IPO Launch: Academy Sports And Outdoors Proposes Terms For $250 Million IPO

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Academy Sports and Outdoors (ASO) aims to raise $250 million in an IPO of its common stock, according to an S-1 registration statement.

Katy, Texas-based Academy was founded in 1938 as a family business to sell outdoors goods and sporting products to consumers in the U.S.

Management is headed by president, CEO and Chairman Ken Hicks, who has been with the firm since May 2017 and was previously president and CEO of Foot Locker and has held senior roles in several consumer goods retailers.

Below is a brief overview video of about canoeing and hiking in N. Carolina:

Source: Academy Sports and Outdoors

ASO currently has 259 stores in 16 contiguous states in the Southern region of the U.S.

Its retail locations range from 40,000 to 130,000 square feet in size, with an average size of 70,000 square feet. Stores are not located in malls.

Notably, the firm's stores have remained open during the Covid-19 pandemic.

Academy also operates three distribution centers and also sells online via its e-commerce platform, which contributed 11% of the company's sales in the first half of 2020.

Academy has received at least $1.1 billion from investors including private equity firm KKR

The company markets its stores via offline and online media as well as local events specific to each area, including supporting local sports teams, programs and civic organizations.

The firm also has invested in its e-commerce capabilities as part of an omnichannel approach.

Selling, G&A expenses as a percentage of total revenue have been dropped as revenues have increased.

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rose to 0.7x in the most recent reporting period.

According to a 2016 market research report by Grand View Research, the global sports equipment marked was an estimated $66 billion in 2016.

The market is expected to grow at a CAGR of 3.5% from 2017 to 2025.

The main drivers for this expected growth are a rising awareness of the health benefits from consistent physical activity and improvements in sports equipment materials and technologies.

Also, below is a chart showing the historical and future forecast growth trajectories of various subcategories in the North American sports equipment market:

academymkt

Major competitive or other industry participants include:

  • Walmart (WMT)
  • Target (TGT)
  • Dick's Sporting Goods (DKS)
  • Camping World (CWH)
  • Bass Pro Shops
  • Big 5 Sporting Goods (Slight overlap)
  • Numerous smaller retailers
  • Online retailers
  • Manufacturer direct sellers

Academy’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increased gross profit, but uneven gross margin
  • Growing operating profit, operating margin and net income
  • Sharply increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

academypl

Source: Company registration statement

As of August 1, 2020, Academy had $884 million in cash and $3.7 billion in total liabilities.

Free cash flow during the twelve months ended August 1, 2020, was $884.5 million.

Academy intends to raise $250 million in gross proceeds from an IPO of 15.625 million shares of its common stock, offered at a midpoint price of $16.00 per share.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $2.0 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 17.73%.

Management says it will use the net proceeds from the IPO as follows:

We intend to use these proceeds for general corporate purposes, which may include the repayment of certain indebtedness.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Credit Suisse, J.P. Morgan, KKR, BofA Securities, Evercore ISI, Guggenheim Securities, UBS Investment Bank, Wells Fargo Securities, Stephens, Capital One Securities, Loop Capital Markets, CastleOak Securities, Blaylock Van, Cabrera Capital Markets, Ramirez & Co and R. Seelaus & Co.

Commentary

Academy is seeking public capital market funding most likely to pay down debt.

The company is private equity firm-owned, so KKR probably received large ‘dividends’ and the company loaded up on debt ($1.4 billion) in the process.

Otherwise, the firm’s operating financials have been impressive in the most recent six-month period, especially since it has been open for business during the Covid-19 pandemic.

However, prior to that, revenue growth was an unimpressive 1.0%, although the company sharply grew its net profits and operating cash flow.

Selling, G&A expenses as a percentage of total revenue have dropped; its Selling, G&A efficiency rate has risen sharply. Again, both of these figures are for the most recent six-month period, which may be an anomaly.

The market opportunity for selling sporting and outdoors goods is expected to grow at a moderate rate of growth, but there are plenty of well capitalized competitors in the space.

Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (16.4%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

As to valuation, compared to Dick’s Sporting Goods, the IPO is priced well below DKS’ figures for major metrics, with only slightly less revenue growth and somewhat lower earnings per share.

The IPO valuation appears reasonable, ASO is weathering the Covid-19 pandemic quite well, is a dominant retailer in the Southern U.S. and is producing enviable profits and cash flow, so my opinion on the IPO is a BUY at up to $16.00 per share.

Expected IPO Pricing Date: October 1, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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