Academy Sports & Outdoors (ASO) — a mid-sized sporting goods retailer, with 261 stores in 16 (mostly southern) states — is a cookie-cutter story to watch, explains Mike Cintolo, editor of Cabot Growth Investor.

It’s a solid, well-balanced business (sales nearly equally split between seasons and a variety of categories like sports, footwear, outdoor and apparel, etc.).

The stock had a big run in late 2020 and most of 2021 as business exploded during the pandemic — as people favored outdoor activities, earnings exploded from $1.12 per share in 2019 to $4.16 in 2020 to $7.60 last year! Most investors figured earnings would fade as the world turned right side up, in essence making this just another pandemic play that had seen its best days.

But that’s where things get interesting: First, business has remained very solid — while sales and earnings have fallen off, they’ve only done so a touch (sales down 6%, earnings down 2% in Q2; analysts see earnings down just 5% this year), as Academy is getting juice from company-specific improvements (cost controls, more private-label brands, bigger e-commerce operation) that are boosting margins while, of course, sales remain resilient.

More important to us, though, is that management isn’t thinking defensively — Academy, in fact, is aiming to be the top sporting goods retailer and it’s just beginning a major store expansion plan, adding nine locations this year and 80 to 100 total during the next five years.

These locations add to EBITDA (cash flow) starting in year two, with a payback within two years as well (solid store economics). Translation: Instead of seeing earnings slip, this company should actually crank out decent gains going forward.

We’re not big on valuation, of course, but the current tally (P/E of just 7) certainly looks cheap, and management agrees; having paid down most of its debt as business surged, the top brass is now buying back shares in a big way (share count down 11.5% from a year ago).

And Wall Street seems to be sniffing out all of this: ASO peaked at $50 last November, fell as low as $25 in May (in what was a giant-volume shakeout) and then motored all the way back to its prior highs, where it’s gyrated for the past few weeks — not surprising given the action of the indexes since late August. The market will obviously be key, but we’re very intrigued by the big-picture story here.

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