J. Michael Jones/iStock Editorial via Getty Images
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 “store comp trends are somewhat stronger.”
Academy’s gross margin has remained rather flat above 35%. With Q3 being a quarter where inflationary pressure decreased, we could expect a margin of 35.7%-36%. This means gross profit should be around $525-$530 million. Net income margin should be once again double digit, and I ‘m forecasting 10.5% which is equal to $154 million. Dividend by the number of shares outstanding at the end of Q2 (76 million) we have basic EPS of $2.03, which is above current consensus. This leads to EPS for the first nine months of the year to $5.42. Current consensus sees Q4 EPS at $2.16, which leads to FY2023 EPS of $7.58. So, I believe Academy is actually trading at a fwd 2023 PE of 6.4, which is a bit below the current fwd PE of 7 we find on Seeking Alpha. Considering its high profitability grades compared to the industry (in particular, return on common equity and on total capital which are 33.2% and 13.1% respectively), I believe this company’s fair value should still be around $65, which translates into a forward 2023 PE of 8.6.
A look at Q4 e -commerce and online sales
Holiday season has started and we know it is more and more linked to e-commerce. Academy has not been idle, more than doubling its penetration from 5.1% in 2019 to 10.7% in 2022. We can expect 2023 to push this penetration up as the company has added several new online capabilities during Q3.
ASO 2023 Investor Presentation
Even though Academy is a brick-and-mortar retailer, it has understood the importance of online shopping and it’s targeting to reach at least a 15% penetration by 2027. After all, the NRF reminds us that this year alone online and other non-store sales are expected to increase between 7% and 9% to a total of between $273.7 billion and $278.8 billion, up from $255.8 billion of 2022. It may seem surprising, but U.S. GDP for Q3 boasted the fastest increase in recent years – 4.9% – supported by a 4% increase in consumer spending which was responsible for more than half of the total GDP increase.
We can see this below. year-to-date, US personal spending has seen almost no stop, with constant monthly increases.
Data by YCharts
Now, before we look at Academy’s upcoming report, it’s helpful to look at some data that can help us understand the overall context of this holiday season. According to the National Retail Federation, this year among the most wanted gifts we find are clothing and accessories. Sporting goods are desired gifts, too, enough to be shown as a standalone category in the top 10 types of gifts. For what concerns us, we can interpret this data as favorable for Academy.
National Retail Federation – Holiday By The Numbers Slideshow
A closer look at gifts shows us also the top gifts consumers are expected to give. While most consumers would like to receive gift cards, when we look at it on the side of those who give, we find clothing or accessories come on top of gift cards, at 56%. Sporting goods or leisure items still make the top 10, with a 17%. Once again, this is good data for a company like Academy.
National Retail Federation – Holiday By The Numbers Slideshow
The NRF also shared its research on consumers’ favorite shopping destinations. Consumers plan to make their holiday purchases mainly online, but department stores and clothing stores are seeing YoY growth among consumers’ preferences.
National Retail Federation – Holiday By The Numbers Slideshow
Conclusion
This is a consolidation year for Academy. So far, the company has weathered it better than anticipated and the macroeconomic news we have seen bodes well for the future of the company. This is why I reiterate my buy rating, suggesting to take advantage of the dip.
Academy Sports and Outdoors: Unwrapping Insights Into Holiday Season And Q3 (NASDAQ:ASO)
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