Academy Sports & Outdoors, Inc. (ASO) stock intrinsic value fair value estimate & owner earnings analysis

Academy Sports + Outdoors is a value-priced sporting goods and outdoor retailer founded in 1938 in Katy, Texas. It runs 327 big-box stores in 21 states, more than a third of them in Texas. It sells hunting, fishing and camping gear, team sports and fitness equipment, apparel and footwear, from national brands and its own labels, plus a growing website business (about 12% of sales). It leases all but one store on 15-to-20-year leases. Its results depend on how much its mainly Southern, middle- and lower-income customers spend on discretionary goods, and on what it pays for imported merchandise. What changed since our last estimate. We previously valued the shares at $61 / $88 / $105 with a $55 margin-of-safety price. We now estimate $37 / $63 / $110, with a $40 margin-of-safety price, for three reasons. - This year's improvement was mostly tariff refunds. We previously read the first half of fiscal 2026 (net income up 11%) as a recovery. The quarterly filing shows that second-quarter results included $83.7 million of refunds of tariffs that the Supreme Court struck down, booked as lower merchandise cost. That adds about 5 points to that quarter's gross margin. Academy had already sold a share of that refund claim to an outside party and paid that party $72.2 million, recorded separately as other expense. Management says the refunds are now essentially all received and are being passed on to customers as lower prices. Without them, first-half operating income was about 2% lower than a year ago on sales 4.7% higher. - A tax timing benefit is reversing. Fiscal 2025 cash flow was lifted by roughly $44 million of tax deferred under the new law allowing an immediate write-off of capital spending. That benefit has started to reverse this year, so we no longer count it as recurring. - The bear case no longer assumes the business lasts forever. Previously our bear case held cash flow at its low point indefinitely. A large share of a retailer's costs is fixed: Academy owes about $255 million in rent over the next year and $1.4 billion over its remaining leases, whatever its sales. Several large sporting-goods chains have gone out of business in the last decade: Sports Authority, Gander Mountain and Modell's. A bear case should allow for that kind of slow decline. How we measured earnings. We start from cash generated by operations. From that we remove the swings caused by inventory and payables timing; subtract stock-based pay; subtract all capital spending, because total sales have not grown with the store count; and subtract rent booked but not yet paid on new stores. We measure before interest, so the debt can be subtracted separately, and remove tax timing benefits. On that basis the business produced $471 million in fiscal 2023, $368 million in 2024 and $312 million in 2025. Our estimate for the coming year is about $305 million, from the first-half results excluding the refunds and the second half running at last year's level. Management's earnings guidance implies roughly $320 million. The gap is worth about $3 a share, and we used our own figure. The decline has slowed from 15% last year to roughly flat this year. Supporting that, comparable-store sales have turned slightly positive since the spring (up 1.1% for the first half). The three cases, each valued at a 6% rate: - Bear ($37 a share). Comparable sales fall about 3% a year for three years, close to the 2023-2025 record. Lower-income shopper traffic is already down by high single digits. New stores keep opening on leases already signed, so rent and wages keep rising while sales per store fall. Gross margin slips about 1 point from tariffs and promotions, and operating margin falls from about 8% to 6%. Cash flow drops to about $210 million a year by 2029, then shrinks about 5% a year after 2035. The business is worth about $2.70 billion, owes a net $0.35 billion, and leaves about $2.35 billion for shareholders. - Base ($63 a share). Cash flow holds at about $305 million a year in dollars for ten years. Comparable sales stay roughly flat, in line with this year's results and guidance. New stores roughly offset rising costs, as they have since 2023. After that it erodes about 2% a year: before the pandemic, sales were flat for years (about $4.8 billion in both fiscal 2018 and 2019) while costs rose. The business is worth about $4.33 billion, owes $0.35 billion, and leaves about $3.98 billion. - Bull ($110 a share). Comparable sales run about 2% a year, the top of management's range; sales since Labor Day have been running slightly positive. The store program continues at 20-25 openings a year. It has done that for four years, paid for from its own cash and through three years of falling comparable sales, and stores opened since 2022 are growing sales in the mid-single digits. Operating margin returns to about 9%, the fiscal 2024 level, and cash flow reaches about $400 million by 2029. Growth tapers to 3% a year as the remaining room for new stores in its states narrows, then holds flat. The business is worth about $7.33 billion, owes $0.35 billion, and leaves about $6.98 billion. Debt. In May 2026 Academy refinanced into $500 million of 5.875% senior secured notes due May 2031, with its $1 billion revolving credit line undrawn. We count about $150 million of its $298 million cash as needed to run the stores, leaving net debt of about $352 million, roughly $5.50 a share. The 5.875% rate is close to our 6% rate, so we made no adjustment for cost. Even in the bear case, cash flow covers interest about seven times. Leases are not counted as debt because rent is already charged in the cash flow above, but they are why the bear case falls as steeply as it does. What we did not count. Continuing tax savings from the new expensing rules: they appear to be reversing this year, and we could not reconcile why from the filings. Any further tariff refunds: management says they are finished. A full return of gross margin to its pre-pandemic level of about 29-30% (against about 34-35% now): that would cut cash flow to roughly $110 million a year and the shares toward the low $20s. We left it out of the bear case because gross margin held at 34-35% through three years of falling comparable sales, which suggests the improvement in buying and inventory control is lasting. It remains the largest risk beyond our bear case. What the shares appear to be worth. About $63 a share, with a range of $37 to $110 on about 63.5 million diluted shares. The range is wide, and the bear case sits well below the base. The margin-of-safety price is about $40, near the bear case. From that price, the base case over two to three years implies roughly a 20%-plus annual return including dividends, and the bear case implies a small loss. What would make this wrong. On the upside: comparable sales staying positive for several quarters while new stores lift total profit, not just sales. On the downside: gross margin sliding toward pre-pandemic levels as tariffs and promotions bite, or lower-income customers pulling back further.