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Introduction
Holiday season has finally come. Another year has almost gone by and, once again, many predictions about what the year would have brought have been proven untrue, while many surprises have come, both positive and negative.
As investors, this season catches a lot of attention. On one side, consumers may spend more than usual, with the National Retail Federation forecasting 2023 holidays may reach record spending levels between $957 and $966 billion, which equals to almost $900 spent per consumer. In addition, an estimated 182 million (15.7 more than in 2022) are planning to shop in-store and online from Thanksgiving Day through Cyber Monday. On the other side, it’s also tax loss harvesting time.
Academy Sports and Outdoors (NASDAQ:ASO) will be impacted by both trends. In fact, the stock is among the 81 companies that should have technical pressure due to tax loss selling, according to Morgan Stanley. On the other side, being a retailer it should be a go-to for many consumers seeking a gift for the beloved ones. With the company reporting Q3 earnings on Nov. 30, we have a lot to cover.
Summary of previous coverage
In the past I have shared the main reasons I’m long Academy. But two are so important I need to recall them:
Compared to its competitors, Academy has a clear growth path in the U.S. The company has proven able to consolidate its strong results achieved during the pandemic.
Using the available data about store profitability together with new store opening costs Academy has shared, I have come up with my forecast for the company’s future growth. We know, in fact, that after one year a new store already is EBITDA accretive and this helped me expect the company to reach $9.7 billion in revenue by 2027 with $1.6 billion of EBITDA (16% margin). This gave me the outcome that the company was trading at around a 2027 EV/EBITDA multiple of 3.5 while the stock price was $47. Thus, my fair value came in around $65. The stock actually has traded up to $67, but since May it has gone back down to a very interesting price of $48.
After my forecast, the company has actually updated its 2027 goals which aim at achieving net sales over $10 billion.
ASO 2023 Investor Presentation
Last quarter, retailers were shaken by awful reports from companies such as DICK’S Sporting Goods (DKS), whose stock dropped 25% after earnings because of the impact of shrinkage. Academy, however, reported a top and bottom line beat and showed shrinkage was impacting only slightly its financials.
The Company
Academy is a retailer of trending outdoor and sport categories which currently operates 270 stores across 18 states, mostly concentrated in the south and the southeast. This alone shows the growth opportunity the company has as it targets to expand across the U.S. with another 120-140 stores by 2027.
ASO 2023 Investor Presentation
Starting in 2019, the company has achieved significant accomplishments as it targets to become the best retailer in the country. Gross margins, for example, have gone up from 29.6& in 2019 to 34.6% in 2022. EBT margin has increased sharply from 2.5% in 2019 to 12.8% in 2022. Currently the company makes around $6.4 billion in revenue in a TAM estimated to be over $175 billion and highly fragmented.
ASO 2023 Investor Presentation
Academy is somewhat unique because it offers both a complete assortment (similar to DICK’S) and high value (comparable to Walmart and Target (TGT)). In addition, around 65% of Academy’s customers come from households with income between $30k and $140k, which means they’re part of that middle class which currently seems to be fully employed and to be spending at a fast pace, keeping the economy afloat.
Compared to its main competitors, Academy usually comes on top when considering the main productivity and profitability metrics. In FY22
Sales per sq ft were $340 vs. DICK’S $290
Sales per store were $24 million vs . DICK’S $14 million
Adj. EBITDA per store was $3.7 millio n vs. DICK’S $2.18
Operating cash flow as % of sales was 8. 6% vs. DICK’S 7.5%
ASO 2023 Investor Presentation
Q3 Earnings Preview
First of all: Shrinkage. Q3 will be a quarter when the company starts to lap other quarters already affected by the issue. The environment has not magically changed, but we should see the effect of the measures the company took to deter and prevent theft.
This year the company has given an overall guidance down compared to FY 2022 because of several macroeconomic challenges. However, while in Q1 the business was decelerating month over month, in Q2 the company said each month was performing better than the previous. With Q3 and Q4 being two strong quarters for the company, we can expect the company to report comparable sales better than -7.5% of Q2. A good result would be negative sales in the range of -1% to -2% year-over-year, which means revenues of $1.47 billion. In particular, since the Sports and Recreation division performed better than expected in Q2, and given the fact this division is particularly strong in the summer, we could see the company come above the current forecast of comp sales down around 3% to $1.45 billion. Moreover, a retailer like Target, alongside many others that have already reported earnings, pointed out that
Academy Sports and Outdoors: Unwrapping Insights Into Holiday Season And Q3 (NASDAQ:ASO)
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