Sporting and recreation goods retailer Academy Sports and Outdoors Inc. (NASDAQ:ASO) reported earlier this month an earnings miss for the first quarter of 2024, sending shares downward. This compounds a decline throughout much of the spring, as ASO shares have fallen 27.9% from their peak on March 1. Still, the company’s expansion strategy is compelling, and its aggressive plans to drive business may make now an opportune time to buy in.
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Among Wall Street analysts considering ASO, the company currently enjoys a “Strong Buy” rating for these reasons. I am inclined to agree with these analysts. Despite the fact that the company’s expansion plans are in the early stages, it remains profitable and has a history of savvy management decisions, including an ambitious stock buyback program launched last year.
Below, we’ll take a closer look at Academy Sports to see why now may be the right time to consider this up-and-coming retailer.
Aggressive Expansion in the Works
For Academy, large sporting goods store locations with the potential for strong sales volume relative to low operational costs have long been a target. The company has faced an uphill battle, considering its relative lack of brand recognition compared with rivals operating at a similar level, such as DICK’S Sporting Goods Inc. (NYSE:DKS).
Key to the company’s plans to achieve both sales and brand growth is an aggressive expansion in terms of number of storefronts, first announced in the most recent quarter. Academy has, as of the end of the first quarter of 2024, 284 stores located across 18 states. The company plans to open between 160 and 180 new locations in the next five years.
So far, expansion has been slow. ASO opened just two new stores in the first three months of the year. But it plans to accelerate its expansion considerably, beginning with 15 to 17 new locations in total this year. Academy has strengthened its cash balance by 28% since the first quarter of last year and ended the most recent quarter with cash and cash equivalents of $378.1 million, positioning it well to accelerate the pace of store openings.
Profit Margin Goals
Academy noted a profit margin of just under 6% for the first quarter. However, the company intends to bolster that figure in the near term to 10%. ASO expects to make improvements to margins through distribution center operations, with executives citing increased productivity in its Georgia and D.C. distribution centers in particular. Executives reiterated gross margin guidance of 34.3% to 34.7% for the year.
Customer Incentives and Challenges
There is no denying that Academy Sports has suffered sales setbacks in recent months. The company posted a decline of 1.4% year-over-year in net sales from the first quarter of 2023 to the same period this year. Net income suffered even more, falling by 18.6% to $76.5 million in the first three months of 2024.
Incentivizing customer traffic is key to Academy’s ability to drive growth in this area. In its first-quarter shareholder letter, Academy cited pressure from the current economic environment as a factor depressing sales. Still, there are reasons for optimism in this area, going forward.
In the first-quarter shareholder call this month, for example, executives highlighted the boost to business that typically occurs in the summer months. This is punctuated by strong shopping events, including 4th of July, back-to-school period, and the start of football season, among others.
Corresponding with the summertime surge in outdoor activities and sales, Academy Sports has plans to further incentivize customer traffic with a new loyalty program and same-day delivery service.
Is ASO Stock a Buy, According to Analysts?
With all of the aforementioned factors in mind, it’s no surprise that ASO stock earns a Strong Buy consensus rating. This is based on 11 Buy ratings, four Hold ratings, and zero Sells. The average price target for ASO stock is $66.53, representing potential upside of 20.4%.
Conclusion: Lots of Room for Growth
Academy’s shares have tumbled in the last several months, but the firm has ambitious plans to expand its base of stores, improve its margins, and drive customer engagement. The company is poised to benefit from the strongest 13-week period of its fiscal year as it expects sales to increase during the summer months. Given the relatively low price compared with recent months, now may be a good time to consider buying in.
