Is Academy Sports and Outdoors (ASO) a Buy Despite the Dividend Cut Risk?

Academy Sports and Outdoors (ASO) has long been a fixture in the U.S. retail landscape, but its recent performance has sparked debate about its dividend sustainability amid aggressive expansion and rising cost pressures. For income-focused investors, the question is critical: Is ASO a buy despite the risk of a dividend cut? A deep dive into its financial metrics, operational strategies, and market challenges suggests the dividend remains well-supported for now, though caution is warranted.

Dividend Payout Ratio and Earnings Coverage

ASO's dividend payout ratio for Q3 2025 stood at 9%, a figure that underscores its conservative approach to shareholder returns according to the latest financial report. This low ratio means the company retains the majority of its earnings, providing flexibility to reinvest in growth or weather economic headwinds. The quarterly dividend of $0.13 per share has remained unchanged for at least two consecutive quarters according to financial data, signaling stability. Analysts project the payout ratio will stay in the low single digits (around 7.9%) in 2025 as reported by market analysis, further reinforcing the dividend's resilience.

Financial Leverage and Cash Flow Strength

ASO's debt-to-equity ratio of 22.6% in Q3 2025 reflects a marked improvement from a peak of 144.6% over the past five years as per financial data. This reduction in leverage, coupled with a debt coverage ratio of 87.8% (operating cash flow relative to debt), indicates robust financial health according to financial analysis. The company's ability to generate sufficient cash flow to service its $481.27 million in long-term debt according to financial statements provides a buffer against potential earnings volatility.

Navigating Cost Pressures and Operational Efficiency

Inflationary pressures and tariffs, particularly from China, have strained ASO's cost structure. However, the company has taken proactive steps to mitigate these risks. It has reduced its exposure to Chinese sourcing from 14% to 9% of cost of goods sold in 2025, with a target of 6% by year-end according to investor updates. By pulling forward domestic inventory receipts and renegotiating supplier contracts, ASO has curtailed cost escalations. Additionally, gross margin expansion-up to 35.7% in Q3 2025 from 34.0% in the prior year according to financial reports-demonstrates effective pricing and cost controls.

E-commerce Growth and Strategic Expansion

ASO's omnichannel strategy is another pillar of its resilience. E-commerce sales surged by 22.2% in Q3 2025 according to financial results, building on a 17.7% increase in Q2. This digital momentum, combined with the opening of 11 new stores (bringing the total to 317 locations according to company announcements), highlights the company's dual focus on physical and online growth. While comparable sales are projected to decline modestly (by as little as 2.0% in 2025 according to financial forecasts), the broader sales outlook-$6.025 billion to $6.2 billion-remains within a manageable range.

Risks and Mitigation

Despite these positives, challenges persist. The projected net profit margin of 6.33% for FY2025 according to financial modeling reflects ongoing pressure from rising operating costs and a cautious consumer environment. If economic conditions deteriorate further, ASO may face margin compression. However, its low payout ratio and strong cash flow position provide a cushion. Management has also emphasized flexibility, with CEO David Campisi noting the company's ability to "adapt to evolving market conditions" according to recent investor communications.

Conclusion: A Buy with Caution ASO's dividend appears sustainable for the foreseeable future, supported by a conservative payout ratio, improving leverage, and operational efficiency gains. While the risk of a cut is not zero-particularly if cost pressures intensify or economic volatility worsens-the company's strategic initiatives and financial discipline mitigate this risk. For investors willing to tolerate moderate volatility, ASO offers an attractive combination of growth potential and income stability. However, close monitoring of its Q4 2025 results and 2026 guidance will be essential to assess long-term sustainability.