Academy Sports delivered a strong 4Q. ASO is our Long in the sporting goods space. We moved it higher on our Long list on March 13th with the stock in the low 30s. This quarter saw an 18% EPS beat, with comps up 13.1%, nearly 300bps ahead of expectations, though unsurprisingly slowing (like most of retail) from 17.9% and slowing about 250bps on a 2yr basis. We were concerned management would set the EPS bar lower with the stock under so much pressure, but management guided ahead of consensus expectations to EPS of $6.70-7.25 vs $6.14 expected. The guide-up appears to be mainly on margins with revenue about in line with consensus. On the call management commentary was again bullish around margin sustainability and how the gross margin initiatives that have been core to the management strategy since the IPO are working. Gross margin for the year was guided to 33% to 33.5%, still 300bps ahead of 2019 levels despite guiding to a “more normal retail environment”. If the company can deliver ~12% operating margins as the guidance implies, this stock is a home run. At that margin the cash generation is immense, the company can buy back a lot of stock, and should be aggressively doing so with the stock trading at about 5.5x the guide. This is a retailer about to go into unit growth mode with 8 new stores this year, ramping to a rate of 80 to 100 stores over 5 years, which implies ~7% unit growth. Is that massive? No, but it is one of the better unit growth trends in retail, and should command a multiple premium accordingly. Even if there is reversion risk on revs and margins, with long term unit growth and comp potential, we think this should be trading at least 10x EPS. If the stock trades lower in the coming weeks around the consumer headwinds, ASO should seriously consider and accelerated share repurchase program. We’re coming in at $6.85 for 2022 building to EPS power over 2-3 years of $8 to $9. Again the cash return power is strong, it now has a yield with a dividend, and is carrying a high teens free cash yield. DKS is closer to 10% FCF yield on consensus. It could buy back $500mm per year. 1Q will no doubt slow as it’s imminently hitting tough compares on last year’s stimulus. Still we’d put fair value on this today at depressed Macro Quad4 multiples at $50 to $55 (~40% higher) and closer to $70 (~80%) later this year when we exit Quad 4 and return to improving comps on top of unit growth.
Takeaway: There aren’t many fundamentally mispriced securities in retail, but ASO is one of them. We’re buyers.
