ASO - Academy Sports and Outdoors: Lousy Quarter But Not Backing Away

2023-11-30 11:14:55 ET

Summary

• The Academy Sports and Outdoors, Inc. Q3 earnings report is triggering a selloff.
• Despite the poor quarter, the company is still expected to expand and stabilize its comps.
• The company's balance sheet is healthy, and management is focused on rewarding shareholders through dividends and buybacks.
• Let the market take this down some, and consider some buying.

Academy Sports and Outdoors, Inc. ( ASO ) is set to fall today after its just-reported Q3 earnings . The report was rather lousy, all things considered, but we are not backing away. Below we are setting up a new trade for new money, but still see a high $50's price target. Today's selling will take the stock back a few weeks, but despite this quarter, which we see as a one-off, the company continues its metered expansion, is seeing inflationary pressures subside, and supply chain issues have worked themselves out. Moving forward, we are looking for comps to stabilize from here. We reiterate a buy.

The suggested play for new money

Target entry 1: $47.50-$47.75 (30% of position)

Target entry 2: $45.35-$45.65 (33% of position)

Target entry 3: $44.00-$48.35 (37% of position)

Short term target: $55

Medium term target: $63.

Options: Specific guidance is reserved for our members, but generally speaking option players should consider selling puts for premium or to define entry here. Calls are also cheap with a low volatility environment right now

Q3 performance reflects weak comps

The just-reported quarter, was below our expectations, triggering the selling today as guidance was narrowed on the results. Chief Executive Officer Steve Lawrence summed it up nicely in the release :

Our sales and net earnings for the third quarter came in below expectations, primarily driven by weakening consumer sentiment coupled with above normal temperatures that negatively impacted demand for Fall product. Over the past year we have seen customers change their shopping patterns and aggregate trips into the key shopping moments on the calendar and we expect to see this pattern continue this holiday season

While competition is stiff in this space, there is a lot of room for expansion as they are only in 18 states. The balance sheet is clean and the management is shareholder friendly, but the quarter was poor overall. We view this as a one-off and not a broader sign that the sports market is dying in any capacity. There is a lot of room to grow across the nation. Further, Academy has a growing online business and reaches customers with multiple distribution centers that it operates. But sales fell on the top line, missing estimates . Net sales in the quarter were $1.38 billion, which actually fell 6.4% from last year, compared to $1.49 billion. This was due to comparable sales falling 8%, but online sales are strong.

Margins have been under pressure of late, but are stabilizing in the 34.0% to 35% range. Gross margins in Q3 were $482.6 million, or 34.5% of the total net sales. This was down a touch from 35.0% of net sales in the prior year quarter. Before taxes, income was $129.9 million, which dipped from $169.9 million. This was largely due to the decline in sales, of course. So really, with the top line down on the back of weaker comps, stemming largely from an inability to move fall merchandise due to much warmer conditions, everything down line on the earnings print suffered.

Net income fell to $99.9 million, or down 24% compared to $131.7 million last year. However, we view this as a short-term pressure, but do expect this Q4 will be promotional, as inventory levels were flat from last year. They need to move items and reduce the inventory, and then we will see margin expansion, likely in 2024. On a per-share basis, we saw $1.38 compared to $1.67 per share. Ugly overall. Declining earnings is not growth. However, we see it as a dip short-term and growth will resume as the company expands. The plan is to open another 100 stores in the next 5 years, growing the company by at least 37% or more. While the near-term outlook is suffering, we like the long-term prospects. Unfortunately, after raising guidance in Q2, the company had to walk back expectations for the year following this Q3.

Net sales are now seen at $6.110 billion to $6.170 billion, down from $6.175 billion to $6.365 billion prior. This will be because comps will be down 6.5% to 7.5%. Previously, it was expected that comps would 4.5% to 7.5%. EPS, however, will come in around the midrange of prior guidance, thanks to margins and stock repurchases. The company sees EPS of $7.05 to $7.20, versus $6.95 to $7.65 in earnings for the year seen prior. Keep in mind, the initial guidance for the year was $6.80 to $7.50, so it is not the end of the world. In fact, at $7 in EPS, and a $46 stock, the valuation is quite attractive when you consider the balance sheet.

The balance sheet is healthy. Academy has $275 million in cash with just with $583 million in long-term debt. The company is using that debt to expand is store footprint and grow. Adjusted free cash flow remains strong and is seen at $400 million this year.

The other thing here is that while the kinks are being worked out to move inventory and regain sales growth after this lousy quarter, the company continues to reward shareholders through dividends and buybacks. That was the biggest piece of positive news. The company has been buying back stock all along, and just announced a fresh three-year, $600 million share repurchase program, bringing the total amount currently available under both share repurchase programs to approximately $700 million.

Final thoughts

As we look ahead, there is value in Academy Sports and Outdoors, Inc. shares. Further, management is taking care of shareholders and the company will grow its physical presence by nearly 40% in the next few years. Inventory will need to be moved, but the company is focused on maintaining expenses to control margins and optimize cash flow. In our opinion, yes, this was a tough print, but let the market take the stock down, again, then do some buying.

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