Daniel Snyder: We're not doing guess a stock because there's two, they’re competitors. They both are in the sports and outdoor space. They are retailers. And those two companies today are DICK’S Sporting Goods (NYSE:DKS) and Academy Outdoors Sports Incorporated (NASDAQ:ASO). Did I say that right?
Austin Hankwitz: I think it's Academy Sports and Outdoors Incorporated.
Daniel Snyder: Academy Sports and Outdoors Incorporated. That's right. All right. So let's go ahead. You want to give them a quick overview of these two companies?
Austin Hankwitz: Yes. So to compare these two companies, we first need to understand what they do and how they make their money. So both of these companies are these retail first sellers of sporting goods, I think fitness equipment, golf equipment, hunting and fishing gear, apparel as well as footwear. I think a good way to compare the company is just like off the rip is by thinking of their size, right?
So DICK’S Sporting Goods is operating 860 retail locations across the country. And you compare that to the 261 retail locations, Academy is operating themselves, which means that DICK’S footprint is roughly three times larger than Academy’s. But the question is, are they making three times as much money?
So last quarter, DICK’S reported total revenue of $3.1 billion You compare this to Academy's revenue of $1.7 billion during the same period of time, which means despite having three times the footprint, DICK’S isn't even making twice the revenue. So why is that?
Before we dive into that, we have a lot to share, but let's talk more specifically about the recent quarterly earnings, give you the kind of lay the table here. So DICK’S had revenue of $3.1 billion in Q3 compared that to - or during the last quarter rather, you compare that to $3.3 billion during the same time last year, so things kind of contracted. Operating income of $460 million compared to $664 million last year. Lots of contraction. Profits of $319 million compared to $496 million last year, also saw contraction.
What about Academy Sports? So Academy Sports saw revenue of $1.7 billion compared to $1.8 billion last year, about flat. Operating income of $257 million compared to $255 million last year, up slightly, and then profits of a $189 million compared to a $190 million light last year, also flat.
So interestingly enough, DICK’S doesn't seem to be trending in their direction financially when compared to Academy Sports. So who at first glance instead seems to be maintaining and growing their margins and moving in the right direction. So the real question, right, what's going on here? Which company is exciting? What's up with this footprint? Who's making them more money? Like, what's - what do we get into?
So let's actually jump in with a chart. Josh, do you mind snagging? Assuming you guys snag the chart from the – okay, cool, cool, cool. Love it. So these charts are going to show you some information right back. Bank of America shared a report with us on November 14th that detailed the spending activity at these types of retailers, right, so just sporting good retailers, not specifically DICK’S or Academy, just sporting goods.
During the month of October and according to the report, spending at sporting goods was down 8% in October, which was worse than the 7.3% deceleration we saw in September. Remember, this is year-over-year deceleration. However, spending is still up 38.5% compared to pre-pandemic levels. And this is up even further against the 35% growth in September that we saw versus pre-pandemic levels. And now you're saying, Austin, where is the spending data coming from? It's coming from Bank of America credit cards and debit cards, right? So this is real spending data.
The next chart is a really cool comparison. I think, yeah, I'll go forward. Let's go to the next slide. Maybe not. Okay. Maybe y'all didn't snag that one. That's okay. So long story short, the chart I'm kind of alluding to here is a - it just shows the correlation between the spending data and the comparable sales at these stores, right? And long story short, it's very close. The comparable sales and the spending data go hand in hand. It's nearly a one-to-one correlation.
Daniel Snyder: Hey, Josh, you should have that chart by the way, if you restart the slide.
Austin Hankwitz: Oh, perfect.
Daniel Snyder: Slide 2.
Austin Hankwitz: But anyway, so it just shows data is very correlated, which means that, theoretically speaking, if Bank of America's report is correct on these sporting goods spending, then maybe DICK’S Sporting Goods and Academy might see some comparable year-over-year contraction. There we go. Yeah, so that's Academy Sports. We can see how closely it is there to the Bank of America spending data and their comps. And then maybe the next chart is also going to show you DICK’S Sporting Goods. I assume go to the next slide.
Daniel Snyder: It's not up yet. Keep going.
Austin Hankwitz: It's all good. So I share this data in the graphs on screen just to preface this analysis. There's clear correlation. And with that being said, if the Bank of America spending data is pointing toward contraction in spending, that might be foreshadowing what could be around the corner for these companies.
So let's kick off this analysis specifically with DICK’S, right? So what's the deal here? Why their stock price see such momentum going into 2020 and 2021? And does the recent rally from the low in June actually have legs?
