If you bought shares of athletic retailer Dick's Sporting Goods (DKS 1.43%) five years ago, give yourself a big pat on the back. Shares of Dick's are up over 200% during this time, compared to a just 56% return for the S&P 500. Returns for Dick's stock also trounced otherwise good returns of 130% from rival Hibbett (HIBB 0.06%).
There's a newcomer to this space that I believe can offer better returns over the next five years than either Dick's or Hibbett. Academy Sports and Outdoors (ASO 2.79%) went public in 2020 and may be obscure. But investors should get familiar with the brand.
Comparing Academy to its rivals
With 1,148 locations as of the second quarter of 2023, Hibbett is actually the largest chain of these three companies. Dick's Sporting Goods has 860 locations (when including its other chains, including Golf Galaxy) and Academy Sports has 271 stores. That said, Hibbett's revenue is the smallest of these three by far, as the chart shows.
HIBB Revenue (TTM) data by YCharts
Hibbett's stores are a smaller format, which is why it doesn't have as much revenue as its rivals. The average store is about 5,800 square feet, compared with an average of 70,000 square feet for Academy Sports and nearly 50,000 square feet for Dick's. Therefore, Academy Sports is more comparable to big brother Dick's than to Hibbett.
There's another similarity between Academy Sports and Dick's Sporting Goods: Right now, both companies have higher operating margins than Hibbett, as this chart shows.
HIBB Operating Margin (TTM) data by YCharts
This hasn't always been the case, so take it with a grain of salt. However, unliked Hibbett, both Dick's and Academy Sports prioritize their respective portfolios of private-label brands, which have higher margins than third-party merchandise. This similarity could partly explain why these two companies have higher operating margins.
Therefore, I'd be looking to Dick's Sporting Goods when comparing and contrasting business for Academy Sports.
Why investors should like this space
Sports retail can be a good place to invest because it's characterized by consistent consumer demand and profitability. Consider that Hibbett had its initial public offering (IPO) in 1996 and Dick's had its IPO in 2002. During more than 20 years as public companies, both have only had one brief stint each of net losses -- Dick's during the Great Recession, and Hibbett during the COVID-19 pandemic.
HIBB Net Income (TTM) data by YCharts
Similarly, Academy Sports has a long history of profitability as well. Based on sales per location, the company was likely profitable long before 2018. But management specifically shares that it was profitable in 2018 with adjusted net income of $41 million. This is significant because the company was struggling at the time.
From 2013 through 2018, sales per location plunged for Academy Sports, with management admitting it was "not a strong operator." That's when management set a goal of hitting a 5% profit margin by 2023 -- a goal it hit early.
The point is that Academy Sports is performing well right now. But even if the company struggles in the coming years, profits should still be there. After all, it was profitable even when it was a weak operator in 2018. And its competitors have track records that show profits can be sustained in this space over prolonged periods.
The case for Academy Sports stock
Dick's has a longer history of market-beating returns, and Hibbett is the cheapest stock of these three from a price-to-sales (P/S) perspective and a price-to-earnings (P/E) point of view. But Academy Sports has something the other two don't: the potential for outsized earnings growth.
At their respective sizes, Dick's and Hibbett have limited opportunities for growth by opening new locations. By contrast, Academy hopes to reach 800 locations someday. It focuses on more regionalized merchandise than its rivals, which could be a winning strategy for gaining share in new markets.
More pertinent to this conversation, Academy plans to open over 100 new locations through 2027. Management hopes this will boost annual revenue to over $10 billion by then, which is ambitious but reasonable. And it hopes it can hit a net profit margin of 10%, which would represent over $1 billion in annualized net income.
As of this writing, the market capitalization for Academy Sports stock is $4 billion, and its P/E valuation is just 8. Assuming management hits its 2027 goals and its valuation remains the same, Academy Sports stock would trade at an $8 billion market cap -- a clean four-year double, which would almost assuredly outperform the market.
The downside risk here is also low. If Academy Sports misses its goals, the stock could still have upside as it opens new locations and grows the business. Moreover, the stock is cheap enough that valuation isn't a concern. And finally, the company was still profitable even when it struggled in the past, which gives relative assurance that the business wouldn't completely crumble even if times get tough.
Given the upside opportunity and limited downside risk, I think Academy Sports' stock could be a good buy today and potentially better than an investment in either Dick's Sporting Goods or Hibbett.
