Academy Sports & Outdoors-ASO
US Mid Cap Play
Disclaimer: This newsletter is not financial advice this is for educational purposes only so please DON’T take this newsletter as a buy or sell signal.
Academy Sports & Outdoors Fundamentals:
Below is a checklist I normally use in my process when I look at the fundamental health of a company. If the company meets my criteria it will be colour-coded in green and if the company fails to meet my criteria it will be colour-coded in red which means I need to investigate further.
5-Year Profit Margin- When looking at a company I ideally want a company to have a 5-year average profit margin above 10% but because this is a retail company I am not going to penalise them for not meeting my 10% target. I do praise Academy Sports & Outdoors for significantly improving their profit margin over the years where it was 2% in 2019 and now their profit margin is hovering around 9% on TTM(trailing twelve months). Academy Sports & Outdoors profit margin has increased over the years because they are good at managing their inventory, pushing their omnichannel capabilities and consumers shifting from soft goods(sports and recreational products) to more hard goods(footwear and apparel). Hard goods tend to be higher-margin products than soft goods.
Shares Outstanding-When analysing a company I ideally want their shares outstanding to be the same or to decrease over time. As you can see, Academy Sports & Outdoors shares outstanding have gone up by 3.5% in the last 5 years which is not something I am worried about as this is minor dilution. Even though the company has issued shares in the past they have bought them back. They currently have a £500m share repurchase programme which they will use to return value back to shareholders.
Debt To Equity Ratio Below 1.0-When looking at a company, I ideally want them to have low debt because when a company has low debt, it would be very hard for them to go bankrupt. Academy Sports & Outdoors debt-to-equity ratio currently sits at 1.09 which is slightly above my 1.00 threshold. I am not worried about this because most of Academy Sports & Outdoors debt is in lease obligations($1.78B) and secondly if you look at Academy Sports & Outdoors history they have significantly reduced their debt as shown below:
Business Overview:
Founded in 1938 by The Gochman Family, Academy Sports & Outdoors is an American sporting-goods store chain based in Texas that sells coolers, drinkware, camping accessories, camping equipment, sunglasses, backpacks, sports bags, marine equipment, fishing rods and fitness equipment.
For 74 years Academy Sports & Outdoors was a privately held company owned by The Gochman family until it was acquired by Kohlberg Kravis Roberts(KKR) in May 2011. Academy Sports & Outdoors was founded in 1938 when Arthur Gochman and his business partner purchased Southern Sales, a San Antonio-based army-navy surplus chain consisting of six stores that were no longer making any profit. At the time, Arthur Gochman was a practising attorney in San Antonio. Arthur Gochman was not formally educated as a businessman, but he had learned much about the surplus retail business from his father, Max Gochman, who had owned a surplus goods outlet in 1935. In 1973 Arthur Gochman bought out his partner business and changed the company name from Southern Sales to Academy Corp. The “Academy” name was borrowed from his father's stores as It came from a now-defunct San Antonio Catholic school named St. Henry's Academy. Max Gochman permitted his son to use the name, knowing that it would help his son’s business grow. In 1978, Arthur Gochman gave up his law practice and moved to Houston to resume active control of the company and complete the overhaul of its basic merchandising policies. During that time Academy built new offices and a 50,000-sq-ft warehouse. The chain grew from 8 stores in 1980 to 12 stores in 1985 and by the end of the 1980s Academy had become a popular Texas chain. Among other things, its outlets sold more state fishing licenses than its competitor Oshman's Sporting Goods or any other group of stores. By 1990, Academy had grown to 18 stores where at that time, it was selling more cowboy boots than any other chain in the United States. Academy also began a period of rapid expansion, jumping from 18 stores to 34 stores by 1995. In June 1994 Academy opened up its first store outside of Texas in Oklahoma then added a store in Lafayette and Louisiana. The rapid expansion outside of Texas ended the company's exclusive Texas identity. To this day Academy's identity remains in Texas where almost half of its stores are located there, as are the company headquarter and its distribution facility. After graduating from Harvard and the University of Texas law school in 1995, David Gochman joined Academy on a full-time basis. By that time, his father, then 65, had built Academy into a $350 million retail chain and was ready to turn control of the business over to his 30-year-old son. David Gochman initially served as vice president of store operations and general counsel, but in the following year, he succeeded his father as Academy's chairman, president, and CEO.
