After doing our work on new Long idea Academy Sports, we felt it would be helpful to host a call to share some of our underlying analysis and model view on the relevant tickers.
We'll touch on ASO, HIBB, and DKS, but some of the key industry insights can be extrapolated to all companies in sporting goods.
Call Details (Webcast Only)
Date/Time: Friday, February 19th at 2pm EST Add To Calendar: CLICK HERE
Live Video Link: CLICK HERE
Our Note from earlier this week on pair Long ASO, Short HIBB...
ASO | New Long Idea – 30%-50% Upside. Bull Case to $40 (60%)
Takeaway: ASO onto Long Bias list as we see both earnings and multiple upside. HIBB moving higher on Short Bias pair short.
We’re adding Academy Sports and Outdoors (ASO) to our Long Bias list. Sporting Goods has been a category winning share in Covid but we think there is still some room to run, especially for ASO. The industry is benefitting from Covid wallet share shifts and de-urbanization and Academy is located in US regions that are seeing strong net population gains. Much of what ASO sells remains in high demand, and ASO is uniquely positioned relative to peers to ride the guns & ammo trade as well as a full return of team sports upon real reopening. With sales tailwinds, margin upside, and multiple reversion towards peers we think you have fair value in the stock around $33-$38 or 30% to 50% upside from here, bull case upside to $40.
What is Academy Sports?
Academy came public in an IPO this past October. It was previously a levered KKR LBO and KKR still owns 55% of the company. Academy is a big box sporting goods retailer with stores in the eastern Sunbelt and lower Midwest (Texas to Virgnia up to Illinois). The average store size is 70,00 sqft and average lease duration is 10 years with zero regional mall exposure. The company has a quality management team headed up by the very well respected CEO Ken Hicks who was the former Chairman and CEO of Foot Locker during its impressive stock run from 2009 to late 2014. Academy sells a wide range of goods, from hiking, biking, hunting, fishing, firearms, fitness, backyard, and team sports equipment, to cleats, sneakers, and apparel. The company has a relatively small but growing ecommerce business that has more than doubled in 2020 to about 11% of sales.
Fundamental Bull Case
We see a lot of sales tailwinds for both the sporting goods industry and Academy in 2021 that we don’t think are currently in numbers. The industry is benefitting from the ‘deurbanization’ effect that the pandemic has had on the consumer. People are moving out of cities and into suburbs and rural areas. That means a multi-year elevated level of demand for outdoor activities, though this is not unique to Academy. What is unique for academy is its regional exposure. For years there has been a migration to regions where Academy has its stores, tax reform in 2018 only amplified this, as lower S.A.L.T. states become more economical. We think this is only going to be amplified further by the new prosperity of work from home and consumer deurbanization. In its IPO roadshow ASO highlighted that 29% of its stores are in the Top 5 fastest growing MSAs based on net population adds. In addition to the secular boost, ASO has many near term revenue tailwinds as well. We expect outdoor to be a hot category at least through summer 2021 and widespread vaccine deployment. Then some key ASO categories continue to have demand far exceeding supply. That includes fitness, bicycles, and guns and ammo. Guns and ammo were already in high demand since the start of the pandemic and through the democratic election victories, then just yesterday the President challenged congress to act on gun reform. That means guns and ammo will be in high demand potentially for many more months until a clear outcome on any potential legislative action is realized (DKS and other sporting goods retailers have been downsizing the guns & ammo category). Also Academy has relatively high exposure to team sports when compared to peers, which means sales tailwinds upon re-opening and a full return of team sports that were shut down by Covid. Then of course, like all of retail, stimulus dollars in early 2021 will help drive elevated sales. When you put it all together, we think you could actually see positive sales growth in 2021.
