As we head into the fall, 2023 has left egg on the face of most forecasters. The seemingly inevitable recession on the heels of a turbulent 2022 hasn’t materialized. The economy continues to grow, inflation is abating, and the stock market has had a remarkable year. I like Academy Sports and Outdoors (ASO) here, says Doug Gerlach, editor of Investor Advisory Service.
Interest rate increases haven’t torpedoed the employment market. Government, consumers, and the market have coalesced around a “soft landing” narrative.
However, as always, there are risks. Federal Reserve policy is the largest one. If progress on inflation reverses, like it did in July, the Fed may be inclined to raise interest rates further. There has been much debate in academic circles about the lagged impact of interest rate increases.
That said, the US economy is headed in the right direction with rising incomes and falling inflation. Those that stay fully invested do well over time and we see no reason to act any differently now.
Academy Sports and Outdoors (ASO)
As for ASO, it reported second-quarter results ahead of expectations, sending shares higher by 9%. Sales declined 6% as results continue to reflect a surge through the pandemic that is in the process of normalizing. Some categories that were particularly strong in recent years, such as fitness equipment, are now underperforming and holding back results.
Management also highlighted current pressures impacting the behavior of consumers. Comparable sales declined 7.5%, as an 8.3% decrease in transactions was partly offset by ticket size. Gross margins increased versus both a year ago and last quarter, helped by lower freight costs that outweighed higher shrink.
Academy reported SG&A deleverage as it invests in new stores, technology, and digital marketing. This resulted in a 10% decline in EPS to $2.01 despite an 8% reduction in share count over the past year. Management reiterated its full-year outlook but upped its expected EPS range to reflect share repurchase activity.
The outlook is for sales to be flat to down 3% with comparable sales declining between 4.5%-7.5%. EPS is now forecast in the range of $6.65-$7.35, down 2%-11% versus prior expectations for a 4%-13% decline.
Academy expects to open 13-14 stores this year with 11-12 of these openings occurring in the back half of the year. This represents store growth of about 5%. Its longer-term ambition remains to increase its store count by 50% by 2027.
Recommended Action: Buy ASO.
