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investment paper
Academy Sports and Outdoors (NASDAQ: ASO) has been on a strong but conservative growth trajectory compared to other specialty big box stores which saw most of their growth in the 80’s, 90’s and early 2000’s. By filling stores in the southeast and then gradually expanding into whitespace regions in the north and west, the company should be able to sustain growth for years, maybe decades. Current stock prices appear to be undervalued relative to the expected growth prospects. Read below for why I assign a strong buy to ASO stocks.
Academy’s current footprint
Academy Sports and Outdoors is a sports equipment and outdoor retailer based in Katy, Texas. With 268 stores across 18 states and his three distribution centers, it is well established in the Southeast. Founded in 1938 as a tire business, then a military surplus store, it transitioned into sporting goods in the 1990s. It grew steadily until it was published in 2020. Learn more about the history of the Academy here.
Compare Academy’s growth potential to that of other large specialty stores
Academy falls into the category of specialty hypermarkets. In contrast to typical large department stores such as Walmart (WMT) and Target (TGT), these large specialty stores sell products around core themes such as sporting goods, home improvement, electronics and pet care. is focused on Academy stores are typically found near many such retailers who tend to set up in interstate exit areas. For example, in Jackson, Mississippi, the Academy is on the same street as Hobby Lobby, Lowe’s (LOW), and Best Buy (BBY). Greenville, North Carolina is bordered by DICK’S Sporting Goods (DKS), Kohl’s (KSS) and Lowe’s. In Tampa, Florida, you’ll find one just a few hundred feet from Home He Depot (HD) on one side and Petco (WOOF) on the other.
Academy has stated in several earnings reports that its goal is to expand by 80 to 100 stores over the next four to five years. However, the largest opportunity size has been identified at 894 stores.
Based on this 894 store potential, we estimated the S-curve and compared it to the growth of other specialty large retailers using the following formula:
y = max / (1 + ((max – initial) / initial) * e^(-c * x)
where maximum In this case, 894 stores, initial is 268 stores, c Tailored to match the Academy’s goals as closely as possible. In this case it is 0.115.
We pulled store counts over time from annual reports and company history. To easily compare trajectories, he set year 0 as the year in which each store’s store count was approximately the same as the Academy’s current store count (268). 1993 Home Depot (264), Lowe’s (295), 1995 Petco (~ 277), 1997 Best Buy (US) (272), 1984 Dick’s Sporting Goods (255).
From this figure, it’s easy to see that Academy’s growth outlook is very conservative compared to those other retailers. The Academy seems to envision rights similar to Dick’s Sporting Goods, but is on track to take about twice as long to reach that right.
Valuation and Finance
With 268 stores today and a 2022 diluted earnings per share of $7.12, extrapolating from current earnings (894 / 268 x $7.12 = $23.75) yields a potential 894 stores. As we got closer, the Academy thought it could be closer to $23.75 per share. I used the same formula as the store count forecast to create the revenue curve. maximum $23.75, initial for $7.12 c 0.115 again.
I discounted the 50-year projected returns at the stock market’s average real rate of return of 7%.
maximum = | $23.75 | Year | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | 2036 | 2037 | 2038 | 2039 | 2040 | 2041 | 2042 | 2043 | 2044 | 2045 | 2046 | 2047 | 2048 | 2049 | 2050 | 2051 | 2052 | 2053 | 2054 | 2055 | 2056 | 2057 | 2058 | 2059 | 2060 | 2061 | 2062 | 2063 | 2064 | 2065 | 2066 | 2067 | 2068 | 2069 | 2070 | 2071 | 2072 | |||
min = | $7.12 | Actual EPS | $0.29 | $0.00 | $1.60 | $3.79 | $7.12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
c = | 0.115 | Forecast EPS | $7.71 | $8.32 | $8.95 | $9.60 | $10.26 | $10.94 | $11.62 | $12.30 | $12.98 | $13.65 | $14.31 | $14.96 | $15.59 | $16.19 | $16.77 | $17.32 | $17.85 | $18.34 | $18.81 | $19.24 | $19.65 | $20.03 | $20.37 | $20.69 | $20.99 | $21.25 | $21.50 | $21.72 | $21.93 | $22.11 | $22.28 | $22.43 | $22.57 | $22.69 | $22.80 | $22.90 | $22.99 | $23.07 | $23.14 | $23.21 | $23.26 | $23.32 | $23.36 | $23.40 | $23.44 | $23.47 | $23.50 | $23.53 | $23.55 | $23.58 | ||||||||
Discount rate = | 7% | Total Discounted Earnings = | $201.33 | Discounted EPS | $7.20 | $7.26 | $7.30 | $7.32 | $7.32 | $7.29 | $7.24 | $7.16 | $7.06 | $6.94 | $6.80 | $6.64 | $6.47 | $6.28 | $6.08 | $5.87 | $5.65 | $5.43 | $5.20 | $4.97 | $4.75 | $4.52 | $4.30 | $4.08 | $3.87 | $3.66 | $3.46 | $3.27 | $3.08 | $2.90 | $2.74 | $2.57 | $2.42 | $2.27 | $2.14 | $2.00 | $1.88 | $1.76 | $1.65 | $1.55 | $1.45 | $1.36 | $1.27 | $1.19 | $1.12 | $1.04 | $0.98 | $0.91 | $0.86 | $0.80 |
The total discounted earnings is $201.33, about four times the current price on ASO. That means the stock is at 25% of its valuation, providing a margin of safety of nearly 75%. This makes ASO a strong buyer in my opinion.
Other financial indicators are also very positive. EPS of $3.79 in 2021 to EPS of $7.12 in 2022 represents 88% growth, but the ASO’s P/E ratio is only about 7. To Peter Lynch’s favorite growth rate. This is clearly the case for ASO.
The Academy’s debt to equity ratio isn’t bad. Its long-term debt (total debt of $3,223,545 minus current debt of $1,191,211) is $2,032,334. Total shareholders’ equity is $1,558,919, resulting in a debt-to-equity ratio of 1.3. Ideally this would be lower.book by peter lynch One up on Wall Street “A typical corporate balance sheet has 75% equity and 25% debt… Above all, it is debt that determines which companies survive and which fail in a crisis.” p. 202).
risk
Brick-and-mortar retailers face greater challenges than when other big box stores started to take off in the 80s, 90s and 2000s. The Academy’s conservatism in adding new stores may be justified given the challenges from the pandemic and the general shift to more online shopping. The Academy’s goal of opening 80 to 100 stores a year seems very achievable to me, but more than that, the Academy’s desire to significantly expand its footprint means adapting to regional market differences. and you may face various problems. competition. We will discuss these factors in more detail in a future article.
Conclusion
There is no indication that Academy is about to take off in the same way that other big box stores have had in the past. But it has strong financials and a long history of slow, steady growth. Based on my analysis above, this growth potential is greatly underestimated and long-term investors may want to take a closer look.