Academy Sports and Outdoors Inc. (ASO, Financial) has room for upside, according to Quo Vadis Capital founder and President John Zolidis. He said:
"Strong management team optimizing a business in a favorable demand environment trading at less than 10x P/E on this year with room for upside to estimates. It's a very simple investment thesis, and it's working."
On Tuesday, the company reported adjusted fourth-quarter earnings of $1.09 per share, beating the FactSet consensus estimate of 50 cents. Sales reached $1.60 billion, up from $1.37 billion a year ago and topping the FactSet consensus for $1.58 billion.
For 2021, Academy expects earnings of $2.70 to $2.95 per share, ahead of analysts' expectations of $2.39.
In a statment, Chairman, President and CEO Ken Hicks said he is "very proud of everything the Academy Sports + Outdoors team members achieved in 2020 as they faced substantial adversity and uncertainty due to the pandemic."
"Through collaboration, dedication, and innovation, the team produced remarkable results and delivered fun to millions of customers while laying the foundation for future success," he said. "With our outstanding team, strong balance sheet, and by investing in our key initiatives, such as power merchandising and e-commerce capabilities, Academy is very well positioned to continue to drive top and bottom-line growth for the long term as well as enhance shareholder value."
Wall Street seems to agree, sending the company's shares close to 10% higher during the regular trading session.
Academy's strong results follow similar results by other sporting goods retailers, notably Dick's Sporting Goods Inc. (DKS, Financial) and Foot Locker Inc. (FL, Financial).
The problem is these peers have created little or no value for their shareholders lately. Dick's Sporting Goods' economic profit is 2.48%, while Foot Locker's economic profit is -0.56%, meaning the retailer could suffer the same fate since growing competition puts pressure on its return on invested capital.
| Company | ROIC | WACC | Economic Profit (ROIC-WACC) |
| ASO | 10.74% | 6.1% | 5.64% |
| DKS | 11.24% | 8.76% | 2.48% |
| FL | 5.56% | 6.12% | -0.56% |
Meanwhile, investors shouldn't be getting too excited about Academy's solid results and bullish guidance. The company has a short history on Wall Street, so there isn't enough public financial data to apply the discounted cash flow model to estimate its intrinsic value. And the results may be positively skewed because of the Covid-19 pandemic and the lockdowns, which have boosted demand for exercise equipment.
According to NPD retail data, health and fitness equipment sales more than doubled to $2.3 billion for the March through October 2020 period. Sales of treadmills surged 135%, while those of stationary bikes nearly tripled.
This trend isn't expected to continue as the pandemic eases and people return to their everyday lifestyles, meaning Academy's upside may be limited.
Disclosure: No positions.
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