In a market crazed over the newest tech IPO or the next hedge fund-backed SPAC, a traditional retail IPO in October of 2020 went unnoticed. The company failed to reach their target IPO price (closed $12.99 with target of $13/share). Even more, with the seemingly never-ending pandemic hitting the retail sector hard, there is now a track record of shorts for the company. However, in just two quarters, the price almost tripled (currently trading ~$30/share), which brings the question: Is Academy Sports & Outdoors (Nasdaq: ASO) already a fish in shallow waters? Or are investors too macro in their evaluations, therefore failing to see ASO’s true values?
Academy Sports & Outdoors (ASO) is a US retailer in sporting goods and outdoor recreational products. Headquartered Katy Texas, they currently have 259 retail stores spread across 16/50 states, mostly in mid-east, east and southeast states of US. To put it simply, they are Dick’s Sporting Goods with good twist of Bass Pro Shop. ASO provides a wide range of products from team sports goods to fishing gear to firearms. What separates them from the competitors and most retail chains is that they deploy a “Localized Merchandising Strategy”. LMS means instead of top-down approach when determining what to sell, Academy Sports & Outdoors design their product mixes of each store specifically towards the needs of the local population.
Despite the pandemic and lockdown restrictions making a considerable impact on the retail sector – especially brick & mortar stores, ASO was able to successfully transition into eCommerce via omnichannel and the “BOPIS” (Buy Online, Pick-up In Store) system. During H12020, digital sales grew 284%. They maintained top-line growth rate, recording $5.69B in total revenue during 2020, a 17.8% increase from FY2019. ASO profited $308.8M in net income.
Academy Sports & Outdoors’ success during 2020 can largely be accredited to their strong and well-experienced management team. CEO Kenneth Hicks took over the company in 2018 with solid retail experience from Foot Locker and JC Penney. He immediately began eCommerce initiatives, which we now know was a brilliant move.
Why the Shorts?
If the company is seemingly doing quite well, why are investors holding short positions on it? What is the reason behind the 26.45% short interest, and will it really impact the performance of the company or the stock? Being such a young company on the market, it is truly hard to say whether the shorts are based on historical trends. It seems like the main driver behind the pessimistic outlook on this stock is COVID-19 and its impact on the broader retail sector, as well as the leveraged capital structure of the company. However, with its advanced omnichannel and pre-established eCommerce platforms, it is quite clear ASO is not your local fishermen’s shop.
Capital Structure & Shareholders Breakdown
A quick look at Academy Sports & Outdoors’ capital structure: 64.4% Debt, 35.6% Equity. The >50% leveraged capital structure does pose some form of threat to the company’s well-being. However, looking at the trend in the previous two years, the total debt percentage within ASO’s capital decreased. 2019 was the most leveraged year from the available filings, with a total of $2.7B in debt, representing 73.1% of the company’s total capital structure. The numbers alone are definitely red flags. However, if you look at how the percentage decreased to 64.4% at ~$2B in FY2020, it is clear just how strong ASO’s financials are – especially their cash flow. Overall, while a relatively highly leveraged capital structure is not the best, ASO has the cash ability to pay back the debts and interests. It is likely that the company is taking on debts because 1. they want to use it to expand their operations, and 2. They have a strong confidence that they would be able to pay it all back.
Looking at ASO’s shareholders breakdown, we see only ~10% of individual/insider investors. The largest shareholder is KKR & Co., one of the world’s largest private equity firms. Overall, a large institutional holding shows the street’s confidence & acknowledgement of the stock. However, do keep in mind that there is a 26.45% short interest in the market right now.
Overall, I believe ASO shows potential at a hold/buy for long positions, despite the short float in the market (they did not affect prices for the first two quarters anyways). The following are three main theses behind a long investment in ASO:
With the 4 annual filings released upon the IPO, there is strong growth for both top-line and bottom-line accounts. Through FY2017-20, we see 4.15% Revenue CAGR, 28.97% Operating Income CAGR 16.8% EBITDA CAGR, and 51.58% Net Income CAGR. As displayed, higher bottom-line (EBITDA, Net income) growth rate means profit margins are increasing at a faster pace than top-line revenue. This shows ASO’s ability to greatly reduce expenses and enhance profitability with stable revenue growth. We will see the same trend later in the comparable analysis as well; ASO’s value & advantages becomes more evident the further we move down the income statement.
In addition to strong profitability, ASO is also recording very solid Cash Flow Growth. Through FY2017-20, they obtained a stunning 86.62% Operating Cashflow CAGR, ending FY2020 with ~$1B in operating cashflow. This is a strong figure even in the retail sector. In comparison, Sportsman’s Warehouse and Hibbett Sports recorded $131.6M & $170M in unlevered free-cash-flow respectively in the first half of 2020; Academy Sports & Outdoors on the other hand, obtained $692M in unlevered FCF during the same period. This strong cash position is what allows ASO to continuously take on debt for scaling without worrying about interest rates or over-leveraging.
Growing revenue with increasing profit margins and a tremendous ability to increase cashflow, those two aspects are the financial cornerstones of any long-position investment.
The unique LMS approach of Academy Sports & Outdoors is also a driver of investment that it differentiates the company from its competitors. While other companies have also integrated elements of LMS into their operations, no one except for ASO and potentially Dick’s Sporting Goods has used this at scale. This strategy allows ASO to provide more personal experience to customers, and it also limits unnecessary shelving and carrying costs. This provides “everyday value” to the consumers, which increases returning customers and frequency of visits.
