Major retailers ranging from Dollar General (NYSE:DG) to Dick’s Sporting Goods (NYSE:DKS) have recently seen their shares plunge on disappointing earnings and guidance cuts. The sector faces many challenges, ranging from inflation and an uncertain consumer to rising theft and difficulty finding workers. However, the sector isn’t uninvestable. Strong earnings results and an updated outlook from Academy Sports (NASDAQ:ASO) show that there are diamonds in the rough in retail if you look hard enough.
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The stock surged by over 16% at one point today after upping its full-year guidance. Therefore, let’s take a look at this attractive retailer that is bucking the trend. I am bullish on ASO stock.
Full Speed Ahead
The Katy, Texas-based sporting goods retailer, which sells sporting equipment, apparel, footwear, and equipment for outdoor activities like hunting, fishing, and camping, beat analyst estimates for the quarter by earning $2.09 per share versus the consensus estimate of $1.99.
Even better, the company increased its full-year guidance for Fiscal 2024, expecting earnings per share to range between $6.95 and $7.65 versus a previous forecast of $6.80 to $7.50 per share. The new outlook also beat the consensus estimate of $6.91.
A Bargain Valuation
Even with shares spiking on today’s news, Academy Sports stock continues to look like a compelling bargain. Using the midpoint of the updated guidance ($7.30), the stock trades at just 7.5 times forward earnings, which is a major discount to the broader market; the S&P 500 (SPX) trades at approximately 20 times earnings.
While retailers face plenty of challenges, and it’s understandable that a retailer like Academy Sports will trade at some discount to the broader market, this discount seems too steep for a company that is growing earnings and forecasting a strong year ahead.
A Lot to Like
In addition to its inexpensive valuation, there’s a lot to like about Academy Sports. The company now operates 270 stores, primarily in the southeastern and midwestern United States. It opened just one new store during the quarter, but it has plans to open six stores during the third quarter and five to six during the fourth quarter, which will further add to growth.
Looking forward a few years, the company plans to open another 120 to 140 new locations by the end of Fiscal 2027, which would supercharge its growth by growing its store count by more than 50% at the high end. Furthermore, the company has plenty of white space to grow into as there are very few locations outside the Southeastern United States and just a handful of locations in Midwestern states like Indiana and Illinois.
Also, while the opportunity to grow its physical footprint is compelling in and of itself, Academy has other irons in the fire as well. The company recently announced a partnership with leading online sports apparel retailer Fanatics, which will enable it to offer an expanded range of licensed merchandise in its stores.
Another nice thing about Academy is that while it offers popular, national brands like Nike (NYSE:NKE), Yeti (NYSE:YETI), and Columbia Sportswear (NASDAQ:COLM), it also has its own portfolio of in-house brands, some of which generate over $100 million in sales, like its largest brand, Magellan Outdoors. This makes Academy less reliant on other brands.
Customers seem to be pleased with what the company’s overall experience has to offer, as they gave Academy Sports a net promoter score of 43 at the end of 2022, surpassing the scores of competitors like Dick’s Sporting Goods and Bass Pro Shops, as well as those of big-box retailers like Target (NYSE:TGT) and Walmart (NYSE:WMT).
Lastly, I also like Academy’s localized approach, in which it sells localized merchandise, such as smokers in Texas and crawfish cookers in Louisiana, that will resonate with consumers in those areas.
Solid Capital Returns to Shareholders
While Academy’s forward dividend yield of 0.66% (based on the $0.09 dividend it declared on August 30th) is probably not enough to draw in income-focused investors, it has increased its dividend payout from last year, the first year in which it paid a dividend, and there is potential for the dividend to further increase over time. Beyond the dividend, Academy has also returned capital to shareholders by buying back over $900 million worth of shares since its IPO in 2020.
Is ASO Stock a Buy, According to Analysts?
Turning to Wall Street, ASO earns a Strong Buy consensus rating based on 13 Buys, two Holds, and no Sell ratings assigned in the past three months. The average ASO stock price target of $66.79 implies 22.4% upside potential.
Using TipRanks’ analyst forecast tool, the highest price target on the Street comes from Oppenheimer’s Brian Nagel, who assigns Academy a Buy rating and a price target of $85, implying potential upside north of 55%.
The Takeaway
While retailers like Dick’s Sporting Goods and Dollar General have painted a picture of doom and gloom for retailers, Academy Sports shows that there are still good investment opportunities in the sector. Academy’s strong results, optimistic guidance, long-term growth potential, and inexpensive valuation combine to make it a compelling investment opportunity.
