Academy Sports and Outdoors
History, overview, and the products they sell:
Academy Sports + Outdoors is one of America’s largest sporting goods and outdoor stores with 268 stores and counting. The products they offer include hunting, fishing, and camping equipment and gear, along with sports and leisure products, footwear, and apparel. These products are directly obtained from the suppliers, allowing them to sell them at maximum profit margins.
Over the last several decades, the company has grown rapidly from its small beginnings. Sales reached one billion dollars in 2003, two billion dollars in 2007, three billion dollars in 2012, and four billion dollars in 2014. In fiscal 2021, sales exceeded $6.77 billion. This is a very strong indicator of their strong business strategies. Especially considering the fact that they reached their latest milestone during a pandemic when nobody went to stores. Initially, they started as a family business and remained private until it was acquired by investment company KKR & Co. Inc. (KKR) in 2011. It had an IPO on Nasdaq in October 2020. Since 2011 it has been a multi-channel retailer with an increasingly important e-commerce store. The company has 278 stores and is expanding into new states, now in eighteen states.
Thoughts:
Every once in a while I like going back to simpler companies that are much easier to operate and understand, as for example compared to firms that are in the oil or energy industries. Currently speaking, I believe clothing retail chains are in a great place, especially considering the state of the economy right now. The reason behind this is the fact that they already went through a tough period of time last year which has now either been solved or the companies have found a way to overcome it. These practices have made them resilient in today’s environment as it can also be seen through their earnings.
Last year was terrible for retail chains. Along with having to find a solution to much emptier stores due to Covid, they also had major problems with distribution costs due to soaring gas prices and a large quantity of unsold products due to inflation and a change in the customer’s preferences. This in return made them cut any underlying costs that could be ignored while also doing a complete overview of their inventory by only selling products that have a high chance of selling at high-profit margins. Back then, nobody had thought that the US will go into a recession so not many businesses tried to adapt to this type of business ethic. Retail chains, on the other hand, were fully prepared for changes due to Covid which has now translated into today’s environment that I find very similar. As Nassim Taleb also states “an initial advantage follows someone through life” and I find it to be the case here.
The reason I find them to be so similar is that the effects are mostly the same, however, I don’t find anybody talking about it. During the pandemic, millions of people lost their jobs or were unable to work, all of which decreased their buying power significantly. On top of that, the last thing customers had in mind was going shopping in stores in the middle of a pandemic. Later on, fuel costs also started increasing which further decreased the chain’s revenues as their distribution costs were much more now. These pressures made companies transform their business fundamentals and strategies into something that would be able to hold up in that environment. Fast forward to now, all of those problems are gone. Jobless claims have reached an all-time low, fuel prices have gone back to normal levels, Covid isn’t a worry for customers anymore, and inflation has been decreasing. This only leaves clothing chains with a business plan that is resilient in any conditions, especially a recession.
Another factor that I like to touch more on is the record number of jobs people have been getting. I believe the reason behind this isn’t because of the good economy, but because the overall buying power of families has decreased. This has for example caused university students to get part-time jobs, or stay-at-home parents to go back to work, now that everything has been increasing in price. So in reality, this decrease in jobless people doesn’t come from the strength of the economy, but due to the weakness that has made people who never had jobs before to get back to work.
The reason why I mention that is that a decreased inflation combined with everybody in the family having a job means that the buying power of customers is increasing again. Although many people might say buyers are being cautious of their spending due to a fear of recession, I can’t imagine an average person not buying a shirt simply because they believe that there will be a downfall in the economy. Another factor that will greatly help ASO is the springtime coming up. This gives them a good future outlook to rely on as customers go shopping for this season and a strong argument for investors to hold their stock until the upcoming season.
Academy’s plan for new store openings puts it on a trajectory of very conservative growth relative to these other big box stores.
Estimating future earnings from growth in the number of stores still produces a very favorable valuation, making ASO a Strong Buy.
Academy Sports and Outdoors has set itself on a strong but conservative growth trajectory compared to its competitors that saw most of their growth in the 80s, 90s, and early 2000s. By filling in stores in the Southeast and then gradually expanding into other regions to the North and to the West, the company should be able to maintain growth for years, and perhaps decades to come.
Academy has said in several earnings reports that its aim is to grow 80-100 stores in the next 4-5 years, an aspiration easily achieved in in-fill locations in its current region. However, the full opportunity size has been identified as 894 stores:
Google and ASO belong to different industries, but it is sometimes striking how a relatively small retailer that is present in only 18 states can outperform a massive business like Google which has an almost undefeatable moat.
