Academy Sports and Outdoors, Inc. (ASO): A Bull Case Theory

We came across a bullish thesis on Academy Sports and Outdoors, Inc. (ASO) on  Substack by Prateek Malhotra. In this article, we will summarize the bulls’ thesis on ASO. Academy Sports and Outdoors, Inc. (ASO)’s share was trading at $50 as of Nov 12^th. ASO’s trailing and forward P/E were 7.76 and 7.54 respectively according to Yahoo Finance.

A manager in a sporting goods store giving a customer advice on outdoor equipment.

Academy Sports and Outdoors, Inc. (ASO) specializes in outdoor recreational products, such as camping gear, hunting equipment, and firearms, targeting middle-class consumers who are passionate about the outdoors. The company competes primarily with Dick’s Sporting Goods, Walmart, and other large retailers, but positions itself as more accessible to middle-income families, contrasting with Dick’s more affluent customer base. ASO’s strategy includes expanding its store footprint from the current 285 locations to about 450 by 2030, mainly funded through the free cash flow generated from its existing stores, reflecting a low debt level and a solid balance sheet.

ASO has also been actively repurchasing shares and paying dividends, having repurchased approximately $1.4 billion worth of shares since 2021, with an additional $476 million remaining for buybacks. The company purchases about $200 million of stock each quarter, which is substantial given its current market cap of $3.57 billion. Despite these positive financial maneuvers, the company faces challenges. Same-store sales are declining, and revenue growth is stagnating despite store expansion. This is largely due to the cyclical nature of the outdoor retail sector, which saw a surge in purchases during the COVID-19 pandemic but is now feeling the effects of inflation and economic pressures on the middle class, leading to a reduction in discretionary spending on outdoor products.

Looking ahead, ASO’s revenue is projected to reach around $9 billion by 2029 if the company successfully increases its store count to 450 locations, each generating approximately $20 million in sales annually. Assuming a 7-9% profit margin, this would yield an estimated net income of $720 million. With a price-to-earnings (P/E) ratio of 10, the stock could see a 100% upside from its current price, offering a good margin of safety. A Monte Carlo simulation considering a range of store counts (400-500), revenue per store ($20 million to $25 million), profit margins (7%-10%), and P/E ratios (8-12) suggests a favorable risk/reward scenario.

However, risks remain. Continued declines in same-store sales could pressure the expansion strategy, and potential trade tensions with China might further increase product costs, reducing profitability. Nevertheless, the downside risk appears limited given the company’s low valuation and the absence of any immediate bankruptcy concerns. ASO’s stock, priced at a P/E of 7.8, seems undervalued, and while consumer spending on outdoor goods may continue to decline in the short term, the company’s expansion and buyback efforts may eventually pay off as the market recovers. For long-term investors, ASO represents a solid opportunity, especially once the cycle turns and same-store sales improve.

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