3. Academy Sports and Outdoors Inc. (NASDAQ:ASO)
Average Upside Potential: 19.89%
Number of Hedge Fund Holders: 28
Academy Sports and Outdoors Inc. (NASDAQ:ASO) is a sporting goods retailer that offers a range of athletic footwear, apparel, and equipment for various sports, including golf. Golf offerings include clubs, balls, bags, and accessories from a variety of popular brands, as well as golf technology and training aids. It also provides golf apparel and footwear designed to cater to golfers of all skill levels, ensuring a comprehensive selection for enthusiasts and professionals alike.
Sales for FQ2 2025 declined 2.15% year-over-year to $1.55 billion. The company’s core customer base, earning between $50,000 and $150,000 annually, remained cautious due to inflationary pressures and rising household debt. This led to reduced consumer sentiment and increased reliance on credit and buy-now-pay-later options. Additionally, severe weather events, including tornadoes and hurricanes, disrupted operations in key markets. Despite these challenges, the company remained committed to supporting its team members and communities affected by the storms.
The decline in quarterly revenue was primarily driven by a 7.4% decrease in transactions, partially offset by a 0.5% increase in average ticket size. Inventory balance increased by 4% to $1.37 billion, while inventory units remained flat on a per-store basis. The company remains committed to its capital allocation strategy, prioritizing financial stability, self-funding growth initiatives, and increasing shareholder returns through share repurchases and dividends.
The company remains optimistic about its long-term growth prospects. its strategic focus on key shopping moments, value pricing, and innovative product offerings continues to drive sales, particularly in footwear and outdoor categories. While the back-to-school season was slightly weaker than anticipated, Academy Sports and Outdoors Inc. (NASDAQ:ASO) is confident in its ability to capitalize on upcoming holiday seasons and new product launches and is well-positioned to improve its top-line performance.
Voss Capital made the following comment about Academy Sports and Outdoors, Inc. (NASDAQ:ASO) in its Q1 2023 investor letter:
“Academy Sports and Outdoors, Inc. (NASDAQ:ASO) is a sports and outdoor retailer based in Houston, TX, with 268 locations across 18 states. ASO is concentrated in the south and southeast, which contain many of the fastest growing markets in the country in terms of both population and labor force. Of ASO’s current footprint, 40% of stores are in Texas with another 40% spread across Florida, Georgia, Alabama, North Carolina, South Carolina, Arkansas, Oklahoma, and Tennessee – all states in the top 20 for net migration since 2020. ASO recently hosted an investor day where they presented their plan to reach $10 billion in revenue, 13.5% operating margins, and 10% net margins by 2027, with a 30% ROIC. This plan includes 120 – 140 new store openings and 3% average same-store sales for existing stores. The company emphasized that these targets were calculated with the assumption that there may be a recession in 2023 or 2024. While there are typically a lot of risks associated with a retailer or restaurant expanding into new markets that aren’t familiar with the brand, we believe ASO has a good track record of doing this successfully and profitably. 7 All ASO’s stores are profitable6, including stores that are the only Academy location in the state such as in West Virginia, Virginia, or Illinois. In fact, ASO’s stores are so profitable that even its worst quartile of stores generates the same amount of operating income ($2 million EBIT per location) as its largest competitor’s average store7.
Two of ASO’s three distribution centers are currently operating at only 50% of capacity, giving them plenty of space to grow into with lower incremental capital needs. If the company executes on its guidance, it will generate $3.5 billion in free cash flow cumulatively from 2023 – 2027. Given this FCF build (assuming no buybacks or dividends), ASO’s enterprise value in 2027 (at the current stock price) would be $1.8 billion or 1.1x 2027 EBIT. The 75th percentile of ASO’s retail peer group trades at 14.5x FY2 EBIT. Achieving these targets over the next four years would cement ASO among the best-in-class public retailers, coming in above the 90th percentile in value-driving metrics including revenue growth, margins, and ROIC. However, even if ASO is valued at just the current median EV/EBIT multiple of the peer group (8.5x) in 2026, it would result in an enterprise value of $11.5 billion. If one adds on the estimated $3.2 billion in net cash in 2027, this will equate to an equity value of $14.7 billion or $184/share, 207% upside from today’s price of ~$60/share or a 45% 3-year CAGR. This assumes the management team can more or less hit the targets they laid out at their 2023 investor day in April–but should they whiff, there could be a downside buffer (or further upside) if there is any value-additive capital allocation along the way.”
