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Academy Sports & Outdoors, Inc (Nasdaq: ASU) fell after just-announced first-quarter earnings. The report was mixed, all things considered. However, this is a trader’s stock. Just today we were asked about this in our investment group, and we reviewed the situation again. Our last buy call on the 40s came in November 2023. We think the stock has pulled back enough to consider buying again.
Below, we are setting up a new trade for new money again. The company continues its controlled expansion, operating through inventory while controlling spending. Going forward, we are looking for similar selling to stabilize from here. We rate ASO as a buy, but be prepared to engage, as we do in our service.
It looks like the gap up from $50 will close On this measure, it’s a good buy here at $53, but a good buy in the upper $40s. Here is a suggested play.
Suggested play for new money
Target Entry 1: $49.75 – $50.00 (30% of position)
Target Entry 2: $48.50 – $48.75 (33% of position)
Target Entry 3: $47.00 – $47.25 (37% of position)
Short-term target: $56
Medium-term target: $67.
Stop: $42
The above trade is exactly the kind we put to our service for our highest level of persuasion. The above is a suggested example of how to consider a trade.
Considering Options: Specific guidance is reserved for our members, but in general, options operators should consider selling puts for a premium or to limit entry here. Calls are also cheap with a low volatility environment at the moment.
Q1 performance again reflects weak formulations
The just mentioned quarter was below our expectations. We were looking for better comps, frankly, even if they were still down, although positive comps encouraged us in some of the newer stores. However, the guidance has been repeated, which is positive. CEO Steve Lawrence summed it up well in the statement:
As expected, our first quarter results reflect that our customers remain under pressure in the current economic environment. We will navigate the remainder of the year by continuing to uphold our position as a value leader in our industry, while also inspiring customers to shop through innovative new product introductions and expansions. We will also continue to make strategic investments in long-term growth initiatives. We are pleased to have achieved positive results with our new stores and omnichannel business. The Academy has the right elements to achieve our long-term goals: a well-established business model, an experienced leadership team, and a strong balance sheet
Competition is tough in this space, and the consumer is certainly under pressure in this macro environment. As you can see, we have very high interest rates which has led to higher housing costs, including rent. Food price inflation continues. Consumer debt is at record highs. Student loans are paid off. Gas prices are high. Taxes seem to only go up. The value of the dollar has been severely eroded. However, there is a lot of room for expansion as they are only present in 18 states with only 284 stores.
Furthermore, the balance sheet is good, and management is shareholder-friendly, but the quarter was weaker than expected. Although there are pressures, we do not consider these results to be a sign that the sports and sporting goods market is in any way at risk. The Academy has a growing online business and reaches customers through the multiple distribution centers it operates. But sales fell at the highest level, below estimates. Net sales in the quarter were $1.36 billion, representing an actual 1.4% decrease from last year, compared to $1.38 billion. This is due to a decrease in comparable sales by 5.7%. It is worth noting that the declines were better than the 7.3% decline from last year, but we were expecting declines of 2-3%.
Spreads have been under pressure recently, but have stabilized in a range of 34.0% to 35%. Gross margins in the third quarter were $482.6 million, or 34.5% of total net sales. This represents a slight decrease from 35.0% of net sales in the prior year quarter. Before taxes, income was $129.9 million, down from $169.9 million. This is largely due to declining sales, of course. So really, with the top line down on the back of weaker comps, stemming largely from the inability to move fall merchandise due to warmer conditions, everything at the bottom of the earnings print suffered.
On a per-share basis, we saw $1.08 compared to $1.30 per share, which also misses estimates. Obviously, declining earnings do not represent growth, which is a big reason for the stock to reset. However, we see it as a decline in the short term and growth will resume as the company expands. The plan is to open another 100 stores in the next five years, growing the company by more than 30%. Although the near-term outlook is uncertain, we like the long-term outlook. We think it’s important to note that guidance was largely repeated despite the weaker-than-expected quarter. There was one exception, which was that they raised their GAAP EPS estimates due to stock buybacks.
For this fiscal year, net sales are expected to reach $6.07 billion to $6.350 billion. This is because comps will fall by 4.0% to 1.0%. Given this quarter and the consumer pressures mentioned above, we think it will likely range from -2 to -3%. The company sees earnings per share in the range of $6.05 to $7.05, versus $5.90 to $6.90 in earnings the previous year. Keep in mind that this is unmodified. After adjustment, we are looking at $6.50 to $7.00. At $6.75 in EPS, and $50 worth of stock, the valuation is very attractive when you consider the balance sheet and store footprint expansion.
Healthy balance sheet. Academy has $378 million in cash with only $484 million in long-term debt. The company paid off $100 million in debt over the past year. This is powerful. The company uses this debt to expand, store its footprint, and grow. Adjusted free cash flow remains strong and is expected to reach $330 million this year at the midpoint. Furthermore, the company continues to reward shareholders through dividends and buybacks. The company has been repurchasing stock, this quarter repurchasing $124 million worth of stock, and also paying a dividend of $8 million.
Final thoughts
This is the trader’s stock. As a company focused on helping investors learn how to trade more and increase their income, there is value in Academy Sports and Outdoors, Inc. stock. We have a company that is stabilizing its businesses and inventory management and will expand its store base by 30% in the next few years. Even though it was a lousy investment, smart traders had great success here. As the stock looks to pull back below $50, we think you can build a trading position to take advantage of the rally over the next few months or so. In addition, you can earn profits while waiting.
