Academy Sports and Outdoors’ Momentum to Continue Beyond the Pandemic

– By Panos Mourdoukoutas

Academy Sports and Outdoors Inc. (NASDAQ:ASO) can thrive beyond the pandemic by riding the health and wellness trend, according to Quo Vadis Capital founder and President John Zolidis.

Looking forward, the momentum in the business is definitely more than the sum of the transitory factors,” he said in a note. “It includes secular trends that we believe have duration, including a heightened post-Covid focus on health and wellness, increased interest in the outdoors (hunt/ fish/ camp), and new participation in activities like golf. We see this, together with the strong consumer and a better BTS, as well as secular trends such as migration from urban to suburban centers and from high tax to low tax states (where ASO stores are mostly located), all leading to elevated top-line demand for the business over the balance of 2021.”

On Tuesday, the company reported adjusted first-quarter earnings of $1.89 per share, beating analysts’ consensus estimate. In addition, sales rose 39.1{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0} to $1.58 billion, compared with the consensus estimate of $1.51 billion.

The gross margin increased 89.2{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0} to $563.7 million, the highest quarterly gross profit in the company’s history.

In a statement, Chairman, President and CEO Ken Hicks noted the company “generated record-breaking sales and profits, while delivering fun to our customers.”

“The strategic initiatives implemented over the last few years, a shift in consumer spending into sports and outdoor categories, government-issued stimulus checks, the addition of new customers, and more frequent shopping by existing customers are driving consistent growth,” he said. “We believe our broad, value-based assortment, available through a true omnichannel experience, positions us to continue to capitalize on these market trends.”

Wall Street seems pleased with Academy’s results, sending shares higher in early morning trading.

Academy’s strong results follow similar results by other sporting goods retailers, like Dick’s Sporting Goods Inc. (NYSE:DKS) and Foot Locker Inc. (NYSE:FL).

Still, Academy beats these two peers with regard to a critical metric: economic profit, which is also known as enterprise value added. For example, Dick’s Sporting Goods’ economic profit is 2.48{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}, while Foot Locker’s economic profit is 5.03{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}.

Company

ROIC

WACC

Economic Profit (ROIC-WACC)

ASO

12.48{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

5.90{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

6.58{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

DKS

11.24{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

8.76{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

2.48{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

FL

11.71{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

6.64{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

5.03{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}

Meanwhile, investors shouldn’t be getting too excited about Academy’s solid results. The company has a short history on Wall Street, so there isn’t enough public financial data to apply the discounted cash flow model to estimate its intrinsic value. And the results may be skewed due to the Covid-19 pandemic, the lockdowns and stimulus checks, as the company recognized in its report.

According to NPD retail data, health and fitness equipment sales doubled to $2.3 billion for March through October 2020. Sales of treadmills surged 135{501502a39ab505f101010808cacdf50dac8c4d25a883d5a39b778a965c3dcca0}, while those of stationary bikes nearly tripled.

This trend should slow down as the pandemic eases and people return to their everyday lifestyles, meaning Academy’s upside may be limited in the short run.

Disclosure: I own shares of Foot Locker.

This article first appeared on GuruFocus.