So starting with the obvious, sell-off catalyzed by the pandemic. We had this March of 2020 sell-off DICK’S actually reported earnings, like, right at the bottom there, which is pretty cool. And so that was a cool little bounce for them to get the recovery started. The earnings they shared were very positive, right? Comparable sales were up 4% for the year of 2019, 5% for the quarter, gross margins were up 30 basis points, profits were up 14%.
And the best part was DICK’S spent all of 2019 repurchasing their own stock to the tune of 11.1 million shares. That's like 15% of outstanding shares at the time. It was wild. The company then smashed their Q2 2020 earnings expectations, officially giving their stock momentum it needed to begin moving in the right direction. Comparable sales were up 20%. Earnings per share came in at $3.12 versus the $1.20 expected. That's nearly 20 - I'm sorry, $2 of earnings per share higher than the expectations.
Daniel Snyder: The opening yields at all.
Austin Hankwitz: The opening, right? People were jumping on this, and this was a lot of e-commerce fueled, right? A lot of people were saying, let me go buy those baseball bats and the soccer ball, so I can get outside. So now we fast forward 12 months and we saw continued execution by their management team. 2021 turned out to be an awesome year for the company with revenue surging 28% and profits skyrocketing a 157%. 2022 was also shaping up to be a solid year, but uncertainty and doubt was on the horizon.
The company definitely benefited from the, let's all go outside again spending we saw in the post-COVID world. But how will this company shape up as trends begin to normalize again in 2023? So let's walk through a few reasons why you might be excited as an investor to old DICK’S Sporting Goods stock.
The first reason is DICK’S has done a wonderful job expanding the gross profit margins post-pandemic from 28% to 37%. This is being continually boosted by their private label vertical brand assortment, the private T-shirts and the private shoes and soccer balls, right? These are private label in-house brands and there's 14 of them. DICK’S is crushing it. These are higher-margin products, right?
The second reason is improved digital capabilities, allowing the company to connect more effectively with a wider range of customers. The next is the company's exit from the hunting category. Two years ago, this was sort of controversial, but is still playing dividends to their company's bottom line because they now use this shelf space to sell higher-margin products, specifically outdoor cooking and pickleball of all things.
DICK’S also launched - this is the last reason, they launched 30 stores called GOING, GOING, GONE! These are markdown stores. These are places that have clearance sales, allowing them a physical location specifically created to help with clearance inventory. This gives their flagship stores, right, now more room to sell full-priced items, boosting those margins even higher. So those are a couple of reasons to be excited.
And a reason, I guess, to be on the sidelines comes back to what we just saw with the spending data with Bank of America. We might get into a couple of more reasons here later, but I'd want to move on and definitely introduce Academy Sports to you. I'll make sure we're on the same page with that.
So Academy Sports actually IPOed in 2020. They're a relatively new company. And they’re IPOed for only $13, and now they're trading at nearly 50, despite all the volatility we've seen this year. So as I shared before, the company's footprint is much smaller than DICK’S, but despite the smaller footprint, they're moving inventory, right? Generating $1.7 billion in revenue during Q3. And to put that in perspective, that's $6.5 million in revenue per store, per quarter, right? $25 million a year per store.
You compare that to the only $3.6 million with DICK’S, right, half of that. Nothing, right? They're crushing it. So similarly DICK’S 2022 was a strong year for the company. And despite reporting comparable sales declining 6% against tough 2021 comps, profits beat expectations. Their gross profit margins expanded by roughly 1% because of their better and best categories. They were really leading into the different pricing here.
Probably the most exciting news I've read about Academy Sports is their intention to increase the footprint by 30% over the next five years. This would add an additional $2 billion in annual revenue to their income statement, potentially translating into some intense free cash flow per share growth.
So why would an investor be excited about Academy over DICK’S? Well, Academy has done a wonderful job positioning themselves as the local sporting goods hub. That's - the keyword here is local. We'll get into why that's so important, but their product offerings are very region-specific, giving them an advantage over the cookie cutter products you might see at DICK’S Sporting Goods or other sporting goods stores, right? Very local and hyper personalized to their location.
Second is, their e-commerce business has ample room to grow as it only represented 10% of total sales last quarter.
