Hibbett Stock: The JD Sports Bid Conundrum (NASDAQ:HIBB)

The following segment was excerpted from this fund letter.

Hibbett, Inc. (NASDAQ:HIBB)

Hibbett is an unusual long for us. It is consumer facing and we rarely own consumer stocks. Secondly, we wrote it up – extensively – recently. As disclosed on Form 13G, we own a bit over five percent of the company and it is the only time Bronte has ever filed such a substantial shareholder notice.

Hibbett received and accepted a bid from JD Sports (OTCPK:JDSPY) – the Manchester based, but global, sneaker retailing giant. It is tempting to declare victory and move on. But we are into postmortem – if only to be honest to ourselves.

This deal – and the price – brings into question our thesis for Hibbett.

We genuinely believed that Hibbett profits would be higher in five years. And not by a little bit. The argument was simple. Nike (NKE) (in particular) had a strategy of killing any distributor who they perceived as not additive to the Nike brand and showering with love any retailer who was additive to the Nike Brand.

We explained at length why we thought Hibbett was additive to Nike. Also, we thought that Nike would neuter their competition – destocking many players – possibly eventually including the super-giant Foot Locker.

Since then, Nike has made marginally conciliatory moves to Foot Locker – but broadly nothing has changed. Foot Locker produced results that look like a slow track to bankruptcy. Our thesis looked intact.

So, it is very difficult to explain why Hibbett management – who we think are honest and competent – agreed to a deal at 10 times current year earnings. By far the most likely hypothesis is that we were wrong – and the management – who know the business better than us disagree that the long-term direction of profits is up – and thought that 10x earnings was a good price.

There are several further issues.

• The position of Nike
  • Nike in North America has three oft-stated key partners. These are Dicks Sporting Goods, JD Sports and Hibbett. Hibbett is (by far) the smallest of these three. There will now be two. Is Nike comfortable with this? How did Nike involve itself in the decision making process and if it didn’t how can JD Sports be sure it is okay?
• The fit between Hibbett and JD Sports
  • Hibbett is not an obvious fit for JD Sports. As explained in our end of year letter, for sneaker retailers, it is critical to maintain superlative relationships with your suppliers. Nike will not sell fashionable shoes to a supplier who is not additive to Nike’s brand. You can be additive to the brand in many ways – a small cool skateboarding shop run by an elite skateboarder but offering skateboarding lessons to teenagers is right in Nike’s sweet spot. So is a running shop that hires elite athletes who explain why this shoe is better for a particular running style. Just putting shoes on a shelf in a b-mall is not additive to Nike’s brand – and Nike will not supply you. Hibbett – as we explained – appeals to Nike because it goes deep into underserved communities – places where nobody – Nike included – is ever going to open a super-store. Through the City Gear franchise, they go deep into “urban” communities. In every City Gear shop we visited all the customers were African American. Hibbett does omnichannel – but it is an underserved community first model. JD Sports by contrast is a super-store and A-mall strategy – again with an omnichannel twist. The JD Sports mega-stores are destinations – and they share the online channel with their brand partners. JD runs other brands (such as Finish Line) – but it is explicitly a strategy that prioritizes the JD Sports brand and destination locations. In the conference call JD Sports management noted that there was almost no store overlap. They thought this was complementary. And maybe complementary might be the polite way to describe what might wind up being a merger of companies with very different cultures.

We are interested in how this plays out.