Academy Sports + Outdoors (ASO)
The right stuff, the right price
Academy Sports and Outdoors is synonymous with growing up in southern Texas in the ‘90s. Academy is where you went to get your first Zebco rod and reel, your Easton Redline Z-Core bat for little league, and your new shoes for the start of another school year. It’s also where you went on the weekends, just because.
Fast forward 20-30 years… and nothing has changed - it is still that place for so many. My guess, is that 20-30 years from now, the same will still be true.
In Peter Lynch’s book, “One Up On Wall Street,” Lynch describes how your next 10x stock pick could be a business that’s right in your neighborhood, which got me thinking. As a result, I started looking deeper into the business of Academy Sports + Outdoors and what I found was very interesting.
Below is a quick snapshot into ASO - the business and the stock. Enjoy!
The Business - Sporting Goods and Outdoors Retailer
Academy was founded in 1938 and operates as a regional sporting goods and outdoor retailer
HQ in Katy, TX (Houston) with 270 stores predominantly in the south and southeast
107 locations in TX
Average store size ~60,000-70,000 sqft.
Approximately 90%/10% in-store/online sales distribution
Vendors include well-known brands like Nike, Under Armour, Adidas, Yeti, The North Face, etc, as well as lesser known brands and Academy private label brands
Academy private label brands account for 21% of sales ($1.37B in 2022)
Very strong retail brand - especially in the south
Net promoter score of 43 at end of 2022 (40% higher than Dick’s Sporting Goods/DKS) - highest NPS in category
Growth Profile - Adding Stores in the Best Markets
Academy is in the early stages of adding 120-140 new store locations over the next five years
If they execute on this plan, they will add 50% more locations to their footprint
They will add these locations to build out markets they already have a presence and to enter new markets primarily in the midwest - Illinois/Indiana/Virginia/etc.)
Academy operates in six of the ten fastest growing markets in the country as defined by expected population growth through 2030 (Texas and Florida are #1 and #2 on this list)
TX and FL account for 45% of Academy’s locations
Academy is only within a 10-mile distance to 17% of US population (as of end of 2022)
A lot of whitespace for continued store expansion - management eventually sees 800+ locations nationally
The Fundamentals - Top-Tier Unit Economics and Robust Free Cash Flow
Bottom quartile of stores meet average profitability metrics for the industry (75% of stores are more profitable than industry average)
An Academy location has never closed because of profitability problems, per management
Gross margin of 34.6% in 2022 versus DKS at 32.4% versus big box retail WMT/TGT at 24.4%/23.6%, respectively
Three reasons for structurally higher margin profile
More localized distributions/locations
Management focused on driving efficiencies in merchandising/purchasing
Good/better/best categories
21% of overall sales from private label brands with higher margins (compared to 14% at DKS)
Academy outperforms their peers on sales and profitability per unit:
Sales per square foot; ~15% higher than DKS
Sales per store; ~42% higher than DKS
Adjusted EBITDA per store; ~41% higher than DKS
Academy expects to grow top and bottom line by 10% CAGR over the next five years
The Stock: ASO
Academy will generate and return ~$3.5B of free cash flow over the next five years, which is ~85% of their current market cap
Academy has committed to return 100% of FCF back to shareholders in the form of debt repayment, dividends, and share repurchases
Academy repurchased 10% of shares in calendar year 2022 alone
Current buyback authorization allows them to purchase another 10% of shares at current market price (they can realistically do this within the next twelve months)
Based on my discounted cash flow analysis - Academy stock is worth $74 today
This assumes only a 10-year lifespan of the business
Trades at ~7x forward 12-month P/E multiple
Compared to Dicks at ~10X
I believe that as the company continues buying back stock in a major way and they continue to add new stores, the stock will be re-rated in line with DKS, implying a 30% increase from multiple expansion alone
This is a business and a stock that is set up to “work” well into the future
Risks: Competition, Recession, Management Changes
DKS “House of Sport” concept - expanding alongside ASO expansion. More involved/comprehensive with golf technology bays, batting cages, and more
Currently, 50-55% of ASO locations within 5-miles of a DKS location (and this has not been a problem thus far)
Amazon’s continued expansion into e-commerce, brick and mortar decline
This seems to have stabilized and people enjoy shopping in person
Academy avoids mall locations and focuses on high-traffic, easy access stand-alone locations
Recession - a decline in consumer spending always a risk factor in retail, but as always this is cyclical and not a going concern for long-term owners
The stock recently declined from $70 to $47 per share on fears of a recession (we viewed this as a great buying opportunity and purchased between $47-$54 per share)
Margin deterioration post pandemic demand
Does not seem to be the case as Academy has seen same store sales decline y/y consistently as the company laps its 2021/2022 demand surge - margins have been sticky in the 33-35% range and were 35.6% in most recent quarter (+30bps y/y)
Ken Hicks departure - many credit Academy’s success over past five years to former CEO Ken Hicks, a legend in retail/apparel - he stepped down in May 2023 from CEO and took the Executive Chairman position
Steve Lawrence, former CMO and Mike Mullican, former CFO are now CEO and President, respectively. They both began around the same time as Hicks and have been his #1 and #2 guys for 5+ years of success. They have the blueprint, experience, and his oversight as Chairman
Disclosure: This is not a recommendation to buy, sell, or hold securities. I own shares of ASO. I am not a financial advisor, this is not financial advice. As always, do your own research.