Hibbett sports_ a bricks-and-mortar winner in retail_ – yahoo finance

In 1996, the Wall Street Journal wrote its first article on online competition for travel agents. High profit selling pdf “For more than a year,” the newspaper reported, “airlines have been trying to cut their payments to travel agents, who account for 80% of the bookings for some carriers, and the Internet holds potential for helping trim those costs.” In fact, the Journal felt there was a real risk that independent travel agents could become the “milk men” of the 1990s.

Fast forward twenty years. Items with highest profit margin on ebay Online booking is simply superior because of efficiency, price and range of inventory.

Low startup cost high profit business According to a CNN report from 2013, the number of bricks-and-mortar travel retail locations is 13,000, down from a peak of 34,000 in the mid-1990s. Business ideas with high profit margins Those who do survive must do so on much lower commissions from airlines than they once earned.

What lessons can we learn from this experience? Is industry structure fate? That is, the travel industry in the 1990s was dominated by a few large suppliers, the airlines. Highest profit business in india By contrast, the travel agents were heavily fragmented with no single travel agent having significant market share. Low investment high profit business philippines As a result, the travel agents were powerless to stop the airlines when they began to sell direct to consumers over the internet. High profit business to start Are all fragmented industry participants doomed to suffer the same fate?

The sporting goods industry in the US is relatively straightforward. High profit shares in india There are three nationwide chains of generalist retailers, Dick’s ( DKS), Big 5 ( BGFV) and Hibbett ( HIBB). Low cost high profit business ideas The other big companies are either regional or specialists (or, in the case of Sports Authority, in liquidation). High profit business ideas in india But the retail segment is highly fragmented. High profit margin business DKS is the industry leader with an estimated 10% market share. High profit small business Other than the 11 companies shown below, there is competition from many mom-and-pop shops, big box retailers and Amazon.

Upstream, manufacturers supply everything from golf clubs to basketball shoes to camping stoves. High profit crops Consumers buy the products via two primary channels, bricks-and-mortar stores and the internet.

As of 2015, sporting goods stores in the US generated $48 billion in sales, according to IBISWorld, up from $39.8 billion in 2012. Business with high profit philippines Sports participation is up, too. Small investment high profit business india According to Euromonitor, participation in high school sports has increased from 25 percent to 35 percent over the last 35 years, with nearly double the number of female students playing sports as compared to the 1980s.

Like the travel business, the sporting goods industry is dominated by a few large suppliers. List of business with low investment and high profit For one nationwide retailer, Hibbett Sports ( HIBB), just two vendors, Nike and Under Armour, provided over 70% of their inventory in fiscal 2016. High profit margin business ideas The lines are increasing blurred between manufacturers, bricks-and-mortar retailers and internet-only sellers. Small items with high profit margin Manufacturers sell direct-to-consumers (DTC) via the internet and bricks-and-mortar stores. High profit cash crops Similarly, the traditional retailers all have web sites.

Traditional retailers have suffered in recent years. Small scale business with low investment and high profit In the last year alone, we have seen five major bankruptcies: Sports Authority, City Sports and Vestis Retail Group (owners of the Sports Chalet, Eastern Mountain and Bob’s stores chains). High risk high profit Those who have avoided going bust have seen their market capitalizations slashed. Business ideas with low investment and high profit in india HIIBB, for example, peaked at $67.50 at the beginning of 2014 and is at $35.80 as of the date of this post.

Or, is there an alternative view here? Is it possible that certain bricks-and-mortar sporting goods retailers could survive and even thrive in the internet era?

We will focus on HIBB because it employs a differentiated business model. High profit business in pakistan This business model greatly increases the probability that it will survive the current industry shake-up and to emerge stronger.

HIBB employs a unique real estate strategy that drives everything else. Best business with high profit HIBB currently operates 1,053 small format stores of approximately 5,000 square feet in 33 states (for comparison, Dick’s has 746 stores averaging 50,000 square feet). Low investment high profit business HIBB targets county populations of 30,000 to 100,000. High profit items Approximately 81% of the store base is located in strip centers, which includes free-standing stores, while approximately 19% of the store base is located in enclosed malls.

Secondarily, HIBB also achieves economies of scale by clustering stores in close to proximity to one another. Products with high profit margins This store density drives HIBB’s lower sales, general and administrative expense (SG&A) as a percentage of sales. High profit low cost business ideas The company observes that higher store density “enables us to achieve significant cost benefits including lower corporate expenses, reduced logistics costs and increased economies of scale from marketing activities.”

If all of this capacity was ever needed, it certainly is of little use now that e-commerce is a viable channel. Low cost high profit items Taking all of this excess capacity out of the market has been and will continue to be a painful experience. Low cost high profit business in india More bankruptcies can be expected. What products have high profit margins Is it inevitable that HIBB will be one of the companies that go bust or at least suffer a long, slow decline?

The risk of a Sports Authority implosion seems very low. Small business with low investment and high profit in india We have identified three factors highly correlated with retail chains going bankrupt:

• Too much debt. Small business with high profit margin Growing by means of acquisition saddled these companies with debt. Companies with high profit margins Sports Authority had $1 billion of debt at the time of its bankruptcy. High profit items to resell Vestis revealed in its own bankruptcy filing last month that it had as much as $35 million of debt and would be taking $125 million worth of bankruptcy financing from Wells Fargo in order to keep store doors open during the dealings. Small business with low investment and high profit The interest expense squeezed out other forms of investment. Small business high profit in india The chains could not update their stores or make other investments because there wasn’t enough money to do what had to be done.” HIBB has no debt .

• Too much competition. High profit margin Retailers have no switching costs. High profit service business Popular inventory can easily be carried by all competitors. Low investment high profit business in delhi This problem is only exacerbated when competing stores sit in close proximity to one another. Low cost business ideas with high profit in india Considering the plethora of industry peers consumers could choose from, having relatively commoditized, un-differentiated items did not bode well for the chain. High profit business in india In the case of Sports Authority, there is a case of competitors encroaching upon one another — Dick’s Sporting Goods, for example, having many stores located near Sport’s Authority locations. Low cost high profit Geographic positioning often offers consumers that much more of an ability to quickly switch stores and purchase elsewhere, all the while fueling a need to differentiate on more than price.

• DTC competition from the UA and NKE. Items with high profit margins As Greg Thomsen, the managing director of Adidas’s outdoor division, puts it, “It’s hard for sporting goods stores when their number one brand also becomes their number one competitor.” “The lines between wholesale and retail faded from black and white to gray to nonexistent,” Greg Baldwin, vice president of merchandising at sporting goods chain Schuylkill Valley Sports, told the Philadelphia Inquirer . High profit home business “I now compete with 90 percent of my suppliers via e-commerce, physical stores, or a combination of the two. Small scale business with high profit in india The importance of the retailer as a pipeline to the consumer has been greatly diminished.”

HIBB has limited or no exposure to the first two factors. High profit online business Further, we actually see consolidation as creating an opportunity for HIBB to reduce DTC competition. High profit products to sell online Winners will certainly emerge from this consolidation – as painful as it is. High profit industries By reducing supply from the market, the survivors should benefit from reduced competition. Small business with high profit “There is lot of activity in the sporting goods landscape right now. High profit farming The long-awaited consolidation is taking place. Low investment business with high profit Over the past several months, City Sports in Boston is liquidated, Sport Chalet has announced the closing of all of their stores, the Sports Authority is in the midst of liquidating and closing their 400 plus stores and others are evaluating strategic alternatives. High profit selling Although it’s a mess, it’s a great opportunity for DICK’s Sporting Goods.”

Unlike Dick’s thought, HIBB seems unlikely to benefit directly from these closures. High profit business ideas As described above, HIBB has little overlap with Sports Authority or other competitors. High profit greenhouse crops What then is the opportunity for HIBB?

We see high likelihood that HIBB will benefit from consolidation as fragmentation is reduced and the survivors will have greater scale to bargain with the manufacturers. High profit business in malaysia In other words, it by consolidating demand, the balance of power will shift from the suppliers to the retailers. High profit margin products to sell on ebay As the retailers gain scale, they will face the suppliers on more equal footing. Low investment business with high profit in india Thus situated, the retailers should be able to get them to curtail their DTC efforts. High profit margin foods In this way, the sporting goods retailers can avoid the fate of the travel agents.

The CEO of DKS recently commented on the benefits of scale when bargaining with suppliers: “If we were a smaller retailer, a smaller regional retailer, I think you’d have the right to be very concerned about what’s going on. High profit margin products to sell online But the size of the player that we are here in the United States and what these brands mean to us and then what we also mean to those brands, there’s a great relationship that we know that we need each other and we’re working very, very well together.”