The omnichannel and eCommerce operations will also become key contributors for future growth of the company based on market trends. The company’s smooth transition into online sales since pandemic is the result of previous preparation made in 2018 when Hicks took over as CEO. Continuous developments on these platforms will further expand ASO’s competitive advantage.
Overall, LMS and omnichannel/eCommerce are strong value-adding aspects of ASO that will harbour the company’s future success. This can be seen now by the inventory turnover rate (a defining ratio in the retail sector), which increased from 3.0X to 3.8X through FY2019-20.
The last thesis is quite a short and simple one: overall growth in market demand for outdoor activities – especially after pandemic lockdowns – will contribute to the performance of ASO. The restrictive society we have been living in for more than a year now has created strong demands for the return of sports and other activities. More specifically, growing interest in outdoor activities will be enhanced for a period after the lockdowns are lifted (a catalyst to be discussed later). From ASO’s investor presentation, hunting and fishing are the two biggest growers, with 13% & 9% increase in participation, respectively. To match the growth, ASO gained 389 bps in market share from 2014-19. If this trend continuous, ASO will become an even more relevant competitor in the market, with higher revenue and profits.
Macro Market Trends
Obviously, the main macro market variable that is influencing ASO and the entire retail sector (and the economy in general) is the COVID-19 pandemic. In fact, as previously mentioned, the lockdowns’ impact on the industry is a driving factor on why ASO has so many shorts in the market right now. However, the pandemic catalyst aside, there are several trends that will contribute to ASO’s performance post-pandemic:
As we can see in figure 3.1, outdoor individual sports have the highest demand among post-pandemic exercising options. Most of survey respondents expect them to participate in more outdoor activities once the lockdowns are lifted. Despite COVID-19, interests for outdoor activities have been growing for years.
Camping is probably the most popular, and therefore more representative, outdoor activity. As seen in Figure 3.2, the camping equipment market has seen some solid expansion from 2007-19. Although the data is not available for post-2019 years (during pandemic), we can expect this growth to sustain.
eCommerce has been a huge revenue and margin driver in the retail sector, and that includes the sporting goods industry. COVID-19 has given the consumers a preview of what shopping could be like in the future, which is heavily reliant on logistics and online platforms. This trend will contribute to ASO as the company could be considered a market leader when it comes to online sales in the sporting goods industry.
Financials and Valuations
When it comes to the fair valuation of Academy Sports & Outdoors (ASO), I did not use an intrinsic method through building a Discounted-Cash-Flow model. This is because since the company is so new on the market, there is not enough historical data available to make the right assumptions and adjustments to the variables included in a DCF. Instead, I evaluated the company using a basic comparable analysis. The companies included in the comparable universe are: Dick’s Sporting Goods (DKS), Hibbett Sports Inc (HBB), Foot Locker (FL), Columbia Sportswear Company (COLM), and Sportsman’s Warehouse Holdings (SPWH).
Figure 4.1 in the comp universe used in the fair-valuation of ASO. As mentioned before, ASO’s advantages/values become more evident as we look at multiples that are further down the income statement. The EV/Revenue and EBITDA are mostly around the mean and median of the universe. However, once we get down to the EBIT and especially EPS multiples, we can see ASO is significantly undervalued compared to similar companies. When I converted the universe multiples into implied values at different levels, averaged them out, calculated the implied equity value, then divided by shares outstanding, we arrive at the implied price/share:
Based on the numbers presented in Figure 4.2, we can see a bullish target price for ASO is around $45, and a more moderate/conservative valuation would put price around $32-$33/share. This means in the bullish cased, there would be a ~50% return on your investment based on current prices of ~$30/share; in the more conservative situation, there is an 8-9% return. These prices are relatively consistent with the target prices on the street (see Figure 4.3)
To finish off this analysis on ASO, there are a few key catalysts to keep in mind:
As vaccines roll out, lockdowns will be lifted, and in-person shopping will resume. This will naturally cannibalize a portion of online revenue earned throughout the pandemic, however, it should still contribute to total revenue of the company. Much like untapping a water balloon, the first few months of normal life will likely spike physical retail sales. This especially affects sporting goods as sporting events will return during the same time, thus highly increasing demand for related products.
As more unfortunate gun violence incidents happen in the US, pressure for stricter gun control is not only applied to the legislative bodies, but also business as well. For decades, Dick’s Sporting Goods have been providing firearms to their customers, however, they have been pulling away from the market at a relatively quick pace. This creates a catalyst for ASO because they are still selling firearms consistently without increasing inventory. The absence of a big competitor like Dick’s Sporting Goods will create opportunities for ASO in this specific market.
Outdoor sporting goods are very cyclical products that mostly revolve around the spring & summer months. Therefore, filings for Q2 & Q3 will likely be very strong, driving stock prices upwards. This means if investors are looking to leverage this catalyst, now (April 2021) would be a good time to invest.
In the End: Buy, Hold, or Sell?
Overall, I think Academy Sports & Outdoors (ASO) is currently undervalued. However, since the company went public recently, there is not enough data to do a full intrinsic valuation for the stock. Nevertheless, my final recommendation is on track with the street’s opinions. On WSJ, 9/9 analysts rate the stock at a buy, and Morningstar Equity reports gives ASO a 3-star rating (buy/hold) based on quantitative analysis. I think ASO hold great potential, therefore: