JPMorgan Downgrades Academy Sports & Outdoors to Neutral From Overweight, Price Target is $53

Academy Sports and Outdoors, Inc. ASO is navigating a challenging macroeconomic environment that is impacting its customer base. With inflation rates remaining high, the company is witnessing curtailment regarding discretionary spending on non-essential items like sports equipment and outdoor goods.

The current economic climate led to notable shifts in consumer behavior. With personal savings depleted, consumers are becoming more cautious with their discretionary spending. Customers are shopping episodically and are more inclined to seek value offerings and innovative products within the company's assortment. Although ASO reported a sequential improvement in spending throughout the first quarter, the overall environment remains constrained.

Academy Sports’ shares have declined 15.4% year to date compared with the Zacks Leisure and Recreation Products industry's 7.3% drop. The stock has also underperformed the sector and the S&P 500.

Closing at $55.89 in the last trading session, the stock stands almost 26% below its 52-week high of $75.73. Technically, ASO is trading above its 50-day moving average but below its 200-day moving average. The crossover of the 50-day moving average below the 200-day moving average warrants caution concerning selling or avoiding the stock for the time being.

Decoding Academy Sports’ Headwinds

Challenges Across Divisions: ASO is witnessing softness in sports and recreation sales. During the first quarter, the company reported Issues like a crawfish shortage impacting outdoor cooking sales and weakness in the fitness segment, particularly in cardio equipment. On the soft goods side, apparel sales fell 3% year over year, with licensed apparel being the weakest segment.

Gross Margin Pressures: Efficient inventory management is critical for ASO to balance supply and demand, minimize excess stock and reduce carrying costs.

From a profitability standpoint, ASO’s gross margin in the first quarter declined 40 basis points year over year to 33.4%. The downside was caused by a shift in sales towards lower-margin hard goods and increased promotional activities. The company reported a dip in merchandise margin, underscoring the difficulty in maintaining profitability in the current economic climate. Although improvements in freight and shrinkage displayed some respite, the mix of lower-margin outdoor products and increased clearance promotions dented overall profitability. Given the reliance on promotional activity to drive sales during key periods, the company is cautious about concerns related to margin stability in the upcoming periods.

Consumer and Economic Uncertainty: The broader economic environment and consumer behavior trends add another layer of uncertainty. Consumers are increasingly value-focused and discerning, often seeking discounts and promotions. While Academy Sports aims to target value-oriented customers through its customer data platform and promotions, the effectiveness of these strategies in sustaining long-term growth remains uncertain. It is apprehensive about balancing promotions and maintaining profitability amid economic pressures.

Intense Competitive Pressure: The Zacks Rank #4 (Sell) company competes in a fiercely-competitive landscape, contending with both large national chains and nimble online retailers. This includes companies like Sportsman's Warehouse Holdings, Inc. SPWH, DICK'S Sporting Goods, Inc. DKS and On Holding AG ONON. The competitive pressure forces ASO to engage in price competition and promotional activities to attract and retain customers.

Earnings Estimates Southbound

The Zacks Consensus Estimate for ASO’s 2024 and 2025 earnings per share have declined 4% and 5%, respectively, in the past 60 days. The downward revision in earnings estimates indicates analysts’ declining confidence in the stock.

Valuation

Based on the forward 12-month earnings ratio, ASO’s shares are currently trading at 8x, which is below both its average of 8.03x and the industry average of 24.20x.

Initiatives to Bring the Stock Back on Track

ASO is actively investing in initiatives to boost traffic and sales across its stores and e-commerce platforms, including enhancements to its website and mobile app. The efforts include a new customer data platform and strategies for improved customer segmentation, along with innovative website features, including a redesigned home page and enhanced BOPIS options.

The company's improved e-commerce platform supports stores through digital marketing and BOPIS programs, helping to connect with customers and expand the brand's reach. In the first quarter of 2024, 95% of sales were facilitated through stores. Academy Sports expects new store openings, with 15-17 planned for 2024, to drive future revenue growth and improve margins. The company aims for 15% e-commerce penetration over five years, supported by a new partnership with DoorDash. However, these initiatives may take time to yield significant returns and do not guarantee to mitigate the current macroeconomic headwinds.

Conclusion

Given the current economic challenges, operational pressures and competitive landscape, investors should stay away from this stock at this time. While ASO’s strategic investments and expansion efforts provide a foundation for potential future growth, the immediate challenges and market conditions warrant caution.

Investors should closely monitor the company’s progress in addressing the challenges and consider reevaluating their position once there is more clarity on the effectiveness of ASO’s strategic initiatives and improvements in the broader economic environment.

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