Third is, there is absolutely potential for the company to continue expanding that footprint, right? We talked about that 30% growth. We love that. That's going to help with sell-through rates per square foot. They're crushing that. And again same reasons to be on the sidelines as we saw with Bank of America spending patterns, things of that nature. I know I just talked a lot. That was a lot of analysis, Daniel. I haven't…
Daniel Snyder: Let me – yeah, let me sum it up, though. Because there's, like, between these two companies, because a lot of the stuff you're talking about is also what I was going to mention as well is, like, this boils down to how many stores do you have. What's your inventory levels? What's your debt load on the company, which I'll point out here in a second as well?
And I mean, like you mentioned, the outdoor spending is in a - is kind of peaked if you want to say it that way. We experienced the peak. They're going through the pullback now. Obviously, schools in session, people have already bought their kids all their gear sports kind of the footprint. And I’m glad you brought up the DICK’S Sporting Goods stores because let me go to my research right here.
They have 861 stores in operation in 47 states. With comparable store sales up 25% year-over-year, 70% of DICK’S Sporting Goods e-commerce is fulfilled by their stores pays to have a footprint. And then 110 of those are specialty stores like you're talking about with the GOING, GOING, GONE!, so they’re like outdoor kind of stores that is. You can go to DICK’S Sporting Goods stores now, put on shoes and go outside and run-in the track, which is actually inside the store, but it's…
Austin Hankwitz: I like that. I think that's pretty cool.
Daniel Snyder: They have that. They have rock climbing walls that you can try rock climbing shoes there. They have golf simulating…
Austin Hankwitz: Having cages, golf simulators, soccer…
Daniel Snyder: The thing I look about DICK’S is they're one well-established. They connect with the athletes early on through their charity program. They get kids to know the store and brand and everything else like that. So that's smart move. They're tied to a lot of professional athletes. They sell a lot of the higher-end products and their partnerships run super deep, right? Didn't even talk about, like, the Nike (NKE)…
Austin Hankwitz: The Nike partnership.
Daniel Snyder: Yeah, it's huge. right, where you can buy at either store and you earn for the membership. Actually, I want to point out, too, Alex said, here in the chat, DICK tends to occupy higher dollar malls and Academy is in lower-tier malls in his experience. Thanks for sharing because I mean that's part of the, I think, Academy has the opportunity here. I think it's the way I would say it.
Is Academy like you're mentioning, they want to grow their front footprint. From what I just saw in the most recent earning calls, their CFO, Michael Mullican said, with they already announced plans to open 100 new stores within five years. That's huge for them. And also if you go and look at the balance sheet, they have drastically, drastically wiped out their debt. I mean, they just still have a little bit of debt. I mean, they took a $1 billion of debt off of the balance sheet just last year. So they're executing really well.
Before we continue, I want to go ahead and go over to the charts, make sure people see the technical levels of what we're talking about on these two stocks. So first up is DICK’S Sporting Goods here. Obviously, I've got a couple of things already pointed out here. So I drew the Fibonacci levels earlier. Of course, we saw the bounce here recently at the 0.618. That was back in May. And then we've seen this consolidation, which is what - this isn't a gap, right? This is consolidation.
So this is something that I'm watching. Obviously, there's a gap down right now And then what's this white dotted line? Well, that's just a support resistance line. And if you look at it, obviously, typically, when price moves through resistance, it later on becomes support. And that's what you saw time and time again here.
And when it breaks through the support, it usually turns into resistance. But here, I mean, just massive rally consolidation something to keep in mind for, like, whenever a stock price consolidates, usually, once it breaks that consolidation and whichever way it moves, it's going to move pretty significantly. And we're seeing a break now down here to the downside. So that's kind of something that's interesting to me right now.
I think the thing that's important to point out about DICK’S Sporting Goods specifically is that they are pretty levered up right now. They have quite a bit of debt on their balance sheet. And I think it's $4.43 billion in debt. Now it's mostly long-term debt, keep that in mind. but you're still paying interest on it. Their interest expenses are increasing and they have $1.9 billion in cash and equivalents on the balance sheet.
So they're at $4.82 of free cash flow per share. Academy Sports though is at $5 of free cash flow per share. So they got pretty even there. They both have about the same amount of outstanding float on the market right now. So that's just DICK’S. And then let's go over to Academy, see their stock.
I mean, obviously, this one, as you mentioned, they just IPOed here down at $12, not too long ago. So [Cross Talk]
Austin Hankwitz: The stock just goes up. It's crazy . It just – I heard a lot of Academy Sports’ advertisements on podcasts, and it's crazy to see just like and that's how I really came to know in the company during the pandemic. I just it's wild to see how this company has favored so well despite all the volatility.
