Academy Sports and Outdoors: Strong Buy While Sentiment Remains Low

Investment Thesis - Academy Sports and Outdoors (ASO) has ambitious expansion plans, aiming to open 160-180 new stores over the next five years with a return on invested capital (ROIC) hurdle of at least 20% for each store, and targeting a 66% increase in annual sales [2] Q2 Earnings - ASO reported Q2 2024 net sales of $1.55 billion, a year-over-year decline of 2.2%, with comparable sales down 6.9%. GAAP diluted EPS was $1.95, and adjusted diluted EPS was $2.03, reflecting decreases of 3.0% and 2.9% respectively [3] - Year-to-date sales have declined by 2.9%, with comparable sales down 5.4%. Both GAAP and adjusted net income decreased by 9.2% [3] - Gross margin expanded by 50 basis points to 36.1%, attributed to improved inventory management and lower freight expenses. Full-year gross margin is now expected to be between 34.3% and 34.7% [3] Growth Ambitions - ASO opened two new stores in Q2, including its first in Georgia, and plans to open 15-17 stores in 2024. The long-term goal is to reach 800 stores, potentially generating $16 billion in revenue [6] - SG&A expenses increased by 4.6% year-over-year, primarily focused on growth initiatives, with 90% of spending increases directed towards growth [6] Growth Expectations Pulled Back - ASO has adjusted its new store sales contribution expectations from $18 million to a range of $12 to $16 million due to challenges in recent quarters [7] - The company is optimizing its new store growth strategy, focusing on lower opening costs while maintaining ROIC and aiming for positive EBITDA [7] - Management noted that stores opened in existing markets have outperformed those in new markets, indicating a need for a more strategic approach to store openings [7] Valuation - ASO has achieved a 21.6% compound annual growth rate (CAGR) in operating cash flow (OCF) and a 31.7% CAGR in free cash flow (FCF) since 2019 [8] - The stock appears undervalued based on free cash flow potential, with estimates suggesting it could be undervalued by as much as 57% [10] Conclusion - ASO stock is considered highly skewed toward the reward end of the risk-reward spectrum, with potential undervaluation of 57% based on a weighted DCF model [13] - The company is operating efficiently and continues to refine its expansion plans, with management confident in the performance of new stores and cost improvements [13]