Academy Sports and Outdoors, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Academy Sports + Outdoors is a leading full-line sporting goods and outdoor recreation retailer in the United States, primarily based in the Southern United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Academy Sports + Outdoors (ASO) is a retailer focused on sporting goods and outdoor recreation merchandise, with a significant presence in the Southern United States. The company operates a blend of retail stores and e-commerce channels, catering to a diverse range of customers, from amateur sports enthusiasts to outdoor recreation enthusiasts. They offer a broad array of products, including sports and recreation equipment, apparel, footwear, and accessories, with a focus on both national and private label brands.

Revenue Distribution

  • The company’s operations are primarily concentrated in the Southern United States, indicating a regional focus.

  • ASO has both brick and mortar and ecommerce sales channels, however, they are primarily known for the their in-store experience.

  • The sporting goods and outdoor recreation market is competitive and heavily dependent on consumer spending.
  • The market is influenced by trends related to health and fitness, outdoor recreation, and fashion.
  • Shift to digital commerce. Omnichannel experiences in the form of convenient in store and online pickup/delivery is now increasingly expected by customers.
  • The market is sensitive to economic cycles, affecting demand for discretionary spending.
  • Industry consolidation is expected to lead to further competition and strategic partnership to provide the best experience and products to customers.

Competitive Landscape

  • ASO faces competition from specialty retailers, big-box stores, and online retailers and marketplaces.

  • The sporting goods market is incredibly competitive, so companies need to have clear strategies on how to compete and differentiate themselves in the market.

  • Some major competitors include Dick’s Sporting Goods, Walmart, and Amazon.

What Makes the Company Different?

  • Regional Strength: ASO has a strong regional footprint, especially in the Sun Belt of the United States, giving it a high level of brand recognition in that geography.
  • Merchandise Mix: ASO focuses on offering a broad range of product categories, including both national and private-label brands.
  • Value Proposition: ASO offers a blend of value (competitive pricing) and quality.
  • Experience-oriented retail: Focuses on providing customers with an in-store retail experience while increasing access through their omnichannel offerings.
  • Strong focus on team sports: ASO provides athletic teams with merchandise, and has an exclusive partnership with the major league sports, allowing them to cater a very large audience and provide personalized apparel to them. This makes them the leading supplier to teams.

Financials

  • Revenue Growth: The company has shown impressive revenue growth in recent years, with total net sales reaching 1.999 B in the 3rd quarter, with an increase of approximately 3% over the previous year. Their overall sales for 2022 totaled $6.7B.
  • Profitability: Gross profit margins have remained steady. Selling, general and administrative expenses have increased, which is partly due to new stores and costs to further implement new operational strategies. Their net income in 2023 was $518 million, a fall from the $707 million from the year before due to lower margins, and higher sales expenses. Their earnings per share dropped to $5.57, compared to the $7.23 last year.
  • Cash Flow: The company is generating cash flow, having 383 million in operating cash flow in 2023. However, the cash flow has declined and has been reduced by an increase in inventory, and capex spending.
  • Leverage: They do have long-term debt which is about 1.1 billion. But the debt is mostly secured loans tied to their assets, and doesn’t have very high interest rates.
  • Share Repurchase: ASO has been very active on buying back their own shares, spending approximately 1.1 billion on repurchases, they also announced a new 500 million share buyback plan.

Their financials have had some ups and downs, however, that is largely attributed to increased investment in the business, including opening new stores and other long-term planning initiatives. Their debt is still quite high, however, this is understandable due to the aggressive expansion.

Moat Analysis: 2/5

  • Brand Recognition (Weak): ASO has regional brand recognition, especially in the Southern U.S, but it does not have the nationwide status of some of its large competitors, and its not clear how much pricing power it provides.

  • Switching Costs (Low): The lack of significant switching costs makes it easier for customers to switch to other retail options. This is especially true with commoditized products such as running shoes, that are also available from other retailers and marketplaces.
  • Economies of scale (Moderate): Their size and geographical footprint may provide moderate cost advantages in some areas, like distribution and logistics, and the ability to buy inventory in bulk from suppliers. However, these advantages are readily replicated by competitors that are larger. This moat isn’t very strong.
  • Intangible Assets (Low): While ASO does have some own brands, none of them are particularly strong and it’s clear that they do not enjoy pricing power from them.

Moat Rating: 2/5

  • ASO has some positive aspects as mentioned above, but they are not strong enough to create a durable and sustainable competitive advantage. Their moat is quite weak, as seen from the points mentioned above.

Risks to Moat

  • Intense Competition: The competitive landscape is the single biggest challenge. Amazon, Walmart, Dick’s Sporting Goods and other competitors can easily make any gains from them futile by offering lower prices and a better customer experience.

  • Changing Consumer preferences: If ASO doesn’t react correctly to changing preferences and trends, they could lose customers quickly.

  • E-Commerce Disruption: E-commerce giants can steal market share and customers from ASO, and this will be challenging to deal with.
  • Economic Downturns: ASO, as a discretionary spending retailer, could feel the adverse effect of an economic downturn, when discretionary spending drops.
  • Supply Chain disruptions: As of late, supply chains are unstable, and this can potentially lead to missed sales opportunities and lower margins.
  • Management Execution: The success of a turnaround plan is very dependent on management’s ability to execute their strategies well, and a failure to do so can mean that they lose out on new product categories, and lose sales.

Business Resilience

  • Regional Presence: A significant portion of their customers are located in one region, that is the Sun-Belt in the U.S, this could help them perform better even if other markets face headwinds.
  • Low Fixed Costs They have low fixed operating costs that is good for surviving an economic downturn.
  • Management Experience: Their management team has done well in the past, to successfully handle new operational changes and keep up with customer expectations.

Understandability: 2/5

  • While sporting goods retailers are pretty easy to understand on a fundamental level, the different aspects of how they are different from the others is harder to understand and gauge, which makes it more complex.

Balance Sheet Health: 4/5

  • They have more cash than debt, that makes their financial position quite resilient.
  • They have good amount of liquidity, with a current ratio above 1, giving them significant flexibility in short-term.
  • ASO’s long-term debt is a factor to be concerned about, but its not a huge threat.
  • Overall, ASO is a company with a healthy balance sheet that gives them a good foundation for future growth.