Academy Sports & Outdoors: Building Resilience in a Tariff-Driven Market

Amid rising tariffs and inflationary pressures, retailers are under pressure to balance cost discipline with customer value. Academy Sports & Outdoors (ASO) has emerged as a contender by aggressively reshaping its supply chain and doubling down on high-margin private brands. While near-term earnings have stumbled, the company's long-term strategy—reducing reliance on Chinese imports, expanding store footprint, and leveraging private labels—positions it to outperform peers in a challenging environment. Here's why current valuation discounts may present a compelling buying opportunity.

Supply Chain Restructuring: Mitigating Tariff Risks

Academy's most significant move has been slashing its China sourcing exposure to 9% of total cost of goods sold (COGS), with a target of 6% by fiscal 2025. This shift addresses a critical vulnerability: tariffs on Chinese goods have historically eaten into margins in the sporting goods sector. The company has diversified suppliers in countries like Vietnam and Mexico, pulled forward inventory receipts at pre-tariff prices, and reengineered logistics to reduce landed costs.

The results are measurable. While Q1 2025 net sales dipped 0.9% to $1.35 billion, the focus on cost controls has started to stabilize gross margins. The company's private label portfolio—now 23% of merchandise sales—plays a dual role: shielding margins through higher markup structures and attracting price-sensitive consumers. Brands like BCG (bedding and outdoor gear) and Magellan Outdoors (active wear) are core to this strategy, offering value without sacrificing quality.

Store Growth and E-Commerce Synergy: Fueling Market Share

Academy is also betting on physical expansion. In Q1, five new stores were opened, with plans to add 20–25 locations in 2025, expanding into states like Pennsylvania and Maryland. This geographic push taps into underserved markets while leveraging economies of scale in inventory and logistics.

Meanwhile, e-commerce sales surged 10.2%, reflecting investments in online integration. The company's hybrid model—where stores fulfill online orders—reduces shipping costs and enhances customer convenience. This synergy is critical as competitors like Dick's Sporting Goods (DKS) and Bass Pro Shops grapple with similar pressures to balance physical and digital channels.

Valuation: A Discounted Play on Turnaround Potential

ASO's valuation is starkly undervalued relative to peers. With a P/E ratio of 7.1 and an earnings yield of 14.1%, the stock trades at a steep discount to its historical averages and sector peers. For context, Dick's Sporting Goods trades at a P/E of 11.6, implying ASO is undervalued even as it navigates near-term headwinds.

The company's inventory build-up (15% year-over-year) and margin pressures are valid concerns, but they're strategic. By stockpiling ahead of tariff hikes and prioritizing new store openings, Academy is making long-term bets that could pay off as supply chains stabilize and holiday demand surges.

Risks and Near-Term Challenges

• Inventory Overhang: A 15% inventory jump raises the risk of markdowns if demand softens.
• Margin Pressure: Selling, general, and administrative (SG&A) expenses rose sharply, squeezing net income to $46.1 million (-39.8% YoY).
• Economic Uncertainty: Consumer spending on discretionary items like sporting goods could decline if inflation or unemployment rises.

However, these risks are mitigated by the company's proactive steps: private labels protect margins, store expansion drives incremental sales, and reduced China exposure limits tariff exposure.

Investment Thesis: Buy the Dip Ahead of Holiday Season

Academy's shares have underperformed due to short-term execution hiccups, but the underlying story is one of resilience. With $108 million returned to shareholders via buybacks and dividends in Q1 alone, management is prioritizing capital discipline while investing in growth.

The key catalysts for a rebound are:
1. Holiday Sales: The Q4 holiday season accounts for ~30% of annual revenue; early inventory positioning could amplify margins.
2. Supply Chain Stabilization: As China exposure shrinks and alternative suppliers ramp up, COGS pressures should ease.
3. Private Label Momentum: BCG and Magellan's growth could lift margins by 200–300 basis points over the next 12 months.

Conclusion: A Bargain in a Value-Driven Retail Landscape

Academy Sports & Outdoors is navigating a challenging environment with discipline, reshaping its supply chain and expanding its footprint to defend margins and market share. While near-term earnings are soft, the stock's valuation—7.1x earnings with 14% yield—offers a margin of safety. Investors willing to look past short-term noise may find a compelling entry point ahead of the holiday season and supply chain normalization.

Recommendation: Consider a gradual build in ASO positions at current levels, with a focus on accumulating ahead of Q4 results. Monitor inventory turnover and private label sales growth as key metrics of progress.

Stay tuned for updates on ASO's fiscal 2025 earnings and supply chain developments.