Sporting goods retailer Hibbett Sports Inc. (HIBB - Analyst Report), managed to post better-than-expected bottom-line results for second-quarter fiscal 2015 despite reduced margins due to higher markdowns and increased input as well as operating costs.

The company’s earnings of 32 cents per share surpassed the Zacks Consensus Estimate by a penny and matched the higher end of the company’s recent cautious forecast of 30–32 cents per share. However, bottom-line results fell 20% compared with 40 cents earned in the prior-year quarter.

Net sales increased 4.1% year over year to $193.9 million but fell short of the Zacks Consensus Estimate of $196 million. Sales results missed our estimate mainly on weak comparable-store sales as shoppers’ cautious attitude led to lower-than-expected traffic trends. Comparable-store sales for the quarter increased 0.1%.

Although the company failed to impress with its second-quarter comps performance, it remains optimistic about the future based on the improved traffic trends since the latter half of July, which has continued into the back-to-school season. Currently, the company’s comps are in the low single-digit range.

Hibbett remains advantageously positioned in the small to mid-sized markets catering to the needs of a population group ranging from 25,000 to 75,000. This allows the company to strategically align its merchandise per the interest of the local community while bringing in the advantage of lesser competition and lower operating costs.

We remain impressed with Hibbett’s sustained focus on expansion of its store network and improvement of productivity, which are the key revenue drivers for the stock. The company is undergoing a store expansion program and plans to widen its network by adding approximately 75 to 80 stores during the fiscal year ending Jan 31, 2015. Furthermore, Hibbett’s management has already identified over 400 locations for future stores and has ramped up its distribution centers to support over 1,200 stores against its earlier count of 1,000 stores.

Moreover, we believe the strategy of doubling the size of its distribution facility will aid in maintenance of its growth momentum in mid-sized and smaller markets, which are the company’s primary areas of focus. Additionally, the company’s debt-free balance sheet provides it with financial flexibility to drive future growth.

However, following the second-quarter results the company reiterated its recently cut fiscal 2015 guidance that estimates earnings per share of $2.63–$2.73 with comps growth in the low single-digit range. Earlier, the company had projected earnings to be in the $2.78–$2.98 per share range, while comps were expected to improve in the low-to-mid single-digit range.

We also remain apprehensive about Hibbett’s growth prospects as its competitor and leading sporting goods store retailer, DICK’s Sporting Goods Inc. (DKS - Analyst Report), has decided to enter smaller and mid-sized markets. The company’s strategy will not only increase competition for Hibbett but also raise store occupancy costs and operating expenses.

Further, growth of its peers, such as Sport Chalet Inc. and The Sports Authority Inc., in the small store format could hurt Hibbett’s sales, affecting overall results. Additionally, this Zacks Rank #4 (Sell) company is losing market share to competitors with omni-channel business operations as its e-Commerce platform is in the early stages of development and will take time to start functioning.

Better-ranked stocks in the related industry are Barnes & Noble Inc. (BKS - Snapshot Report) and ULTA Salon, Cosmetics & Fragrance Inc. (ULTA - Snapshot Report). While Barnes & Noble carries a Zacks Rank #1 (Strong Buy), ULTA Salon has a Zacks Rank #2 (Buy).