Sporting goods retailer Academy Sports & Outdoor (NASDAQ:ASO) reported results in line with analysts' expectations in Q4 CY2023, with revenue up 2.8% year on year to $1.79 billion. On the other hand, the company's full-year revenue guidance of $6.21 billion at the midpoint came in 2.7% below analysts' estimates. It made a GAAP profit of $2.21 per share, improving from its profit of $1.97 per share in the same quarter last year.
Academy Sports (ASO) Q4 CY2023 Highlights:
- Revenue: $1.79 billion vs analyst estimates of $1.8 billion (small miss)
- EPS: $2.21 vs analyst expectations of $2.28 (2.9% miss)
- Management's revenue guidance for the upcoming financial year 2024 is $6.21 billion at the midpoint, missing analyst estimates by 2.7% and implying 0.8% growth (vs -3.9% in FY2023)
- Management's EPS guidance for the upcoming financial year 2024 is $6.40 at the midpoint, missing analyst of $7.53
- Gross Margin (GAAP): 33.3%, up from 32.8% in the same quarter last year
- Free Cash Flow of $178.8 million, down 16.4% from the same quarter last year
- Same-Store Sales were down 3.6% year on year
- Store Locations: 282 at quarter end, increasing by 14 over the last 12 months
- Market Capitalization: $5.28 billion
Founded in 1938 as a tire shop before expanding into fishing equipment, Academy Sports & Outdoor (NASDAQ:ASO) sells a broad selection of sporting goods but is still known for its outdoor activity merchandise.
The core customer is anyone in need of products for fishing, hunting, camping, or hiking. Despite its heritage in outdoor merchandise, Academy Sports also sells equipment for traditional sports such as baseball, soccer, or football as well as sneakers, apparel, and accessories. It is very much a one-stop shop for sports. The breadth of sporting goods and the depth of product in each category is what differentiates Academy Sports. Sporting goods can be large and cumbersome, so general merchandise retailers who devote limited space have limited selection.
Academy Sports has a strong presence in the Southern and Midwestern US, areas with strong outdoor activity affinity and traditions. Stores are 70,000 square feet on average and located in suburban or rural shopping centers alongside other retailers. The store is divided into sections based on sports with additional sections for footwear and apparel. Academy Sports also has an e-commerce presence, which the company launched in 2011 as a somewhat late adopter of online shopping. Many customers choose to order online and pick up at their nearest store since shipping is not available or overly costly for large items such as camping tents, canoes, and outdoor grills.
Sports & Outdoor Equipment Retailer
Some of us spend our leisure time vegging out, but many others take to the courts, fields, beaches, and campsites; sports equipment retailers cater to the avid sportsman as well as the weekend warrior. Shoppers can find everything from tents to lawn games to baseball bats to satisfy their athletic and leisure needs along with competitive prices and helpful store associates that can talk through brands, sizing, and product quality. This is a category that has moved rapidly online over the last few decades, so these sports and outdoor equipment retailers have needed to be nimble and aggressive with their e-commerce and omnichannel presences.
Retailers offering sporting and outdoor goods include Dick’s Sporting Goods (NYSE:DKS), Sportsman’s Warehouse (NASDAQ:SPWH), and Hibbett (NASDAQ:HIBB).Sales Growth
Academy Sports is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.
As you can see below, the company's annualized revenue growth rate of 6.3% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was weak , but to its credit, it opened new stores and expanded its reach.
This quarter, Academy Sports's revenue grew 2.8% year on year to $1.79 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 3.5% over the next 12 months, an acceleration from this quarter.
Number of Stores
When a retailer like Academy Sports is opening new stores, it usually means it's investing for growth because demand is greater than supply. Academy Sports's store count increased by 14 locations, or 5.2%, over the last 12 months to 282 total retail locations in the most recently reported quarter.
Over the last two years, the company has generally opened new stores and averaged 2.9% annual growth in its physical footprint, which is decent and on par with the broader sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.
Same-Store Sales
Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.
Academy Sports's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 6.5% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.
In the latest quarter, Academy Sports's same-store sales fell 3.6% year on year. This decrease was a further deceleration from the 5.1% year-on-year decline it posted 12 months ago. We hope the business can get back on track.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.
Academy Sports has subpar unit economics for a retailer, making it difficult to invest in areas such as marketing and talent to grow its brand. As you can see below, it's averaged a paltry 34.4% gross margin over the last two years. This means the company makes $0.34 for every $1 in revenue before accounting for its operating expenses.
Academy Sports's gross profit margin came in at 33.3% this quarter, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).
Operating Margin
Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Academy Sports generated an operating profit margin of 11.4%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.
Zooming out, Academy Sports has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer retail business, producing an average operating margin of 12.1%. However, Academy Sports's margin has slightly declined by 2.2 percentage points year on year (on average). This shows the company has faced some small speed bumps along the way. The company's operating profitability was particularly impressive because of its low gross margin. This margin is mostly a factor of what Academy Sports sells and takes fundamental shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Academy Sports).EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q4, Academy Sports reported EPS at $2.21, up from $1.97 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2019 and FY2023, Academy Sports's adjusted diluted EPS grew 622%, translating into an astounding 63.9% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that Academy Sports has excelled in managing its expenses.
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 8.5% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.
Academy Sports's free cash flow came in at $178.8 million in Q4, down 16.4% year on year. This result represents a 10% margin.
Over the last two years, Academy Sports has shown strong cash profitability, giving it an edge over its competitors and the option to reinvest or return capital to investors while keeping cash on hand for emergencies. The company's free cash flow margin has averaged 6.1%, quite impressive for a consumer retail business. However, its margin has averaged year-on-year declines of 1.6 percentage points. If this trend continues, it could signal that the business is becoming slightly more capital-intensive.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Although Academy Sports hasn't been the highest-quality company lately, it historically did a solid job investing in profitable business initiatives. Its five-year average ROIC was 20.7%, higher than most retailers.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Academy Sports's ROIC over the last two years averaged 3.1 percentage point decreases each year. We like what management has done historically but are concerned its ROIC is declining, perhaps a symptom of waning business opportunities to invest profitably.
Key Takeaways from Academy Sports's Q4 Results
It was a tough quarter. The company's full-year revenue and earnings forecast missed analysts' expectations. The company is down 13.5% on the results and currently trades at $61.6 per share.
Is Now The Time?
Academy Sports may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Academy Sports isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been a little slower over the last four years, and analysts expect growth to deteriorate from here. And while its EPS growth over the last four years has been fantastic, unfortunately, its shrinking same-store sales suggests it'll need to change its strategy to succeed.
Academy Sports's price-to-earnings ratio based on the next 12 months is 9.4x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Academy Sports, it seems to be trading at a reasonable price.
Wall Street analysts covering the company had a one-year price target of $78.35 per share right before these results (compared to the current share price of $61.60).
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