Academy Sports and Outdoors (ASO -2.02%) came public on Oct. 2. With most of the media focused on big tech IPOs, this specialized retailer may have slipped past investors' radars. The company has its challenges, namely competition and debt, but it also has a niche opportunity: serving the hunting and fishing consumer at scale and at discount, and increasingly with e-commerce.
Playing in the right markets
Academy is in regional and merchandising sweet spots. The $1.2 billion company owns 259 stores, exclusively in the Southeast. The company touts this as a key growth opportunity, as six of the 10 fastest-growing metro areas in the U.S. are in its home turf, places like Austin, Dallas, San Antonio, and Charlotte. Additionally, Allied Market Research expects the outdoors and sports industry to grow 6% annually through 2027. COVID-19 accelerated this growth as people seek home fitness solutions and outdoor activities. (How many consumers will keep up their new fishing hobby and bedroom spin classes after the pandemic -- or into winter -- remains to be seen.)
In its markets, Academy enjoys a decent share of the sporting goods market pie. In this industry, side-by-side comparisons are more difficult than, say, the fast-food industry, and it's hard to find efficient scale. If retailers specialize in basketball, the market is too small. If they try to be Walmart, good for them, but they can't offer everything a competitive fly fisher may need; they'd lose scale. Academy is trying to be in that sweet spot of speciality and scale. All that said, for a relatively unknown company, it's competitive. In 2019, the more sports-focused Dick's Sporting Goods delivered $8.7 billion in sales. Outdoor-focused Bass Pro Shops sold $6.5 worth of goods. Regionally focused Academy competed with a little more than $5 billion in sales. That's a real base of customer the company hopes to grow from.
Another sweet spot paying off for Academy is e-commerce and omnichannel. CEO Ken Hicks brings reliable retail experience from Foot Locker and J.C. Penney. After taking over as chief executive in 2018, he prioritized investing into e-commerce, and the results are outstanding. In 2019, the company grew digital sales by 8%. Not impressed? For the first half of 2020, digital sales grew 284%. That's also partly a COVID bump, but it's a sign of more customers spending more. The strategy has a multiplying effect, as much of Academy's online business is "BOPIS," or "buy online, pick up in store." This turns online traffic into increased foot traffic. Academy is capitalizing on these growth strategies, turning increasing traffic into impressive cash flow.
At the top of their game
Academy hasn't always enjoyed growth. Prior to 2020, the company experienced three consecutive years of same-store sales declines.That might give potential investors some pause. However, this year's second quarter, as reported in the company's pre-IPO S-1 filing, represents Academy's fourth consecutive quarter of same-store sales growth and fifth consecutive quarter of free cash flow growth. Not many brick and mortar retailers can claim that feat, especially those that don't sell staples. What sparked the turnaround? Difficult to know for sure, as the company wasn't public. But the timeline of the turnaround does align closely with Hicks' arrival as CEO and the focus on e-commerce.
This recent performance bodes well when stacked up against their competition. Academy has a lot of competition: Walmart, Bass Pro Shops, Cabella's, Dick's Sporting Goods, Sportsman's Warehouse, and many smaller local outfits. Walmart does sell value shoes, athleisure, and some sporting goods, but those are far from its focus. That makes Academy's closest public competitors Dick's and Sportsman's.
For the first half of 2020, the smaller Sportsman's generated $17 million in free cash flow. The bigger player, Dick's, fared worse, with $62 million in negative free cash flow over the same period. Academy's first half of 2020 shows its strategy is paying off, as it generated $760 million in free cash flow. Can it stay on top of its game?
A competitor leaves the market
In the context of COVID-198, there is a lot of messiness to recent cash flow data. But a shift in the market is worth noting here. After the Parkland, Fla., high school shooting in 2018, Dick's announced it would stop selling certain firearms in its stores. As it did, it saw a positive response in sales. This accelerated Dick's decision to exit the firearms market altogether. It removed guns and ammunition from 125 stores in 2019 and is currently removing all firearms from all stores in 2020.
Dick's move may be attracting new customers to its gun-free stores. Remaining firearm customers, especially the outdoor enthusiasts of the South, need somewhere to go, and many might be finding Academy to fill that need. Its value proposition helps it compete with Bass Pro Shops and Cabela's, while its relative scale and e-commerce helps it compete with local shops.
Is it a buy?
Academy's recent momentum with e-commerce and free cash flow proves it has plenty of potential. It came to the public markets as a spinoff from public equity firm KKR. As is common with these kinds of deals, it does come with more debt relative to its industry and competitors. Sportsman's Warehouse, which had a modest $729 billion market cap at Friday's close, currently has about $15 million in debt, aside from its lease obligations. Dick's, at $5.5 billion, wisely converted its revolving credit line into $400 million of convertible notes.
Academy needs to show investors how it plans to manage its balance sheet over time -- it currently has $1.4 billion in long-term debt. This could be more than manageable; some of the proceeds from its IPO, about $200 million, are earmarked to pay down debt. And if its recent improvements in free cash flow hold steady, it shouldn't be a problem. Investors looking for a retail growth story should keep their eye on Academy Sports and Outdoors. If the growth story holds true over coming quarters, and management shows a commitment to pay down debt, it could be worth a buy.