ASO - Academy Sports: Great Read From DICK'S Sporting Goods

Summary

• Academy Sports got good news when peer DICK'S Sporting Goods guided up for the year.
• The sporting goods sector forecasts negative comp sales this year, but the sector isn't giving back as much profit as feared.
• The stock is far too cheap trading at only 6x EPS targets that appear very solid now.

The retail sector has faced a tough road this year with some of the e-commerce boosts during COVID unwinding while retailers are left with too much inventory. The sporting goods sector has held up stronger than most retailers with Academy Sports and Outdoors ( ASO ) actually trading back at the highs supported by a strong report by peer DICK'S Sporting Goods ( DKS ). My investment thesis is actually Bullish on the stock based on the cheap valuation and signs the company won't need to cut targets.

Strong Results From Peer

Academy Sports reported FQ1'23 results back on June 7 with solid results. The company guided FY23 results down slightly to an EPS of $6.55 to $7.25 per share with comp sales falling up to 6% on the slowing economy.

With the stock trading in the $30s at the time, Academy Sports wasn't correctly priced for the earnings potential, even with a small cut to targets. In addition, a sizable reduction in comp. sales sets up the sporting goods retailer for an easier hurdle next fiscal year.

The company reported results through the end of April, so the updated results from peer DICK'S through the end of June provides a timely view of the sector. Considering the retail weakness during May and June with surging gas prices, the market was expecting most retailers to cut numbers. Instead, DICK'S actually guided up EPS estimates for the year to $11.00 at the midpoint from $10.43. The company even narrowed what was originally a very wide range of $2.55 per share.

DICK'S has far more confidence in the business near the end of August than Academy Sports had when reporting back in early May. The big fear was that results would fall apart further, but DICK'S narrowed the comp. sales range to -6% to -2%.

The sporting goods sector has benefitted from boosting sales without requiring additional spending on labor. Merchandise margins are up even with higher supply chain costs.

Academy Sports ended the April quarter with merchandise inventories of $1.3 billion, up 8.8% from FQ1'19. The sporting goods retailer has far more sales now, but higher inventories have been the general downfall of apparel retailers in this environment requiring aggressive promotions.

A big key to the DICK'S Q2'22 earrings report was no signs of promotions in the sporting goods sector. The company has only given up a small portion of the revenue boost, even during a recessionary environment, while mostly maintaining higher margins.

Great Setup

Academy Sports trades near the all-time high of $51 after going public back in 2020. The market probably doesn't want to rush into the stock at the highs, but Academy Sports only trades at 6x forward EPS estimates. DICK'S trades at closer to 10x EPS estimates

Both stocks are incredibly cheap considering the ability to survive the weak retail environment this year. Now, Academy Sports can utilize free cash flows with a $6+ earnings stream to repurchase shares.

The company bought 2.3 million shares in FQ1'23 for $88.5 million while also paying a 0.7% dividend yield. Academy Sports cut the diluted share count from 96.5 million last FQ1 to just an average of 88.6 million shares in the last quarter.

As long as the stock is this insanely cheap, management can continue reducing the share count by up to 10% per year providing a great boost to EPS. At $7 per share, Academy would produce $600 million in earnings and potentially higher cash flows due to high deprecation costs and inventories streamlined.

Takeaway

The key investor takeaway is that Academy Sports is further de-risked following the solid numbers from DICK'S Sporting Goods. The sector is overlooked by the market expecting a bigger pullback in comp. sales following the covid boost and not full appreciating the better operations of the management teams.

Investors should continue buying Academy Sports, even at the highs.

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