Though I've spent a good portion of my life living in the Southeast, I didn't stumble upon Hibbett Sporting Goods (NASDAQ:HIBB) in real life. Instead, the company popped up on a stock screen I ran back in May in search of small caps with strong financials and significant insider ownership. Fellow Fool Nathan Slaughter discovered the company around the same time and reached a similar conclusion. Hibbett is a growing company that just might warrant an inclusion in Tom Gardner's Hidden Gems.
Six months later, Hibbett is still on the updated version of my original screen and is beginning to look increasingly more attractive, especially after announcing third-quarter results last night. In a quarter when many retailers -- from Goodys (NASDAQ:GDYS) to Gap (NYSE:GPS) -- reported negative comparative-store sales (comps) in at least some portion of their business, Hibbett came through with 5.4% growth in comps.
Boosted by strong performance in football equipment and footwear categories, net sales also rose by 17.5% and earnings per share came in at $0.26, two pennies higher than the analyst average. Finally, the company guided in line for the upcoming quarter, predicting 15% to 19% growth, and boosted its share repurchase program from $30 million to $40 million.
This is the type of company Tom Gardner is looking for. Let's tick off some of the positives: Insiders own 20% of the business, the return on equity is in the high teens and its operating margin has increased to 10% while revenues have grown at a steady 16% annual rate. There's more -- Hibbett Sporting Goods carries no debt, sits on $45.5 million in cash, and has a free cash flow run rate for 2004 of $22 million. While 24 times free cash flow isn't a screaming bargain, it's not an unreasonable valuation for a company with such strong financials and projected 19% growth over the next half-decade. If the growth rate holds steady, my quick valuation attempt points to a clean double four years from now.
Of course, if all growth held steady, investing wouldn't be much of a challenge. With a strong focus on small to mid-size markets, the company is essentially a regional player with just under 500 stores located primarily in the South. This much the company freely admits. Thus, it's not realistic to expect the Birmingham, Alabama outfit to turn into the next Foot Locker (NYSE:FL) or even Dick's Sporting Goods (NYSE:DKS).
However, not every investment needs to be a potential 10-bagger. As it continues to service a customer base it knows extremely well, Hibbett Sporting Goods should outperform the market in the upcoming years.
Fool contributor Marko Djuranovic does now own shares in any companies mentioned in this article.
