This article is for sports enthusiasts on both sides of the 49th parallel. Back in April, I named Hibbett Sports (Nasdaq:HIBB), along with Nike (NYSE:NKE), Quiksilver (NYSE:ZQK) and Jarden (NYSE:JAH) as the best sports stocks to own in the coming decade. I've written extensively in the past about Hibbett, a sporting goods retailer I admire greatly. Another company I've come to admire is Canadian Tire (TSE:C.CTC.A), the 88-year-old general merchant that's become iconic in Canada. In September, CEO Stephen Wetmore shuffled management, unhappy with the progress it was making on its three-to-five-year strategic plan. At the forefront of its plan is an increased emphasis on improving customer service.

You wouldn't know it by its name, but Canadian Tire is one of Canada's leading retailers of sporting goods and expects its fitness business to grow by 12-15% in the next few years. If it can get its automotive business back on track, its stock could be in for some real appreciation. However, it's got a ways to go if it wants to catch Hibbett, which is up 62.6% year-to-date compared to Canadian Tire's 17.2%. Is Hibbett that much superior to Canadian Tire or have investors gotten ahead of themselves? Let's find out.

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Balance Sheet
When looking at the balance sheet I like to look at one or more of the components used to calculate the Z-Score. After all, there's no point looking at a business if it doesn't have a solid balance sheet. The two I'll use in this example are working capital to total assets and market cap to total liabilities. Why these? The first tells me how well each is able to meet its short-term obligations. The second is an indication what investors think about a company's value in relation to its liabilities. Unfortunately, for Canadian Tire, there's not much of a comparison. Hibbett generates almost twice as much working capital from every dollar of assets and investors are eight times as confident about Hibbett's debt situation. Now, it's important to keep in mind that the Z-Score, when fully applied, should be done over a number of years to assess the level of deterioration in a company's financial position. Clearly, however, Hibbett's balance sheet is stronger.

Cash Flow
Here I'll look at operating cash flow to operating profit and free cash flow to sales using an average of the past five years. The first answers how efficient they are converting profits into cash and the second indicates how well they're converting sales into cash. Both retailers convert approximately three-quarters of their operating profits into operating cash flow with Hibbett doing a marginally better job. On the sales front, Canadian Tire fails miserably behind the 4.9% for Hibbett. Once again, the Canadian retailer fails to meet the standard set by its American counterpart. It's a good thing Hibbett sticks to smaller towns and likely isn't interested in Canada. Otherwise, Canadian Tire's market share in sporting goods would be seriously at risk.

For this comparison, I'm using each company's return on assets and operating margins for the trailing 12 months. One of the things I like to do with numbers like these is to multiply them together. It tends to amplify any major differences. Doing so, I find that Hibbett's numbers are five times greater than Canadian Tire's. In English, that's 3.7 times and 1.5 time's better than Canadian Tire in return on assets and operating margin, respectively. It's getting downright embarrassing.

Fortunately and unfortunately, this is where Canadian Tire shines. Once again, I'll multiply four ratios - P/E, P/B, P/S and P/CF - generating a number that is meaningless by itself but speaks volumes about the difference in the two valuations. Hibbett's P/E is almost double Canadian Tire's, four times P/B, three times P/S and three times cash flow. The question is whether Hibbett is excessively valued or Canadian Tire is incredibly cheap. I'd like to believe the latter statement is correct, but truthfully, the answer is somewhere in the middle. Canadian Tire gets this lowly valuation in part because it's done a mediocre job growing its legacy automotive business, generating consistent profits and producing an adequate return on its capital investments.

Hibbett on the other hand, knows exactly who its target market is and they go after it. Add to this the fact that's Canadian unit is poised to take market share in the sporting goods arena and quite possibly Dick's Sporting Goods (NYSE:DKS) as well. Quite honestly, it's easy to see why the two companies are valued differently.

Bottom Line
Despite the obvious valuation gap, I'm hesitant to recommend Canadian Tire until it gets a handle on its management team and demonstrates that its strategic plan is more than just a piece of paper. Hibbett on the other hand might be expensive but it's clearly the better retailer. (To analyze retail stocks, investors need to be aware of the most common metrics used, as well as the company-specific and macroeconomic factors. To learn more, read Analyzing Retail Stocks.)

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