On the margin side, ASO is still in the middle of deploying Ken Hicks’s plan for driving higher productivity and profitability. Even with strong recent performance, ASO’s margin levels are over 200bps below the competitors of DKS and HIBB despite having higher private label penetration. We think there is upside opportunity on both gross margin and SG&A rate. The company has merchandising initiatives it has been deploying to improve turns and reduce markdowns. One lever we know can be pulled is driving higher Nike penetration. In 2019 Academy’s biggest supplier (which we assume was Nike) was 12% of sales, while DKS had Nike at 21% and HIBB at an egregious 70% last year. More Nike might pressure your footwear/apparel initial markup, but it drives higher full price selling and much better gross margin dollars. Hicks knows how powerful it can be as that was one of the big moves made at FL, and it’s been helping DKS the last few years as well. We think as sales grow, and management executes its plan, a sustained Tail EBITDA margin of 9.5-10% is achievable in 2-3 years, while the street is looking for a reversion to 8-8.5%.
Trading & Valuation
As we remain in Macro Quad2, ASO checks all the right boxes. It’s high short interest with 35% of float is short (limited float from KKR ownership). It’s also small cap, higher beta, consumer discretionary, with leverage. The only thing we don’t like is the steepening comparisons coming, which is why we’d pair with a peer we think is overvalued with earnings risk (below).
As for what it’s worth, we’re getting to $500mm in EBITDA and $2.75 (15% ahead of the street) in EPS for 2021E. ASO has some debt, but with how strong we think the fundamentals will be the company is in a net cash position within 2 years. Given you have margin expansion and a deleveraging story, we think a fair EBITDA multiple is 7x (ex leases) on our 2021 estimates, just above where DKS is trading (on street #s). That means a stock at $35, or 40% upside. On a PE basis, that gives us about 13x. We’d argue a PE of 12x-14x is a fair range given HIBB and DKS are trading near 13x and 15x respectively. On that PE range you’ve got a stock around $33-$38 or 30% to 50% upside from here. On a bull case we’d give it a 8x EBITDA multiple or a DKS PE and you’ve got upside to $40 or nearly 60% upside.
Short-Side Pair – Hibbett Sports (HIBB)
We think sporting goods has a greater chance to comp the comp than expected, but given the likely industry slowdown, we think it makes sense to have ASO paired short side on this trade with a name with earnings risk vs upside. We think that is HIBB. Hibbett Sports has similar regional exposure to ASO, but the category exposure and earnings upside is very different. Over the last few years HIBB has turned itself into a kind of Bible belt strip center Foot Locker. In 2020 HIBB got a big help from stimulus and athletic footwear/apparel demand, with much less comp upside coming from the outdoor and home fitness trend. Footwear was 62% of sales last year, which has gone up in 2020, and Nike last year was 70% of sales, and it’s likely that went higher as well (we’d argue it’s at 80% now – which is reckless). With comps up 79% in 2Q, footwear was up mid 90s, apparel up mid 80s. In 3Q comps were up 21% apparel was up mid 30s, footwear up low 20s. If the business is just footwear and apparel, when stimulus wanes and supply/demand normalizes, there is big markdown risk for HIBB, not the mention the very tough comparisons.
The company gave preliminary 4Q results 4Q EPS of $1.30-$1.40, driven by comps of 21.9%. At the same time it had the audacity to guide the full year mid pandemic at $5.00-$5.50 or about 30-40% above street estimates less than 2 weeks into the new fiscal year. This was a dangerous move by management (we think HIBB is a C- mgmt team) given the huge uncertainty around its demand and the huge growth comparisons it faces. We think it will come back to haunt HIBB since as we go through the mode we’re coming to a reasonable EPS number as being around $3.50-$4.00. Given its newfound similarity to Foot Locker (though off mall), we can probably argue a multiple in that same range, lets say 10x-12x. Our top end $4 in EPS would mean a stock of $40-$48 or 20%-35% downside.
If you’re thinking, why not DKS as a pair short? Well DKS has yet to report or signal 4Q results, and we suspect it will come out ahead of expectations, whereas we just noted HIBB has already presented lofty fiscal ’22 expectations. Also, DKS has a very easy 1Q comparison having had doors closed for much of the spring; street numbers look too low in that quarter to us especially in the context of more stimulus. Also, the golf market is expecting a huge spring selling season with big YY rounds increases that we think will be a 1H tailwind for DKS. So though we see Tail expectations for DKS as peaked, we think there is near term upside for DKS and HIBB is a much better short play today.
