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Academy Sport and Outdoor (NASDAQ:ASO) is a US-based sporting goods and outdoor retailer with 263 stores in 17 states. The company was founded by Arthur Gochman in Texas in 1938 and had been a family business until then was acquired by private equity firm KKR (KKR) in 2011. ASO went public in October 2020 and KKR sold its remaining stake in the public in September 2021. The sporting goods chain is led by CEO Ken Hicks, a retail veteran who was previously president and CEO at Foot Locker (FL) and has held senior positions at JC Penney, Payless Shoesource and Home Shopping Network.
Since Hicks took the lead in 2018, ASO has grown its revenue from $4.8 billion in 2018 to $6.8 billion in 2021 at a 3-year CAGR of 12% while growing gross margin by 29% to 35% and operating margin increased from 3% to 13% over the same period. During the pandemic, comparable sales grew 16% in 2020 and 19% in 2021 (up from 0.7% in 2019) without a permanent store closure.
The average ASO store has annual sales of $25 million and is located in high-visibility areas near major freeways or thoroughfares in cities and suburbs. A typical store is approximately 70,000 square feet, larger than 40,000 square feet at DICK’S Sporting Goods (DKS) and 11,000 square feet at Big 5 Sporting Goods (BGFV). Store productivity is high with revenue per square foot of $359 in 2021, while SG&A per square foot has been well-maintained in the $70 range for the past several years. Obviously, sales per square foot will soften as 2021 has benefited from pandemic-driven demand and government stimulus, but it’s somewhere over $300 compared to $290 at Dick’s and $234 at Big 5 in 2021 favorable, both of which are expected to normalize in 2022.
ASO strives to offer the most comprehensive product ranges with different price points. For example, you can find baseball gloves from $49-$279, bats from $49-$329, and 120 different styles of bikes, while other retailers carry 40 sports team apparel in the right city, but also the right style of fishing lures for the most common breed found in the local fishing community. The goal is to make every store a “local destination” for sports and outdoor products.
Under Hick’s leadership, ASO exited underperforming product categories like luggage, electronics and toys and focused on just 4 core categories – Outdoor, Sports & Leisure, Footwear and Apparel. Outdoor (camping, fishing and shooting sports) account for about 1/3 of total sales. 80% of the products are from national brands like Nike, Adidas and Under Armour, while 20% are private label (better margins). Products have minimal overlap with direct-to-consumer (DTC) brands, and no single brand accounted for more than 11% of sales in 2021. This is a lower-risk strategy than relying on a single vendor like Foot Locker, which had 68% of its sales on Nike merchandise in 2021.
ASO operates in a large total addressable market of $120 billion, according to Sporting Goods Intelligence. With 2021 sales of $6.7 billion, ASO had less than 6% of this highly fragmented market, which was filled with a multitude of competitors from Walmart (WMT) to Hibbett (HIBB). Dick’s Sporting Goods, the largest sporting goods retailer in the US with over 780 stores, had sales of $12 billion in 2021, accounting for 10% of the market. With 261 stores located primarily in the Southern United States (~40% in Texas), ASO has significant white space to expand its retail footprint.
It’s also worth noting that ASO stores are conveniently located in states that have experienced higher population growth. Both Texas and Oklahoma (~46% of total store base) experienced stronger growth than the national average in 2020 and have attracted millennials just starting their own families.
In 2022, ASO plans to open 9 new stores with an investment of about $140 million. Approximately 45% of spending is related to business operations, e-commerce, and IT programs, while 35% is used for new stores and relocations, and the remaining 20% is used for refurbishing existing stores and distribution centers. I expect ASO to open 8-10 new stores in the next few years. In the long term, management believes it can operate more than 1,100 stores with more than 800 new business opportunities.
ASO reported 2Q22 revenue of $1.69 billion (-5.8% YoY), missing consensus of $1.71 billion. Same store sales (SSS) growth of minus 6% beat Street’s 5.7%, while both gross margin of 35.3% and operating margin of 15.7% beat the consensus of 34.5 % and 14.7% respectively. ASO reported adjusted earnings per share of $2.30, up 11% from Street’s $2.08, and management raised adjusted 2022 EPS guidance to 7.13 from $6.9 at midpoint $ (ASO does not provide a quarterly forecast). The company bought 5.6 million shares for $200 million in the second quarter and had $500 million left in the repurchase program. Net debt was $286 million, and while inventories are up 17% year over year, they accounted for a modest 28% of total assets, up from 24% a year ago.
For 2H22, ASO expects more promotions due to overstocking at other retailers and the fact that much of the demand for sporting/outdoor items has been pulled forward during the pandemic. Still, management was confident of being able to reach its long-term gross margin target of 32.5-33%. Overall, there is no question that business will normalize in 2022 as ASO forecasts -6% to -3% SSS growth and the adj. Earnings per share of $6.75 to $7.50 indicates a 1-11% decline from $7.60 in 2021. However, the estimated 3.6% decline in total revenue in 2022 points to a relatively resilient post-Covid demand environment for sports and outdoor activities.
ASO is in the early stages of growth, as there’s plenty of room to expand the company’s retail presence as well as its e-commerce initiatives (only 10% of sales in Q2). During the pandemic, ASO has grown its top line and bottom line significantly and now has ample firepower to generate shareholder value through buybacks. From a valuation perspective, ASO shares are currently trading at an attractive discount of 6.7x expected earnings to peers. While Dick’s Sporting Goods has a slightly better margin profile, the company is in a relatively mature state with nearly 800 stores. If ASO is to trade at 8x to 10x expected earnings, a significant uptrend could see the stock reach the $57-$71 range, which represents an upside potential of between 19% and 48%. That’s why I recommend buying stocks.
Data from YCharts