Academy Sports + Outdoors

This Power Player Has Some Serious Financial Challenges Ahead.
Price Is Right: On display at an Academy location in San Antonio — T-shirt prices that are hard to beat.

Katy, TX

Our quick scan of Academy’s digital presence: Website focuses on deals. In mid-March Academy’s home page was promoting 25% off fishing and buy one, get one 50% off crew t-shirts. Buy online, pickup in store not featured prominently on the site. On social media, the retailer interacts with customers and promotes events and athletes. Products are promoted, but social media is not used as strictly a selling tool.  

Instagram: 120K
Facebook: 3.5M
Twitter: 312K

We visited two Academy stores in San Antonio, TX.
Top takeaways: Big boating and fishing departments. Store signage in both English and Spanish. Merch is a mix of name brands such as Columbia, Crocs, Nike, Carhartt, Adidas, Under Armour and house brands, largely Magellan ($24.99 jeans) and BCG. Pricing is sharp. Signage promises 5-percent rebate if you find it cheaper elsewhere. Closeout footwear is on the back wall by the camping and barbecue section. We estimate 40 percent of store’s overall merch mix is footwear. Footwear includes everything from kids’ cowboy boots and adult waders to flip-flops. Browning apparel, Stance and Thorlo sock displays adjacent to the footwear department. Large baseball section is dominated by Rawlings, Under Armour and Nike. There is also a sport bra merchandise display from Under Armour and a large Adidas apparel department.

The Rundown: A Texas original with 253 doors across 16 states, mainly Southeast and the majority in the Lone Star State, the chain generated nearly $4.9 billion in revenues for the 12 months ended Nov. 3, 2018, according to Moody’s Investors Service. Employs more than 21,000. Oshman’s is long gone as a state retail rival, but Dick’s Sporting Goods has entered the region and competes with Academy by offering up a different look that focuses more on showcasing brands and team sports for families and less on some Academy offerings such as lower-margin hunting, fishing.

Background: Started as a tire shop in San Antonio 81 years ago before later evolving into a military surplus store. The current focus on sporting goods and the outdoor life was adopted in the 1980s. The Arthur Gochman Family-controlled Academy until August 2011 when private equity firm Kohlberg, Kravis Roberts acquired the then 133-doors across 11 states business. Under KKR’s ownership over the last seven-and-a-half years, Academy’s topline has grown more than 75 percent.

Major 2018 Developments: Former Foot Locker senior executive Ken Hicks was named Academy’s chairman, president and CEO, the retailer’s third top senior executive following Rodney Faldyn and J.K. Symancek in 2011 and 2015, respectively. A late January credit opinion piece from Moody’s cited Academy’s solid position in its core markets, driven by value price points and a broad assortment, but also alluded to the chain’s weak operating performance, regional concentration, intense competition and high operating leverage.

In early February, Academy hired Steven P. Lawrence, the former president and CEO of the Francesca’s retail chain and a prior 12-year J.C. Penney senior executive, as EVP and Chief Merchandising Officer. Of Lawrence’s hiring, Hicks said, “In his new role, Steve will lead the company in our efforts to be the power merchandiser of sports and outdoors. His depth of retail experience, focus on sales and execution, and overall leadership style will serve us well as we execute our new long range plan. ”

It’s not immediately clear if Lawrence will be groomed for Hicks’ role or will drastically alter the merchandise assortment within the chain, which has been negatively impacted, for one, by the ongoing weak sales of firearms.

Omnichannel Challenges: Hicks said Academy’s website along with building customer loyalty were two of his top priorities when he hired last spring. Moody’s remains critical of the banner’s ecommerce penetration, and we noticed no BOPIS (Buy Online, Pick Up In Store) counter/area in either of the locations we visited in San Antonio, but the capability will be addressed this year. The investors service says Academy has less than 5 percent ecommerce penetration versus 12 percent for Dick’s Sporting Goods.

Sponsorship Deals: High-profile marketing partnerships for Academy include being the official sporting goods retailer of the Southeastern Conference, as well as sponsoring the Bassmaster High School Fishing Series and #DeerWeek, a cross-platform event featuring televised deer-specific content on Outdoor Channel and Sportsman Channel. Additionally, in 2018, Academy was  the title sponsor of a college football bowl game — The Academy Sports + Outdoors Texas Bowl at NRG Stadium in Houston.

A Lawsuit: In February, a Texas judge ruled that victims and families of the Sutherland Springs church massacre could sue Academy, where the shooter purchased his gun and ammunition. According to a Dallas Morning News report, the lawsuit could “test the limits of state and federal gun laws and may answer some long-standing, hotly contested legal questions, like whether gun dealers must decline to sell certain items based on the buyer’s place of residence and whether shooting victims can file civil suits, and get monetary damages, from these dealers in certain circumstances.” At the heart of the case is whether the federal definition of a firearm includes the magazine with which it is sold, and if a Colorado law banning the sale of high-capacity magazines applies to Coloradans who buy guns in Texas.

Defying the Odds/What’s Next? After a decade of growing its store base 9 percent annually, Academy has scaled back to focus on profitability. About 70 percent of Academy’s current retail footprint is in sports participation/population-rich Texas. Clearly, key vendors value Academy’s regional stronghold, even if some are dismayed by the banner’s value-pricing and focus on lower-margin categories such as hunting and fishing. An estimated 52 percent of Academy’s merchandise focus is on lower-margin hardgoods compared to 48 percent (21 percent for footwear, 27 percent for apparel) for soft goods. Moody’s, which projects earnings declines for Academy, until at least next January but potentially through mid-2020, suggests Academy’s regional concentration exposes the retailer to greater volatility and region-specific event risk than national retailers.

Debt is an issue for the chain. Given its 6.6x debt-to-EBITDA ration for the 12 months ended Nov. 3, 2018, down from a high of 7.0x in Jan. 2017, it’s doubtful Academy will possess the capital or have the desire to expand beyond its core markets in the near-term. KKR pulled out $886 million in debt-funded dividends from Academy between Dec. 2012 and July 2015. Also, it should be noted here that Academy, according to a Moody’s report on retail defaults published in February, is one of four Ca credited-retailers (J.Crew, Neiman Marcus Group and Petsmart are the others) that represent nearly 71 percent of the $22.8 billion in outstanding distressed retail debt. Academy’s $1.8 million in debt trails only that of Neiman Marcus ($4.6 billion) and Petsmart ($8.1 billion).

Clearly, KKR and the Academy senior management tandem of Hicks and Lawrence will have a significant say in Academy’s direction in 2019 and beyond. Unless, of course, KKR is looking for an exit strategy. Moody’s writes, “Academy faces a challenging turnaround with significant execution risk, given the need to differentiate its value proposition amid intense competition in the sporting goods sector.”