We have already seen examples of DKS, the largest retailer, retaliating against the DTC efforts of UA and NKE. Low investment high profit business in pakistan As the manufacturers forward integrate, DKS reverse integrates. Business with small investment and high profit DKS introduced its own private label products that compete with UA and NKE. Small scale business with high profit On the Q1 2016 earnings call, the company stated that they expect the private label business to generate $1-billion of revenue over the next few years, with margin rates of 600 to 800 basis points higher than the brands they replace. Low overhead high profit business Also, they expect their private label brand of women’s apparel, CALIA, to be the number three women’s brand in their stores by the end of 2016. High profit business ideas india Obviously, if DKS or the other retailers are able to get traction with their own in-house brands, this would give them leverage with other suppliers.

• Limited Online Distribution – In sporting goods, as discussed above, premium brands are important to consumers. Business with low investment and high profit The very best brands are sensitive to discounting, presentation of the product as fit for the prestige of the brand, and service levels needed before and after the sale. High profit plants As such, not all products are offered by vendors to all retailers. High profit small business ideas 2013 Many brands are unwilling to sell their goods to an Internet-only retailer. High profit margin business india They do not want their brand tarnished.

• Fit, Feel and Performance – Most sporting goods need to be tested and tried on for fit, feel, and performance before purchase. High profit online business ideas Fishing, cycling, hunting arms, golf clubs, baseball mitts, and hockey sticks are all examples of items that consumers prefer to test for performance before purchase

• Service – In sporting goods, many products need high levels of service. Business with low overhead high profit Bicycles and fishing equipment are but two examples. High profit business for sale In product categories with low service needs-books, for example-this is not a problem and can be sold without the need for a physical retail presence. Business ideas with low investment and high profit in hindi Sporting goods, however, often require a convenient local store to fill service needs.

The elephant in the room during any discussion of the retail industry is, of course, Amazon. High profit companies It seems inevitable that Amazon will one day dominate the entire retail sector.

Yet, the sporting goods industry has done a surprisingly good job of not playing Amazon’s game. Items to sell with high profit margins The sporting goods market is very driven by brand names. Low risk high profit business ideas UA, NKE and Adidas make up 70% of HIBB’s sales. Low cost business ideas with high profit UA and NKE refuse to sell products to Amazon.

Similarly, a 2016 Credit Suisse/Bloomberg report showed that only 17% of the 3,000 SKUs tracked in the study were sold and fulfilled by Amazon.

In a move we appreciate, management has clearly laid out their capital allocation priorities: “First and foremost the priorities for the cash will be to build new stores and remodel existing stores, invest in our major initiatives including the omni-channel initiative and then after that free cash flow will be targeted towards stock buybacks.”

The clearest path to growth for HIBB is to open new stores. Low investment high profit business in chennai Management believes it can grow from 1,053 stores to 1,500 in its current states plus additional growth in states it currently not in. Small business high profit As can be seen below, HIBB as excellent ROIC on its new store investments:

• Phase I – New point of sale (POS) system to be implemented in Q3 2017. High profit small business ideas , we expect to roll out our new POS system, which will enable Phase 1 of our omni-channel initiative. High profit products to sell on ebay This phase will provide inventory visibility across the chain, and will facilitate store-to-store transfers to complete a customer sale. High profit business This phase will also include a new CRM capability, which will allow HIBB to more effectively communicate and market to our database of over 5 million loyalty members.

• Phase 2 – Store-to-home capability, and is expected to be in pilot by the end of FY17. Low price high profit shares This phase will allow HIBB to use its chain-wide inventory to satisfy a customer sale by shipping directly to the customer’s home.

• Phase 3 – Digital commerce. High profit margin products in india It is expected to launch in the back half of FY18. Low investment high profit business ideas Once implemented, digital will be fully integrated with the brick-and-mortar stores, and will provide a seamless omni-channel experience for customers.

HIBB expects to spend $16-18 million on this initiative in FY17. High profit business in india 2012 This spending comes on top of a period of heightened capex. What is a high profit margin In the prior 4 years, capex is running well ahead of depreciation – reversing a 4 year stretch where it ran well below depreciation. Highest profit margin products on ebay The risk here is that the enormous amount of capital expenditures are simply table stakes for retailers in 2016. Low capital high profit business The investment will not result in additional profits but merely help them to maintain their current level of profitability. Low risk high profit business That is, the omni-channel initiative will leave HIBB running to stand still.

With the remaining cash, HIBB has been aggressively buying back shares. Business ideas with low investment and high profit The float has been reduced by 25% over the past 10 years. High profit business opportunities Management expects to reduce the float further in FY17: “Last year we finished the year at about $32 million in cash. Business with high profit We should be at or slightly above that number for this year. Today high profit shares So, we still have quite a bit of availability under our authorization and our cash flow to execute a significant buyback for the year.”

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