My family portfolio is filled with retailers. We own Carvana (NYSE:CVNA), Farfetch (NYSE:FTCH)Sea Limited (NYSE:SE), and Amazon. Obviously my strong bias is toward internet retailers. In 2020, we're seeing a huge wave of retail businesses trying to shift to the virtual world. This has been happening for decades, but because of the coronavirus pandemic the trend has really accelerated. That's why Shopify is killing it right now. And what about the brick-and-mortar retailing stocks that are making this transition?

Hibbett Sports (NASDAQ:HIBB) is a 75-year-old retailer that sells sports equipment and clothes, mostly Nike's products. Based in the South, the company has over 1,000 stores all across the U.S. Most of the stores are in small towns, in strip malls. The company's market cap is tiny, $620 million. It has slight profit margins and pays no dividend. Why would a high-growth investor bother taking a look at Hibbett Sports?

Interior of Hibbett Sports store.

Image source: Hibbett Sports.

Revenues are spiking dramatically

In the second quarter, Hibbett reported revenue growth of 75% year over year. That number reflects a 60% growth on the brick-and-mortar side, and an outstanding 212% growth in e-commerce. This amazing spike in revenue happened in the middle of a health pandemic and a recession. 

No doubt you've heard of all the retailers that are suffering right now from the loss of revenues. In my opinion, many of these closed shops won't be coming back. And all that retailing business will shift elsewhere. The survivors, the winners, are going to expand their market share dramatically. If retailing is a disaster zone right now, how exciting is it to find a winning retailer in this environment?

Obviously the shift to e-commerce dramatically helped Hibbett. But even the brick-and-mortar numbers showed outstanding growth. On the conference call, CEO Michael Longo identified the "temporary closures of competitors" as one of the factors in the surge. Yes, that's right, if your competitors are closed for business, of course your numbers are going to spike. Longo said: "Approximately 27% of store traffic and approximately 49% of our online business came from new customers."

Is this just a fluke quarter? Will all those new customers stop going to Hibbett Sports once we get back to normal and our society reopens?

That's highly unrealistic.

In a dog-eat-dog world of retail, Hibbett Sports is a Rottweiler

Many of these stores that are closed for business are not going to reopen. "We're just now beginning to see the benefits of the permanent closure of a number of competitors and similar businesses who also sell apparel and footwear," Longo said on the earnings call. "J.C. Penney and Stage Stores have announced the closure of approximately 250 stores within 2 miles of an existing City Gear or Hibbett Sports location."

Nike (NYSE:NKE) is a major supplier to Hibbett Sports. And Nike is ruthlessly eliminating all the retailing losers from its distribution plans. Last month Nike cut ties with Dillard's, Belk, Fred Meyer, Zappos, and five other retailers. In 2017, Nike brand president Trevor Edwards said: "Undifferentiated retail won't survive." Even mighty Amazon is now being excluded from Nike distribution.

For years Nike has made noises about its direct-to-consumer ambitions. Is it possible that one day Nike will cut ties with Hibbett Sports too? That's unlikely. All the retailers who were cut from Nike's distribution were all-purpose retailers. Specialty shops like Hibbett or Foot Locker are perfect Nike distributors. Indeed, cutting out the sports shops might be disastrous for Nike, as it would give advantages to competitors like Adidas.

 At 7%, Nike profit margins are not as high as you might expect. Trying to replicate the 1,000 Hibbett stores, or the 3,000 Foot Locker stores, is probably not in the game plan. Indeed, Nike's revenues lost 1% this quarter year on year. Investors bullish on Nike might want to buy this fast-growing Nike distributor instead.

And the stock is very cheap right now

Hibbett Sports has tripled from the dark days of March. And yet Hibbett is still dirt cheap. Right now the stock is showing up on Joel Greenblatt's Magic Formula screens.

Greenblatt is a value investor who reduces stocks to two criteria: Earnings yield and return on invested capital. Any stock that shows up on his screens is definitely cheap. Most of the stocks are dead cats, value traps, and assorted falling knives. To have a stellar growth company show up on his screen is pretty exciting. 

Hibbett Sports has a price-to-sales ratio of 0.49, and its forward price-to-earnings is 8.90. The company has almost as much cash ($218 million) as debt ($253 million). And yet another bullish signal (at least to me) is the high short interest. 30% of the stock is sold short. These are people who have borrowed shares of the stock, in order to bet against it. In other words, all the shorts represent future buyers. If Hibbett has more positive earnings surprises, investors might expect the shorts to feel the squeeze.

Right now, Hibbett is seeing fantastic growth, while the stock is showing up on deep value screens. This is a bullish double whammy. My family is buying shares next week.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.