Fast forward to October 2020 Academy Sports & Outdoors launched an initial public offering(IPO) to pursue further growth opportunities. The company was listed on the Nasdaq with the ticker symbol ASO. After going public, a continued national expansion plan was laid out calling for 8-10 stores per year starting in 2022. The company stock price originally stood below $13 but eventually rose to $40 by June 2021. After its first public year, Academy Sports & Outdoors debuted on the Fortune 500 list of 2021. In 2022, Academy Sports & Outdoors opened its first locations in Virginia. The company has plans to open up to 100 locations in the next five years.
Merchandise:
Academy Sports & Outdoors merchandise consists of national brands that they purchase and license from various vendors. Academy Sports & Outdoors have a long-standing relationship with many of its suppliers and have partnered with them to grow their business over time. In 2022 the company purchased merchandise from approximately 1,400 vendors. For 2020, 2021 and 2022 no vendor represented more than 12% of Academy Sports & Outdoors total purchase. Academy Sports & Outdoors have preferred access to hundreds of well-recognised national brands such as Nike, Under Armour, Adidas, Winchester, Brooks, Crocs, Wilson, and Spaulding. Yeti, North Face, and Columbia Sportswear are critical to their market penetration as these are national brands that rely on Academy Sports & Outdoors to broaden their consumer reach, which fosters a mutually beneficial relationship when it comes to pricing and assortment.
Academy Sports & Outdoors private label brand portfolio consists of 20 brands which include Academy Sports & Outdoors, Magellan Outdoors, BCG, O’rageous, Game Winner, Outdoor Gourmet and Freely. The company’s private label brand strategy focuses on in-filling categories and price points that their national brand products may not satisfy. Their private-label brand offerings support and complement their overall merchandising strategy due to limited price-point overlap with national brands. Additionally, their private-label brands generate strong brand equity and drive significant customer loyalty. Approximately 56% of Academy Sports & Outdoors customers purchased a private label brand in 2022.
Business Segments:
Outdoors:
Camping-Coolers, drinkware, camping accessories and equipment, sunglasses, backpacks and sports bags.
Igloo Latitude 30 QT Roller Cooler. Fishing-Marine equipment, fishing rods, reels, baits and equipment.
Shakespeare Navigator 6 Ft M Spinning Rod And Reel Combo. Hunting-Firearms, ammunition, archery and archery equipment, camouflage apparel, waders, shooting accessories, optics, airguns and hunting equipment.
NSG Deluxe Archery Set.
Sports And Recreation:
Fitness-Fitness equipment, fitness accessories and nutrition supplies.
ProForm Carbon CX Exercise Bike. Team Sports-Team and speciality sports equipment including baseball, football, basketball, soccer, golf, racket sports, and volleyball.
Adidas 2022 World Cup Club Soccer Ball. Recreation-Patio furniture, outdoor cooking, wheeled goods (bicycles, skateboards and other ride-on toys), trampolines, play sets, water sports and pet equipment.
AGame 12 Ft Round Trampoline With Enclosure. Front End-Electronics, watches, and front-end(consumables and batteries.)
Casio Men's Wide Face Digital Resin Sport Watch.
Apparels:
Outdoor And Seasonal Apparels-Outdoor apparel, seasonal apparel, denim, work apparel, graphic t-shirts and accessories.
Magellan Outdoors Men's Relaxed Fit Jeans. Youth Apparel-Boys and girls outdoor and athletic apparel.
BCG Boys' Bring The Heat Short Sleeve T-shirt.
Athletic Apparel-Sporting apparel and apparel for fitness.
