A stellar quarter for ASO. Revenue was known from its prelim sales results, but margins were very impressive, particularly gross margin despite the industry headwinds we’ve seen in retail of higher ecommerce and freight from excessive demand and port delays. With the margin upside Net Income up over 480% YY, EPS up 300%. Management has been selling a margin expansion story here, and sure, there were covid demand tailwinds in 2020, but the underlying margin expansion is clearly there and management remains confident in the driving the long term margin higher. Our view is given the consumption tailwinds we think persist well after Covid subsides, this industry likely ends up a healthier demand and margin levels than before the pandemic, which would be incremental to the margin expansion opportunity that Ken Hicks has been executing his entire time at Academy. Management didn’t get into the specifics of near term trends, obviously February was a rough at times for some core ASO markets like Texas due to weather, but management is optimistic that the aggregate impact on 1Q as whole will be offset, and it makes for a brief easy compare next year.
For 2021 as a whole, management is guiding to $2.70 - $2.95, that’s down 25% YY, but well above pre-covid levels, nearly 80% higher. The implied free cash generation is high, about $340mm, and that basically means the net debt (ex leases) is gone this year. Which brings cash return to shareholders into the discussion for 2H 2022. Unit growth was signaled to return in 2022, something the currently valuation is completely missing as this company could potentially double its store count over the long term. Given the margin performance this Q, and the continued business momentum, our numbers are marching higher. We think the valuation gap with DKS continues to close, and that ASO should trade around 12x-14x PE given our EPS that means a stock $34-$38. On a bull case we’d give it a 8x EBITDA multiple or a DKS PE and you’ve got upside to $40 or more for 50%+ upside.
For our original note on Long ASO: ASO | New Long Idea – 30%-50% Upside. Bull Case to $40 (60%)
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