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What happened

Shares of sporting goods and outdoor activities retailer Academy Sports & Outdoors (ASO -3.15%) are soaring 14.3% higher compared to where they closed last Friday, according to data from S&P Global Market Intelligence, after the company reported stronger-than-expected third-quarter earnings.

Although the top- and bottom-line numbers fell year over year, Academy said it did not feel the pressure to be as promotional with its outdoor gear as some of its rivals. The retailer has improved its inventory position and consumer response to brands like Nike, Columbia Sportswear, and Carhartt was strong.

Person holding a catfish.

Image source: Getty Images.

So what

The triple threat of inflation, rising interest rates, and elevated gas prices has created a more cautious consumer and many retailers are feeling the need to be extra promotional to drive sales. While that might work, it will come at the cost of lower profits and margins.

Academy Sports & Outdoors saw revenue fall 6.2% to $1.5 billion as comparable-store sales tumbled 7.2% in the quarter. It resulted in earnings of $138 million, or $1.69 per share, a 3% decline from the year-ago period. 

Even so, it was in line with management’s expectations and handily exceeded Wall Street’s forecast of $1.59 per share in earnings. It also raised its full-year earnings guidance above forecasts. Revenue, though, fell short of analyst estimates of $155 million.

Although Academy’s merchandise inventories were up more than 12% to $1.5 billion versus last year, much of it was based on higher prices. In comparison to 2019, inventory dollars were up 12.3%, but actual units on hand were down 10%. 

Sales were also 30% higher compared to 2019, which suggests Academy’s business has reset from the pandemic at a much higher baseline, a hopeful development for future growth.

Now what

Academy Sports & Outdoors has done really well over the course of 2022 and its stock reflects its business gains, up 29% year to date. In fact, since its initial public offering in October 2020, the sporting goods and outdoor activities retailer has more than quadrupled in value, helped in large part by a robust e-commerce business, which saw sales grow by double-digit rates for the fifth consecutive quarter.

Despite its phenomenal performance (the S&P 500 is up only 18% in that same time period), shares trade at just 7 times both trailing earnings and next year’s estimates, going for a discounted 10 times the free cash flow the retailer produces.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.