In the past few years, the company has turned into growth mode and is targeting to become the largest sporting goods retailer in the country. Its expansion plan is focused on three main opportunities, as shown from the infographic below:
Filling metro areas where the company is already present. Most of these markets are fast-growing metro areas, such as Dallas, Houston, Atlanta and Charlotte.
Expanding into markets like Panama City, Florida, and Lexington, Kentucky, where it just opened new stores. This is a thoughtful way to plan expansion while leveraging the logistic and the warehouse infrastructure that has already been built to support the existing stores.
New geographies. The company is targeting to become a nation-wide retailer, and it is slowly expanding east in Virginia and West Virginia.
They have also revisited its store model, and it is running its stores with a new operating model which makes the company state that every new store will have a return on invested capital of at least 20%
Academy Sports has delivered early investors with returns of 300% since its IPO in 2020.
This well-established company, which has been private for most of its history, has had a successful performance in the market since its IPO in 2020 at $13.00 per share
Disadvantages:
There aren’t any notable disadvantages in investing in ASO as there is almost no news or information that comes out about it. Maybe it's due to how boring and simple the business structure is, I'm not sure. Logic prevails though, so if you consider the inflationary environment, the simple assumption that people aren’t going to be able to spend money on things like sneakers isn't great for ASO. One thing is clear though, insiders are selling their stakes:
“Over the last year, we can see that the biggest insider sale was by the Senior VP & Chief Information Officer, Manish Maini, for US$2.4m worth of shares, at about US$54.32 per share. So it's clear an insider wanted to take some cash off the table, even below the current price of US$59.87. As a general rule we consider it to be discouraging when insiders are selling below the current price, because it suggests they were happy with a lower valuation. Please do note, however, that sellers may have a variety of reasons for selling, so we don't know for sure what they think of the stock price. We note that the biggest single sale was only 30% of Manish Maini's holding. In total, Academy Sports and Outdoors insiders sold more than they bought over the last year. The chart below shows insider transactions (by companies and individuals) over the last year. By clicking on the graph below, you can see the precise details of each insider transaction! Academy Sports and Outdoors, Inc. (NASDAQ:ASO) insiders sold US$5.3m worth of stock suggesting impending weakness”
Competitors:
While there may not be much to fault in ASO’s business practices itself, there is a problem with their standing within the sector. Most notably, the comparison between ASO and the powerhouse DICK’S. Dick’s has just recently announced that it’s being made the official sporting goods retail partner of the NCAA, which will undoubtedly bring in a ton of revenue, especially with March Madness fast approaching. Dick’s has already released their Earnings Report “beating analysts’ expectations for its fourth-quarter earnings and revenue, citing a sales boost from the gift-giving season even with inflation-weary consumers. Same-store sales increased 5.3%, more than double analysts’ estimates of 2.1%, according to StreetAccount. The company posted full-year guidance for 2023 that was also above what analysts had anticipated.” Alongside that “Dick’s is the clear winner in terms of shareholder returns as it has raised its dividend from $1.95 per year to $4 per year. Hibbett’s dividend hovers around Dick’s previous level, and Academy’s dividend is negligible at just 0.5%. Dick’s also has a three-year share buyback ratio of 6.9%, which is lower than Hibbett’s 10.1% but higher than Academy’s -3.5%.“ While buybacks aren’t a good indicator of how well a company is performing, they do show whether the company cares about instilling confidence within its investors, and a $0.5 dividend does not help its case.
Another behemoth of a competitor is Foot Locker, which is unmatched in the sneaker market. The company is currently in talks with Metro Brands for India entry, which will undoubtedly bring in an influx of consumers, putting pressure on the rest of the sector to expand. There’s also news that “The Ilac to welcome largest Foot Locker store in Ireland” which further exemplifies Foot Locker’s pursuit of global expansion. The current CEO of Dick’s, Ken Hicks, is the previous CEO of Foot Locker which is a bit concerning, given that Foot Locker is making global expansions while ASO is barely expanding into the Northwest of the US.
One of ASO’s biggest competitors is Hibbett which has just recently reported Q4 results that fell short of analysts’ expectations. However, sales of popular footwear brands were the main growth driver for the sporting goods chain in the quarter and the full fiscal year of 2023. This is concerning as it doesn't allow us to gain an understanding of where the sector is headed, one end we have Dick’s which just reported incredible results, and on the other, we have Hibbett which is lagging behind. The question is which way will ASO sway?