Nike Men’s Dri-FIT Legend Fitness T-shirt. Licensed Apparel-Professional and collegiate team licensed apparel and accessories.
Columbia Sportswear Men's Collegiate Omni-Dry Tamiami Shirt.
Footwear:
Casual And Seasonal Footwear-Casual shoes, slippers, seasonal footwear and socks.
Crocs Classic Clog Pink Lemonade. Work Footwear-work boots, western boots, shoes and hunting footwear.
Justin Men’s Stampede Chet Western Boots. Youth Footwear-Boys and girls athletic footwear.
Nike Girls' Court Borough Mid 2 Shoes. Athletic Footwear-Running shoes, athletic lifestyle and training shoes.
Under Armour Men's Surge 3 Running Shoes. Team Sports Footwear-Team and speciality sports footwear and slides.
adidas Boys' X Speed Portal 4 Firm Ground Soccer Cleats.
Omnichannel:
Academy Sports & Outdoors is a true omnichannel retailer. They have built an e-commerce and mobile platform that have a true connection with their stores as shown below:
75% of e-commerce sales are fulfilled in stores.
60% of omnichannel customer spending comes from those within 10 miles of a store.
60% growth in omnichannel customers when opening a new store.
Omnichannel customers spend more and shop more often than the average Academy Sports & Outdoor customer.
97% of all company sales are fulfilled through the stores.
In 2019 they Implemented buy online pickup in-store(BOPIS).
In 2020 they Implemented kerbside pickup and ship to stores from distribution decentres chainwide.
In 2021 they launched The Academy app to make online shopping easier and to integrate the in-store experience for customers.
In 2022 they expanded the ship-to-store from store to all locations.
Management
When looking at management I like to judge the CEO in several different ways such as experience, capital allocation skills and Incentives. In this section, I will cover whether management incentives are aligned with shareholders.
Experience-Kenneth Hicks, also known as Ken Hicks is the current Chairman, President and Chief Executive Officer at Academy Sports and Outdoors since May 2018. Before he joined Academy Sports and Outdoors in 2017 Ken Hicks use to serve as the Chief Executive Officer and President at Foot Locker from August 2009 to February 2010. Ken Hicks has many years of senior marketing and operational experience in the retail industry which sells retail brandings. Ken Hicks also graduated from the United States Military Academy located in West Point, NY, and served in the U.S. Army. He also earned a Master of Business Administration with highest distinction from Harvard Business School.
Below is an image illustrating the current experience of Academy Sports & Outdoors board members:
Capital Allocation-When it comes to judging management I think capital allocation skill is very important because I want management to create shareholder value and not destroy it. So far Academy Sports & Outdoors capital allocation has been spot on because they are returning value back to shareholders via paying down debt, reinvesting back into the business to further expand their omnichannel capabilities, paying a dividend and doing share buybacks.
Academy Sports & Outdoors is currently paying a dividend with a yield of 0.67%. As shown below this dividend is sustainable because it only takes up 6% of their overall free cash flow.
Incentive-This is important because if the current board is actively purchasing stock of their own business this is a positive indicator that shows that management believes the stock is undervalued and they believe in the long-term prospect of the company.
As you can see below we have 3 people selling and no one buying. The insiders that are selling Academy Sports & Outdoors stock are Manish Maini(Chief Information Officer), Sherry Harriman(Senior Key Executive) and Jamey Rutherford(Senior Vice President Of Omnichannel). I am not going to put too much weight into this because there are so many reasons why someone might sell their stock.
Bull And Bear Case:
Bull Case
Bull Case-The first bull case is customer loyalty. When it comes to customer loyalty Academy Sports & Outdoors has the highest in the industry. If customers are loyal to your store there is an increased chance they will shop at your store again and recommend others to your store. Below is a graph illustrating this point:
Bull Case- The second bull case is Academy Sports & Outdoors long runway for growth. Academy Sports & Outdoors priority is long-term growth and a sustainable business model. The company’s vision, mission, and values remain the same. The company has developed a long-term plan and established a new set of goals to be achieved by 2027. Academy Sports & Outdoors believe these targets will drive the next level of performance for their company. The goal for Academy Sports & Outdoor is to:
Open new stores to expand the store base by 50% in existing and new markets.
