carry a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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