Academy Sports & Outdoors: Undervalued Retailer Betting on Omnichannel Growth and Margin Resilience

Amid a challenging retail landscape dominated by inflationary pressures and shifting consumer preferences, Academy Sports & Outdoors (ASO) is positioning itself as a contrarian play. The outdoor and sporting goods retailer is leveraging strategic initiatives—such as e-commerce expansion, store growth, and new partnerships—to navigate headwinds while trading at valuation multiples that suggest significant undervaluation relative to its peers. For investors willing to bet on ASO's ability to execute its long-range plan, the stock offers a compelling risk-reward profile.

Strategic Initiatives: Omnichannel Growth and Brand Partnerships

ASO's recent moves underscore its focus on omnichannel retail and customer loyalty. The company's Q1 FY2025 results revealed a 10.2% surge in e-commerce sales, now representing 9% of total merchandise revenue—a clear sign of progress in its digital strategy. This momentum is being amplified by a new partnership with DoorDash for same-day delivery, set to launch ahead of the Back-to-School season. The DoorDash collaboration aims to tap into the growing demand for instant gratification, a critical differentiator in a market where convenience drives spending.

Additionally, ASO's push into private-label products and brand partnerships is bearing fruit. Private labels now account for 23% of sales, up from 20% in 2024, with the recent introduction of Jordan Brand products driving foot traffic. Store expansion remains another pillar of growth: the company opened five new locations in Q1 and plans 20–25 stores in FY2025, extending its footprint into key markets like Pennsylvania and Maryland.

Margin Pressures and Guidance Revisions: Navigating Tariff Headwinds
Despite these positives, ASO is not immune to macroeconomic challenges. Q1 gross profit fell 35.5% year-over-year, with tariffs and supply chain costs squeezing margins. To combat this, management is aggressively reshaping its supply chain. The company aims to reduce reliance on Chinese imports for private-label goods to 6% by year-end (from 9% currently), a move expected to mitigate tariff-related inflation.

Guidance revisions reflect cautious optimism. ASO lowered its FY2025 comparable sales range to -4% to +1% (from -2% to +1%) and trimmed capital expenditures. However, the high-end of sales guidance was maintained at $6.26 billion, suggesting confidence in its strategic levers. Meanwhile, adjusted free cash flow guidance was reduced to $250–320 million, a trade-off for prioritizing shareholder returns ($108 million returned in Q1 alone).

Valuation: A Bargain at Current Levels?

ASO's stock trades at a Price-to-Sales (P/S) ratio of 0.53, far below the sector median of 0.7–1.0. This metric highlights the market's skepticism about near-term profitability, but it also suggests a margin of safety. The EV/EBITDA ratio of 6.33 (vs. an industry median of 10.09) further underscores its undervaluation. Analysts estimate a fair value of $59.62—42% above current levels—reflecting the belief that ASO's margin improvements and omnichannel execution could unlock value.

The stock's trailing P/E of 6.64 and forward P/E of 8.24 also appear compelling, especially relative to its peers. For context, L Brands (LB) trades at 14.5x forward earnings, while Dick's Sporting Goods (DKS) sits at 13.2x. ASO's lower multiples reflect not just current struggles but also its leveraged balance sheet ($482 million in debt). However, its stable cash flow ($285 million in Q1) and focus on free cash flow generation provide a buffer against downside risks.

Catalysts for Growth and Risks Ahead
Investors should watch for three key catalysts in the coming quarters:
1. Back-to-School and Holiday Sales: The DoorDash partnership's impact on e-commerce will be tested during peak seasons.
2. Tariff Mitigation Progress: Reducing China's influence on supply chains should ease margin pressures.
3. Store Expansion Momentum: New locations in high-growth regions could drive top-line growth.

Risks include inventory overhang (up 15% YoY due to pre-tariff stockpiling) and macroeconomic uncertainty, which could further dampen consumer spending. The company's 15% inventory per store increase also raises execution risks if demand weakens.

Investment Thesis
Academy Sports & Outdoors is a contrarian bet on retail resilience. Its low valuation, disciplined capital allocation, and strategic moves in omnichannel and private labels position it to capitalize on a rebound in outdoor and sporting goods demand. While near-term EPS headwinds are real, the stock's cheapness and long-term growth drivers make it a candidate for investors with a 12–18 month horizon.

Final Call: Hold for now, but consider a gradual build. Wait for further evidence of margin stabilization and top-line growth before committing to a larger position. If ASO's Q2 results show sequential improvement in comps and e-commerce traction, the stock could move sharply higher toward analyst targets of $55–$60.

Disclaimer: Past performance does not guarantee future results. Consult with a financial advisor before making investment decisions.