Description

Academy Sports and Outdoors, Inc. (Ticker: ASO) is a mid-cap Texas-based sporting goods and outdoor recreational retailer trading at a P/E of 7x, and an EV/EBITDA yield of 17%, which places it among the cheapest 10% of stocks in our liquid, tradeable universe of stocks (mkt cap > ~$2 bn).

ASO employs approximately 22,000 people, and operates 269 retail locations in 18 states across the southeastern US, as well as three distribution centers located in Texas, Tennessee, and Georgia.

ASO was written up in 2021 by baileyb906, and we encourage VIC members to review that writeup for additional background.

Q1 Weakness and Retail Crime Fallout

There are some good recent reasons to be pessimistic about the stock. First, fiscal Q1, ending 4/29/23, showed a negative trend -- a YoY decline in quarterly revenues of 5.7%. The company has also indicated Q2 would also be challenging. With earnings coming out next week, we will soon see. Most of the Q1 softness was due to a 15% YoY decline in revenues in its Outdoor division, traditionally the company’s largest. The company has explained that 1) it had very tough comps versus the prior year in hunting, camping, fitness and bikes, and 2) the company’s products are designed to be enjoyed outside, and much of the weakness was due to unfavorable weather patterns, including cooler temperatures and rain. Second, Dick’s missed earnings pretty dramatically few days ago due to inventory shrink due to a rise in retail crime, and sold off ~20%. ASO has been caught up in concerns about how this might affect the sector. But this current weakness comes at the tail end of a successful multi-year turnaround story, and is a reasonable entry point.

Turnaround Background

By way of background, KKR bought 20% the company in 2011, and the company did poorly from 2013-2018 during which time, despite aggressive store count growth, EBITDA/Store fell from ~$2.5 million to ~$1 million. Enter Ken Hicks, who was appointed CEO in 2018. Hicks had previously run a successful turnaround at Foot Locker, increasing Sales, and EBIT and net income margins while there.

At Academy Sports, Hicks pursued a successful store expansion plan, oversaw its IPO in 2020, and grew sales from $4.8 bn in 2018 to $6.4 bn in 2022. KKR sold its stake in ~2021. As of Q4 22, the company had increased its market cap by almost $4 bn since its IPO, and had returned $2 bn to stakeholders, including $900 million of repurchases. It’s been a successful turnaround.

Merchandise and TAM

The company sells merchandise across four divisions: Outdoors (Camping, Fishing, Hunting at ~31% of sales), Sports and recreation (Fitness, Team sports, Recreation at ~28% of sales), Apparel (Outdoor, Youth and Athletic apparel at ~21% of sales), and Footwear (Casual, Work, Youth and Athletic footwear at ~20% of sales).

The company believes its total addressable market in the US is ~$175 bn, of which Dick’s Sporting Goods, the largest sporting goods competitor, has less than a 10% share, but also has over 2x the revenues of ASO. This suggests there may be room to take share, and the market looks healthy. The US sporting goods market has/is expected to grow at a 7.9% CAGR from 2019 to 2025, according to a Morgan Stanley Outdoor and Active Living 2022 survey. Additionally, the Bureau of Economic Analysis reports that consumer spending on sporting equipment, supplies, guns and ammunition grew at 5.6% CAGR from 2000 to 2022. The industry appears to be fragmented, but growing.

Favorable Geographic/Demographic Tailwinds

Approximately 29% of the company’s stores are in the top 5 fastest growing metropolitan statistical areas, including parts of Texas, Tennessee, and Florida. Of note, approximately 40% of the company’s stores are in Texas, which last year surpassed 30 million people, and which the company estimates will see population growth of 17% between 2020-30.

The company believes there is ample opportunity for geographic expansion. Walmart has a store within 10 miles of 88% of Americans. For ASO, the figure is 17%, which means there’s a good runway for further penetration.

Succession

On June 1, 2023, the company announced that as a result of a planned succession process, Steven Lawrence was promoted from Chief Merchandising Officer and became the new CEO. Lawrence has announced a 5-year plan to open 120-140 new stores and achieve $10 bn in revenue by 2027 (approximately a 10% CAGR), up from ~$6 bn today, with a net income margin of 10%, and ROIC of 30%, which we think are attainable goals. The blueprint is in place, and now it falls to the new CEO to execute. Longer-term, the company sees the opportunity for 800 additional stores.

A key driver of the company’s growth strategy is expansion of the store base by ~50% over the next few years, with new stores making up $2.4-$2.8 bn of the incremental revenue required to meet the goal of $10 bn.

Store Economics

The company’s stores average approximately 70,000 SF and are highly profitable. The company seeks to lease all its stores via long-term lease agreements, ranging from 15 to 20 years, and executes sale-leaseback transactions for stores it is developing. ASO’s average store delivers ~$4 million in EBIT, which is double the $2 million for Dick’s. It costs approximately $4-$5 million to open a new store, which is expected in the first year to achieve $18 million in sales, be EBITDA positive, and have an ROIC of 20%. The stores ramp to $25 million in sales over 4-5 years. If the company can successfully open 120-140 new stores in the next 5 years, as planned, good things will happen to the stock price.

Omnichannel

ASO has built an e-commerce and mobile platform that allows enhanced consumer connection with stores. This includes buy-online-pickup-in-store program, and ship-to-store and curbside pickup programs. The company is also enhancing the customer experience through new features such as new site search capabilities, outfitting, express check-out, and biometric security.

The company expects its omnichannel efforts will be a continued driver of growth and gross margin. The company has stated that 75% of e-commerce sales are fulfilled in stores, and 60% of omnichannel customer spend came from within 10 miles of a store. Omnichannel customers spend more and purchase more frequently than the average customer. During 2022, stores facilitated approximately 95% of ASO’s total sales.

Capex Budget and FCF

In support of its store expansion and growth goals, the company has unveiled a 5-year capex plan to invest $1.5 bn over the next five years. With $5.5 bn -$6 bn of anticipated adjusted EBIT projected over the next 5 years, the company anticipates the plan will be entirely self-funded through cash flow. Add an additional $0.5 bn to $ 1 bn required for WC and other factors, and that still leaves $3.5 bn in FCF available to stakeholders.

Return of Capital / Share Repurchases

The company has repurchased $440 million of stock in the past 12 months, and the company initiated a quarterly cash dividend in FY 22. We believe this is a shareholder friendly management team who will continue to return capital to shareholders when it makes sense. With the stock price as cheap as it is today relative to fundamentals, we would applaud additional buybacks at these prices.

Operational Momentum: Increasing Margins, Returns, Inventory Turns

The company’s gross margins have improved from 29% in 2018 to 34% LTM. Similarly, EBIT margins have improved from 3.5% in 2018, to 11.9% LTM. ROIC has improved from 14% in 2018 to 34% LTM. Inventory turns are also up, from 2.7x in 2018 to 3.2x LTM. These metrics demonstrate that the business has positive operating momentum, and is increasing efficiencies. The company’s current ratio has increased from 1.4x a year ago to 1.6x today, indicating increased liquidity. Additionally, the company’s ROE is 37%, demonstrating that it is using its equity capital effectively.

The company also boasts a strong balance sheet. The company’s net debt has declined from $1.5 bn in 2018 to $0.5 bn currently. Additionally, the company maintains a $1 bn credit facility, with no debt maturities until 2027.

Summary

ASO trades at a P/E of 7x, and has an EBITDA/EV yield of 17%, which we think is cheap for a company that has been successfully turned around from 5 years ago, and with good growth prospects for the next 5 years. ASO is positioned to benefit from positive growth trends in its core product areas, and has stores in metropolitan areas that are growing. Its stores have become increasingly profitable and are being run efficiently, and compare favorably to those of its competitors. The company’s ROE of 37% and ROIC of 34% are both impressive, indicating that it has done a good job managing its capital. Margins have strengthened over recent years, and are reasonable today with EBITDA margins of 14.9% and net margins of 9%. It has an ambitious store count growth plan for the next 5 years, with self-funded capital and a conservative balance sheet available to pursue it. It is generating strong positive free cash flow, and is buying back stock and returning capital to shareholders via dividends, demonstrating its friendliness to shareholders.

Catalyst

-New store openings

-Continued high returns on capital and equity