Daniel Snyder: Yeah. Alex is asking here. So, well, let me just read this off for everybody, so that they understand for anybody listening in the podcast, says middle class and upper middle class families probably buy more gear. So DICK’S occupying higher-end malls probably pays off at least with foot traffic.
If inflation continues, the question is how much will these upper middle class families cut back? My experience is the last thing they'll cut back on is stuff for the kids. Alex, I think that's within reason. This is just my opinion. But I think it's within reason of what they're going to cut back on.
I mean, I'm not a parent myself. But if I can imagine having my nephews through my sister, parents want to get kids out of the house. They want them to go play. They want them to be in sports. You learn the team aspect and everything else, but also it's like you just get their energy out.
So I think there's still going to be a little bit of spending within the sports arena. But it's just like, would you go then buy a DICK’S, or would you go to a place like Academy instead? And I think you're going to see there's obviously price fluctuations. As you mentioned, Austin as well, they both have private labels. And Academy's private labels are doing pretty dang well right now, as well as DICK.
So it's just something to keep in size, like, so private label at Academy is stuff like Freeleaf, Right of Way, Magellan Pro, and they point that out in the earnings call time and time again about how those private labels are doing. I mean, they talk on their partnerships, right? They - both companies have partnerships with companies like YETI, right? And YETI, of course, you can buy either way, price say the same, MSRP stuff. But, yeah, it's pretty interesting.
The thing I want to point out about Academy for all the people that are in the dividends, Academy just started paying a dividend as well this year. Granted it's like $0.07. The yield is like 0.60%. Obviously, it's a growth company right now. Their whole focus right now is let's just grow, let's grow, let's grow, let's take market share. There's obviously players out there that we can disrupt with our products, our private label, we can become the next big player in this space.
DICK’S Sporting Goods on the other hand has been around forever and they have all their locations. And now what they need to do is really manage that debt with the inventory levels. Because from what I understand, their inventory levels are pretty high right now. And as we just heard, you brought up Target earnings earlier this morning is Target is saying that they're expecting a decreased holiday shopping season.
And if that affects DICK’S Sporting Goods as well, then you're going to start seeing sale prices come through. They're going to have to move that inventory out and get ready for next year or the next season. So I think that's something to keep in mind as well.
I think I want to mention as well, they both have upcoming earnings announcements. Academy’s will be on - is estimated to be on December 8th. They're expecting an earnings per share at a $1.61 and revenue of $1.55 billion, and DICK’S Sporting Goods earnings will be on November 22nd. They're expecting earnings per share of $2.24, with revenue of $2.7 billion. So we'll get some updates here shortly on both of these companies.
But for me personally and Austin, I'm sure you might feel the way. I - if I was to buy one of these two right now, 100% I would go into Academy. What about you?
Austin Hankwitz: I'm so glad. I was really worried you're going to say DICK’S. I was really worried you're hyping them up there for a little bit. Don't get me wrong. DICK’S Sporting Goods…
Daniel Snyder: I’ve given both sides [indiscernible]. We got to talk to both sides.
Austin Hankwitz: Yeah. No. I was worried - I'm on Academy team. I'm team Academy. But I was looking at the DICK’S Sporting Goods during the pandemic. What really got me excited about them were these, like, simulation things. We're talking about, like, the golf simulations and the soccer and the bad engages and, like, all these really cool things to get kids say, oh, I'm going to buy that. Let me have that. That's so cool. And they've done a really good job to Alex's point here in the chat moving up is kind of this value chain, right?
I think DICK’S Sporting Goods went from - it's just a Sporting Goods store to now it's in the high-end malls. Now they got the rock climbing. They got the people in the uniforms. Like, it's pretty cool. But in my humble opinion and I'm not saying future of DICK’S is grand [ph], I’m not saying that at all, but I could see much more excitement, much more growth, much more earnings, compound earnings potential from Academy Sports.
Daniel Snyder: I agree. Josh, let's go ahead and go through the slides real quick. Make sure everybody knows where the ratings summary are for these stocks and the Factor Grades.
So first up, let's do Academy Sports and Outdoors. So, Seeking Alpha authors currently have a buy rating. Wall Street analysts are a strong buy on the stock in the quant rating is actually a strong buy on the stock as well.
