Academy Sports And Outdoors: Undervalued Growth Potential (NASDAQ:ASO)

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Investment Thesis

Academy Sports and Outdoors, Inc. (NASDAQ:ASO) has set itself on a strong but conservative growth trajectory relative to other specialized big box stores that saw most of their growth in the 80s, 90s, and early 2000s. By filling in stores in the Southeast and then gradually expanding into whitespace regions to the North and to the West, the company should be able to maintain growth for years, and perhaps decades to come. In my view, the stock looks undervalued right now in relation to its long-term growth prospects. Read more below on why I assign a Strong Buy on ASO stock.

Academy’s Current Footprint

Academy Sports and Outdoors is a sporting goods and outdoor retailer based in Katy, Texas. It has become well established in the Southeast, with 268 stores and 3 distribution centers throughout 18 states. Founded in 1938 as a tire business and then military surplus store, it transitioned to sporting goods in the 1990s. It grew steadily until it just recently went public in 2020. You can read more about Academy’s History here.

Comparing Academy’s Potential Growth to Other Specialty Big Box Stores’ Growth

Academy falls in the category of specialty big box stores. In contrast to general big box department stores such as Walmart (WMT) and Target (TGT), these specialty big box stores focus their products around a central theme such as sporting goods, home improvement, electronics, or pet care. Typically, Academy stores can be found neighboring many such retailers that tend to pop up in interstate exit areas. For instance, in Jackson, MS, you can find an Academy on the same strip as Hobby Lobby, Lowe’s (LOW), and Best Buy (BBY). In Greenville, NC, you will find one neighboring DICK’S Sporting Goods (DKS), Kohl’s (KSS), and Lowe’s. In Tampa, FL, you will find one just a few hundred feet from Home Depot (HD) on one side and Petco (WOOF) on the other.

Academy has articulated in several earnings reports that its aim is to grow 80-100 stores in the next 4-5 years, an aspiration easily achieved in in-fill locations in its current region. However, the full opportunity size has been identified as 894 stores:

Based on this 894-store potential, I estimated an S-curve to compare to other specialized big box retailers’ growth using the following equation:

y = max / (1 + ((max – initial) / initial) * e^(-c * x)

where max in this case is 894 stores, initial is 268 stores, and c is adjusted to match Academy’s aspiration as closely as possible – in this case, 0.115.

I pulled store numbers over time from annual reports and company histories. To easily compare trajectories, I set year 0 to the year when each store had approximately the same number of stores as Academy has now (268): Home Depot in 1993 (264), Lowe’s in 1987 (295), Petco in 1995 (~277), Best Buy (U.S.) in 1997 (272), and Dick’s Sporting Goods in 1984 (255).

From this figure, it is easy to see that Academy’s growth prospects are very conservative relative to these other retailers. Academy seems to be assuming a similar entitlement to Dick’s Sporting Goods, but placing itself on a trajectory to take about twice as long to reach that entitlement.

Valuation and Financials

At a current store count of 268 and 2022 diluted earnings of $7.12 per share, I considered that Academy could approach $23.75 per share as it approaches that 894-store potential, simply extrapolating out from the current earnings (894 / 268 x $7.12 = $23.75). Using the same equation from the store number projections, I developed an earnings curve where the max is $23.75, initial is $7.12, and c is again 0.115.

I discounted those projected earnings over 50 years with the average real stock market rate of return of 7%.

Max =	$23.75				Year	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035	2036	2037	2038	2039	2040	2041	2042	2043	2044	2045	2046	2047	2048	2049	2050	2051	2052	2053	2054	2055	2056	2057	2058	2059	2060	2061	2062	2063	2064	2065	2066	2067	2068	2069	2070	2071	2072
Min =	$7.12				Actual EPS	$0.29	$0.00	$1.60	$3.79	$7.12
c =	0.115				Forecasted EPS						$7.71	$8.32	$8.95	$9.60	$10.26	$10.94	$11.62	$12.30	$12.98	$13.65	$14.31	$14.96	$15.59	$16.19	$16.77	$17.32	$17.85	$18.34	$18.81	$19.24	$19.65	$20.03	$20.37	$20.69	$20.99	$21.25	$21.50	$21.72	$21.93	$22.11	$22.28	$22.43	$22.57	$22.69	$22.80	$22.90	$22.99	$23.07	$23.14	$23.21	$23.26	$23.32	$23.36	$23.40	$23.44	$23.47	$23.50	$23.53	$23.55	$23.58
Discount rate =	7%		Sum of Discounted Earnings =	$201.33	Discounted EPS						$7.20	$7.26	$7.30	$7.32	$7.32	$7.29	$7.24	$7.16	$7.06	$6.94	$6.80	$6.64	$6.47	$6.28	$6.08	$5.87	$5.65	$5.43	$5.20	$4.97	$4.75	$4.52	$4.30	$4.08	$3.87	$3.66	$3.46	$3.27	$3.08	$2.90	$2.74	$2.57	$2.42	$2.27	$2.14	$2.00	$1.88	$1.76	$1.65	$1.55	$1.45	$1.36	$1.27	$1.19	$1.12	$1.04	$0.98	$0.91	$0.86	$0.80

Click to enlarge

The sum of discounted earnings is $201.33, roughly four times the current price of ASO; or, in other words, the stock price is 25% of the valuation, providing a margin of safety of nearly 75%. This makes ASO a strong buy in my view.

Other financial metrics also indicate a very positive picture. Going from $3.79 EPS in 2021 to $7.12 EPS in 2022 represents an 88% growth rate, yet the P/E ratio for ASO is only around 7. Typically, a P/E ratio less than the growth rate indicates that the stock is undervalued according to Peter Lynch’s favorite growth ratio. This is clearly the case with ASO.

Academy’s debt to equity ratio is not bad. Its long-term debt (total liabilities of $3,223,545 minus current liabilities of $1,191,211) is $2,032,334. With a total stockholder equity of $1,558,919, that gives a debt-to-equity ratio of 1.3. Ideally this would come down lower. Peter Lynch in his book One Up on Wall Street explains “A normal corporate balance sheet has 75 percent equity and 25 percent debt… More than anything else, its debt that determines which companies will survive and which will go bankrupt in a crisis” (p. 202).

Risks

Brick-and-mortar retail is facing greater challenges than when other specialty big box stores were taking off in the 80s, 90s, and 2000s. Academy’s conservatism when it comes to adding new stores may be justified given the challenges from the pandemic and the general transition to more online shopping. In addition, while Academy’s stated aspiration of 80-100 stores in the next 4-5 years seems very feasible to me, beyond that, if Academy tries to expand its footprint considerably it will have to adapt to differences in regional markets and could face different competition. I plan to cover these factors more in a future article.

Conclusion

There are no indications that Academy is seeking to take off in the same way other specialty big box stores have in the past. However, it has strong financials and a long history of slow and steady growth. If Academy can overcome the broader challenges to brick-and-mortar retail, it has more growth yet to come. Based on my analysis above, this growth potential is being severely undervalued, and long-term investors may want to take a closer look.