The sector as a whole has been performing well, apart from smaller companies such as the “regional sporting goods retailer Big 5 Sporting Goods Corporation (NASDAQ: BGFV) stock has fallen since its $41.33 high in November 2021 as both top, and bottom lines continue to shrink. The company had a big surge during the post-pandemic reopening as team sports and live events resumed. However, 2022 was a challenging year for comps as inflationary pressures and economic uncertainty caused consumers to tighten their discretionary spending habits. These headwinds are expected to continue moving forward. Big 5 continues to experience normalization as the top and bottom deflate. This makes the dividend yield grow at the cost of shrinking share prices. Amongst the sports retailers, Big 5 sticks out like a sore thumb with its underperformance. The sports retailing industry has been predominantly strong heading into 2023. Big 5 has fallen (50%) in the past year while peers have seen double-digit gains. It continues to vastly underperform sports retailers like DICK’S Sporting Goods Inc. (NYSE: DKS) up 33%, Dilliard’s Inc. (NYSE: DDS) up 30%, Hibbett Inc. (NASDAQ: HIBB) up 38%, and Foot Locker Inc. (NYSE: FL) up 38% in the past year.”
ASO is still able to hold ground against its competitors in some areas as “Year-on-year, ASO stock has gained a whopping 69.5%, making it one of the biggest retail industry winners of the last 12 months. Shares have easily outpaced the y-o-y performance of its major competitors, such as Dick’s Sporting Goods (NYSE:DKS) (+17.6%), Hibbett Sports (NASDAQ:HIBB) (+26%), and Sportsman's Warehouse (NASDAQ:SPWH) (-16%)” The capital structure is also heavily praised by both retail and institutional investors, stating that “We prefer [Academy Sports] (ASO), [its] value-oriented market position drives outperformance over the next 12-18 months, 'sticky' margin improvement, & over 3x unit growth opportunity,” the team explained. By contrast, Hibbett (HIBB) and Dick’s Sporting Goods (DKS) were assigned Hold ratings given questions regarding the “staying power” of recently robust sales. Additionally, consumers are expected to trade down amid persistent inflationary pressure in 2023, increasing the upside for Academy Sports in contrast to Dick’s, for example. Further, inventory risks are more pronounced at both Dick’s (DKS) and Hibbett (HIBB) in comparison to ASO. “DKS is best-in-class, but see few upside catalysts on the horizon. DKS is the industry leader, with superior capacity for experiential in-store investment. However, we see few catalysts for upside, and see expectations for '23 merch margin expansion at risk,” the team concluded. “HIBB [is] most at-risk from a rising promotional tide. Greatest exposure to apparel/footwear (90% of sales) presents outsized promotional risk. ASO is the firm's top pick in the sporting goods retail sector due to its value-oriented market positioning, best-in-class unit economics, longest unit growth runway, and attractive valuation. Meanwhile, DKS is "best-in-class," but the firm sees few upside catalysts on the horizon, while HIBB is "most at-risk from a rising promotional tide."
Overall, ASO still holds a favourable position in the market, even though it is being outperformed by Dick’s and Foot Locker, the question is, will its fundamentals and consistency be enough to surprise the markets tomorrow?
Investor Sentiments:
“I think taking in to account share buybacks is really important if you’re going to be looking at future EPS for your valuation. With the amount of FCF they can generate, they can significantly reduce shares outstanding in the coming years.”
“Low share price is a good thing. Allows them to buy back more shares on the cheap.”
“Ken Hicks, the CEO, is a GOAT capital allocator and has proven success in retail being at Foot Locker 2009-2015. I think there is a lot more success to come from this company”
“It’s a real winner. I loaded up in the 30s, got scared and sold and then buying back in the 40s and even some in the 50s. I’m probably going to add more. The store by me is always crowded and I go there frequently and there’s lots of great products. The long-term debt is very minimal compared to cash flow and net income. I think they can pay it all off in a year and a half or two which is fantastic. The ROIC is over 10% and growing. It’s so interesting that you don’t hear the Talking Heads on TV and on podcast talking about this. I hope it stays that way. In my view. This is recession proof.”
SWOT Analysis:
Strengths:
Low debt
High revenue margins
Strong outlook
Strong business strategies
Resilient in a recession
Weaknesses:
Low buybacks and dividends
Weak growth
Overlooked in the sector
Inflationary environment is approaching
Insider selling
Opportunities:
Do more share buybacks
Expand into more states and countries
Do more advertising
Increase stock dividends
Threats:
Competitor growth
Purchasing power of the consumer base
Inconsisent growth
Meeting high expectations
Estimate:
I’m expecting a 13% change after the report comes out. The average change is 15% however, I’m expecting a little less this time considering the economy and investors being more cautious with how much they invest.
Change: +13%
Report Time: Thursday before market open
P/E Ratio: 8.45
Market Cap: 4,686,349,233