Build a more powerful omnichannel business.
Drive their existing business by Improving service and productivity in their stores.
Strengthening their merchandising through meaningful assortment, powerful brands, and compelling value.
Attract and engage customers through communication, content, and experiences.
Leverage and scale their supply chain to enable industry-leading growth.
Support their growth with the best team in retail.
Bear Case
Bear Case-The first Bear care is competition. The retail business is highly competitive based on many variables including pricing, product assortment, customer service, omnichannel experience and store locations. The retail sporting goods and outdoor recreation retail industry consist of six principal categories and they are:
Mass general merchants such as Walmart, Kohls and Target. Their stores generally range in size from 50,000 to over 200,000 square feet and they are typically located in shopping centres, free-standing sites or regional malls. Sporting goods merchandise, apparel and outdoor recreation products may represent a small portion of the total merchandise in these stores.
Large format sporting goods stores such as Dick’s Sporting Goods and Scheels. Their stores generally range from 20,000 to over 100,000 square feet and offer a broad selection of sporting goods and outdoor recreation merchandise.
Traditional sporting goods stores such as Hibbett Sports and Big 5 Sporting Goods. Their stores generally range from 5,000 to 20,000 square feet and are frequently located in regional malls and shopping centres and they typically carry a varied assortment or primarily sporting goods merchandise.
Speciality outdoor retailers for example Bass Pro Shop and Sportsman’s Warehouse. Their stores generally range from 7,500 to over 100,000 square feet and they typically focus on specific categories such as outdoor recreation.
Speciality footwear retailers for example Foot Locker, Boot Barn and The Finish Line. Their stores generally range from 2,000 to 20,000 square feet and they typically focus on specific categories such as athletic footwear.
Catalogue & Internet retailers for example Amazon, eBay, and Fanatics. These types of companies do not typically operate a brick-and-mortar store but they rely on delivery of goods. Sporting goods merchandise, apparel and outdoor recreation products may represent a small portion of the total merchandise on their website.
Academy Sports & Outdoors primary competition is large format sporting goods stores and mass general merchants that offer sporting goods, outdoor recreation products and other lifestyle and recreational merchandise.
Bear Case-The second bear case is consumer behaviour changing. If Academy Sports & Outdoors are unable to predict or effectively react to changes in consumer tastes and preferences, or if they fail to acquire and sell brand name merchandise at competitive prices, or not successful in managing their inventory balances, then they may lose customers and their sales might decline. The level of success they achieve is dependent on the frequency of merchandise and service innovations and how accurately and timely they predict consumer tastes and preferences regarding sporting goods and outdoor recreation merchandise.
Valuation:
In this section, I am going to talk about valuation. Using some basic metrics I am going to compare Academy Sports & Outdoors against some of its industry rivals and see if the company is cheap relative to its peers then I will value Academy Sports & Outdoors using a discounted cash flow model to come up with a price I am willing to pay based on expected growth rate and my desired return of 15%.
As shown below when comparing Academy Sports & Outdoors against its peers it scores 1/6 whilst Hibbett Sports scores 6/6. Both are high-quality companies that offer different things which is why I own both as a basket bet.
As you can see based on my conservative assumption, Academy Sports & Outdoors is looking to grow between 2-5% in the short term so I went conservative and assumed a 4% growth in the first 1-3 years then the growth will slow down to 1% in 4-6 years out. In my assumption, I also went with an exit multiple of 8x earnings. Based on my assumption I have come to a buy price of $51 which means right now Academy Sports & Outdoors has significant upside potential if you compare it against the stock price of $48.
Thanks for reading my newsletter on Academy Sports & Outdoor. Disclaimer this newsletter is not financial advice this is for educational purposes only so please DON’T take this as a buy or sell signal.
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