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Academy Sports and Outdoors, Inc. (NASDAQ:ASO) is roughly fairly valued at its current share price at the time of writing, and I recommend staying neutral for now.
ASO offers a wide range of sports and outdoor recreation products for consumers. A number of favorable trends, most of which stem from the COVID-29 pandemic, are contributing significantly to ASO’s growth. ASO also has a number of partnerships with specific brands that set them apart from other retailers. They also offer a website that allows them to reach a wide range of customers. All of this and more will contribute to the progress of ASO in the long term.
Academy Sports and Outdoors, Inc. is a comprehensive retailer of sporting goods and outdoor recreation in the United States. ASO strives to be a retailer that continues to provide quality sporting goods and outdoor recreation. They have strengthened their position as leaders in rapidly evolving product categories, offering a broad, value-driven selection with strong and regional customer affiliations.
The market is developing
Change is a constant in the US sporting goods and outdoor recreation industry. There is the undeniable fact that fast-growing trends are becoming known. During the COVID-19 pandemic, when everyone was forced to stay at home, sportswear, insulated coolers, mugs, and outdoor recreation also became popular.
Additionally, one thing that greatly benefits Academy Sports and Outdoors, Inc. is the recent shift in consumers spending more on health and wellness at home and spending time on memorable experiences. Not long ago, the advent of COVID-19 led consumers to stay at home more and participate in isolated recreational and leisure activities that ASO promotes. I expect this trend to continue and ASO’s customer base to continue to grow over a longer period of time.
Academy Sports and Outdoors, Inc. has proven that it can thrive even in the face of major industry changes. On the other hand, although e-commerce disruptions and consolidations have led to the demise of some of ASO’s competitors, ASO has capitalized on these changes by taking market share. Many factors have contributed to their success, including their value-based operating strategy and extensive range that goes well beyond traditional sporting goods.
Partnerships with brands and a strong private label
Academy Sports and Outdoors, Inc. is able to offer a more comprehensive selection of value-driven and diverse products across a range of price points because of its access to national branded and private label merchandise. Many other stores would struggle to achieve their specific combination of product categories, brand names and price points.
It’s safe to say that ASO has a significant impact nationally. As a result, many well-established brands are turning to them for help expanding their customer base, which is good news for ASO in the long-term from both a financial and product choice perspective. As mall retailers face additional headwinds and the industry consolidates, ASO plays a particularly important role in driving traffic to these brands. Their brand selection, which includes products in each brand’s price range, is unrivaled by their competitors in my opinion. In addition, they gain the upper hand as they have monopoly rights to distribute certain products from well-known manufacturers (source: S-1).
While it is helpful and even desirable to have many brand partnerships, ASO must also have its own brands. Many of ASO’s unique products, such as the Academy-branded folding chair and cart, are best-sellers. This means these brands have strong brand equity and many loyal customers.
ASO positions the brand image and reputation to attract their target audience
I believe ASO is in a very favorable position in terms of customer demand. They offer different types of sporting goods and outdoor recreation products that allow their customers to enjoy themselves and get engaged, regardless of their profile. All of this has resulted in sporting goods buyers consistently ranking them as the top retailer of outdoor sports and recreation products (according to management in the S-1 filing). More importantly, it is not only the number one retailer, but also a retailer that offers products to a large number of different customers and is a one-stop shop. ASO does this by meticulously crafting products that produce great strains that are appealing to novices, families, experts, and even casual participants.
To put it mildly, ASO is the largest retailer of sporting goods and outdoor recreation by value. Academy was also voted the best value retailer of all sporting goods retailers by its customers, who also ranked value for money as the most important factor in their purchasing decision (Source: S-1). They have been successful for so long because they focus on what their customers value most: a wide range of reasonably priced products, user-friendly omnichannel solutions, a one-stop shopping environment, and helpful support staff.
Overall, their broad product range and focus on value allow them to cater to customers who are both price conscious and picky.
Customers want to be able to choose from a variety of options when shopping. This has fueled the increased need for omnichannel offerings. The S-1 filing states that ASO omnichannel customers spent 43% more than their store-only customers, and these customers spent 197% more than ASO online customers. Since the launch of the Buy Online – Collect in Store program, ASO has been able to infiltrate e-commerce and has resulted in higher average order values and additional in-store purchases.
There are a number of benefits that ASO’s omnichannel platform has to offer. Some of these are the ability to offer a channel where return-to-store may be available for online orders, curbside fulfillment, the ability to order goods online when they are not currently available, and the ability to to ship online orders from their retail locations. All of this allows them to mitigate the risk of lost sales and make deliveries faster than normal while ensuring inventory productivity increases. They’ve also rolled out ship-to-store capabilities to give their customers a wide range of options for different ways they can shop at Academy.
The ASO website also serves as a directory of their physical stores. Customers often visit the website before going to an Academy location to familiarize themselves with the selection, read reviews from previous buyers, compare prices, and make sure their nearby Academy location carries the items they want want to buy. The website also plays an important role in attracting customers who live in areas without one of their physical locations. As ASO’s omnichannel offerings are strengthened and supported, I expect sales to increase.
I believe Academy Sports and Outdoors, Inc. is worth $59.37 per share for the fiscal year 24 for a 2 year return 14% up since the date of writing. This suggests that ASO is roughly fair to undervalued when discounted at 9-10% over the next 2 years.
This value comes from my model based on the following assumptions:
- Revenue and earnings in FY22 will follow management’s guidance
- Revenue is expected to grow in the mid to high single digits, according to consensus estimates. This is helped by ASO continuing to capture shares from smaller players alongside industry growth
- Since ASO is a relatively mature company and margins are more or less maturing, although there is still room for growth, I expected margins to remain in the same range going forward. If margins increased, that would only be good news.
- ASO is currently trading at 7x expected earnings and I don’t expect any changes to that
Low bargaining power with big brands
ASO is as good as any other distributor; they’re just bigger. Therefore, since big brands have the most bargaining power in price negotiations, there is a limit to how much ASO gross margin can grow, as big brands are unlikely to give up too much of the unit economy.
Trend is difficult to predict
There is literally no person in the world who can confidently, confidently and correctly predict future consumer trends. ASO cannot predict these trends and therefore its growth and success will depend heavily on these trends due to the nature of the industry in which it operates. If ASO makes a math error in their prediction, they could underperform on these timeframes.
conflict of interest
Even though ASO has its own brand, situations can arise where brands complain about conflicts of interest. Because of this, ASO may not be able to move up as far as it could, as other brands are put off by the idea of a distribution channel that competes with their products.
There are a number of trends that have emerged in recent years as a result of the pandemic and these trends have placed Academy Sports and Outdoors, Inc. in a thriving position in the marketplace. As these trends continue to put them in the spotlight, I have a strong belief that continuing these trends will lead to success for ASO. However, I believe that Academy Sports and Outdoors, Inc. stock will need to be re-rated lower before it becomes an attractive investment destination.