Let's go to the next slide. Check out the Factor Grades and you're looking at evaluation with a C+ grade, a growth with A-, profitability A-, momentum A, revisions A+. I mean, just breaking this down a real quick. So it looks like it's fairly valued right now if you're looking at the C+ grade, growth is stellar beyond belief, profitability is increasing in stellar beyond belief, momentum to the upside that's just tracking the moving averages and stock price movement obviously to the upside, and then revisions are just the earnings per share revisions that we're seeing across Wall Street A+, means that the majority of them are revising upwards on the revenue and EPS guidance.
Let's go to the next slide. This was just something I pulled earlier. I completely forgot about. This is from most recent earnings deck. And I was just going to point out that…
Austin Hankwitz: Is that an action shot at you, Daniel, that you’re fishing a little bit ahead on?
Daniel Snyder: No, no, no, I'm actually - I'm not in the fishing. That's not me. I can't do that. I mean, I'm a golf guy, now you're talking. But I was just always going to point out at the bottom line. As of July 30, 2022, Academy has opened two new stores this year and the company plans to open at least nine new stores in 2022. So they've got a few more stores opening this year. Of course, just want to remind you, 100 stores within five years, pretty aggressive, but then I'm sure they can probably pull it off.
All right. Let's go ahead and look at DICK’S, next slide from you, Josh. So Seeking Alpha authors have a hold rating on DICK’S Sporting Goods right now. Wall Street, still has a buy on it, but the quant system does have a hold on the stock. And if we go to the Factor Grades and check those out, the valuation of DICK’S Sporting Goods right now is a C-, which seems fair valued, but its growth is a little worrisome here, so there's something to keep in mind. Profitability – sorry, growth is a D-, profitability is an A-, momentum is an A-, and revisions are an A-. So I went ahead and opened up the growth.
Go to the next slide, please, Josh. And looking at the growth here, there's a couple of things that - I mean, this is just a few of them, but the lever free cash flow growth is a D- grade, the operating cash flow growth is a D, and the CapEx growth is a D+. I mean, it's just - they're just a little over levered, right? They got to tweak a few knobs. They can definitely do it. They get the higher margins off of the brand name products. They make a good amount of money. They'll be fine. I will say that. I think that they're going to be completely fine.
Lastly, let's look at the dividend grades real quick for DICK’S Sporting Goods and it's a little worrisome. But I think overall, the amount of money that they're actually paying out in dividends versus spending money on paying down their debt and everything else, I think it's going to be okay for now. I mean, obviously, a low payout ratio. They have levers they can pull. They move product. The big thing is just where we go from here.
Management just has a little bit of work to do on this. But I personally just my opinion, I wouldn't be too worried about this one. If their dividends being consistent, they've grown it for seven year, or they paid it for seven years, they've grown it ever three years, I think. They did special dividend. Looks pretty solid to me.
So let's go ahead and chart off of that. Please, Josh. And got to ask the people since you're here listening to us. Do you have a thought if you were to buy between these two companies today, would you choose DICK’S Sporting Goods or Academy Sports Outdoors. Let us know right now in the chat. Alex has been tuning in.
Austin Hankwitz: Alex is on it. Alex knows what's going on.
Daniel Snyder: There we go. So let's see. ASO from norm. Alex, I got to ask you. Alex, would you be more into buying DICK’S stock or ASO?
Austin Hankwitz: Alex is the girl.
Daniel Snyder: Girl. I apologize.
Austin Hankwitz: I'm so sorry.
Daniel Snyder: Apologize, Alex.
Austin Hankwitz: Well, Alex, I mean - yeah.
Daniel Snyder: All right. So I guess we’re going with ASO. Anybody for DICK’S Sporting Goods? George is also ASO. Okay. Well, guys, we hope you learned something today. Thanks for hanging out with us this hour. Obviously, let us know if you have any stock recommendations that you want us to look at, you can email that over at email@example.com.
Again, you can find Austin at Cash Flow Freaks on Seeking Alpha Marketplace. You can find me on LinkedIn. You can find him on Twitter and TikTok and LinkedIn as well. And we really just appreciate you guys. We hope you have a great rest of the week.
Remember, Seeking Alpha Black Friday sales going on right now, 50% off premium, You can also check out Alpha Picks and everything else. Austin, anything you want to say before we get out of here?
Austin Hankwitz: I just want to shout out Christian, NVIDIA for hyping us up, Norm as well. George, Alex. Alex, thank you so much for being so active in the chat. Don't forget to leave those podcast reviews. Drop the 100 emojis, so we know you're a real one and we'll see you next week.
Daniel Snyder: All right, Josh, let's get on out of here. Everybody, have a great rest of the day.
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