Academy Sports and Outdoors Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2023

There are 12 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Academy Sports Plus Outdoors Second Quarter Fiscal 2023 Results Conference Call. At this time, this call is being recorded and all participants are in a listen only mode. Following the prepared remarks, there will be a brief question and answer session. Questions will be limited to analysts and investors. Please limit yourself to one question and one follow-up.

Operator

I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors' Q2 2023 financial results call. Participating on the call are Steve Lawrence, Chief Executive Officer Michael Mulliken, President and Carl Ford, Chief Financial Officer. As a reminder, statements in today's earnings release and the comments made by management during this call may be considered forward looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings.

Speaker 1

The company undertakes no obligation to revise any forward looking statements. Today's remarks also refer to certain non GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors. Academy.com. I will now turn the call over to Steve Lawrence for his remarks.

Speaker 1

Steve?

Speaker 2

Thank you, Matt. Good morning to all and thank you for joining us for our Q2 earnings call. It's been 3 months since Michael and I stepped into our new roles. Over the past 90 days, we've worked hard to improve our sales trend, align our expenses and current run rate of the business and to backfill some key positions on our leadership team. I'm excited that we're able to fill all of our key roles with internal promotions, which speaks to the work the team has done Over the past couple of years, I'm building a strong internal bench and focusing on succession planning.

Speaker 2

To highlight that, I'm thrilled that Carl Ford, our new CFO, with one of these promotions and he will be joining us on today's earnings call. Carl has been with Academy for 4.5 years and during that time he's played an integral role Helping the company achieve several milestones, including navigating the pandemic, achieving all the objectives in our first long range strategy, Supporting our IPO and helping shape and create our new long range plan. Turning to our Q2 results. For the quarter, we achieved net sales of $1,58,000,000 for a negative 7.5 comp. While we are not happy with running a decrease, these results were in line with our Q1 trend and are aligned with guidance we shared during our last call.

Speaker 2

What was encouraging was that unlike Q1, we saw the business decelerate as we move through the quarter. In Q2, we saw steady improvements in both sales and margin rates with each month getting successively better. Our belief is that we can continue to build on this momentum as we progress Through Q3 and into the holiday selling season in Q4. Looking at sales by division, our best performing business during the quarter was Sports and Recreation, Which ran a 2.7% decrease. Sporting goods equipment, outdoor cooking and outdoor furniture all performed well during the quarter.

Speaker 2

However, the fitness Equipment and bike business continue to be tough. Apparel was the 2nd best performing division with a negative 3.7% decrease. We continue to see solid performance out of the men's and youth businesses as well as our licensed apparel area. Nike also continues to Well for us along with our Private Label business. The women's business has remained more challenging for us.

Speaker 2

As we move forward, we're very focused on getting our women's active business back on track. Footwear during Q2 ran a 4.5% decrease. We continue to see a strength in casual and work footwear driven by national brands such as Hey Dude, on with our private work boot and apparel brand, Brazos. The cleated business was also strong as we continue to be in a much better inventory position versus where we were a year ago. Our outdoor trend for Q2 was a 12.2% decrease, which was an improvement versus Q1's down 15%, but it's still well below our expectations.

Speaker 2

Better performing categories for the quarter were Fishing and Camping. Hunting remained the most challenged business with continued softness in both the ammunition and firearms businesses. Both of these categories continue to perform well above 2019 levels, but continue to decline from the peaks that we saw during the last couple of years. As we move forward, we expect to see the declines in these categories moderate as we start to lap softer comparisons from last year. When you look across the various businesses, many of the key themes that we called out in our Q1 call carry forward into the Q2.

Speaker 2

Customers continue to gravitate towards value on one end of our assortment, demonstrated by an increase in the penetration of private brand sales. At the same time, customers are also focusing on new and innovative products such as bog bags or OOFOS recovery slides, which in many cases were not value items. Bigger ticket items with long replacement cycles continue to be challenged, along with many of the surge categories that benefited from increased demand during the pandemic. We've also seen a consistent pattern of the customer aggregating their purchases during the natural shopping time period such as Mother's Day, Memorial Day, Father's Day and the 4th July. We are continually adjusting our assortment and future buys along with our promotional efforts to align with these trends.

Speaker 2

Customers will continue to see us lean into our position as the value leader in our space by expanding our everyday value offerings, while also leveraging Strong promotional efforts during the key shopping moments on the calendar. In regards to new brands and ideas, I'd like to highlight a couple of new initiatives launching in Q3 will help us take advantage of the customers' appetite for newness. This past week, we announced the new partnership with L. L. Bean become one of their key retail partners.

Speaker 2

We believe their focus on outdoor apparel and footwear with a northern sensibility is the perfect complement to our Magellan Outdoors and Columbia businesses, which lean more towards fishing in southern climates. Another new initiative is our partnership with Escalade and American Cornhole League to become the exclusive seller of ACL Boards and Bags for this fall. With the strong market share we have in all things tailgating, this partnership is a perfect fit for us. Later in Q3, we'll kick off a new partnership with Fanatics to help Our online offering in license team apparel. This business has been a strong suit for us over the years, but our offering has traditionally been anchored in the leads and teams that live within our geographic footprint.

Speaker 2

Our new relationship will allow us to dramatically grow our assortment and to service a greatly expanded number of categories, teams and leagues moving forward. Shifting to profitability, we remain focused on proactively managing our business to deliver the best possible results for our shareholders this year, while ensuring we remain on track to achieving our long term initiatives and goals. Our gross margin for the quarter came in at 35.6%, which is a 30 basis point improvement over last year, was 180 basis point increase over our Q1 rate. Beneath the surface, our merchandise margins stabilized at 21 basis points versus last year, which was a market improvement over our Q1 run rate of down 110 basis points versus 2022. Carl will give you more color around our financial performance shortly.

Speaker 2

Turning to inventory. At the end of the quarter, our inventory balance was $1,300,000,000 which was flat to last year in terms of dollars and down 2% in units in total. On a per store basis, units declined 5% compared to Q2 of last year. The team has exhibited a very disciplined inventory management approach through the past couple of years and we plan to continue to lean into the strength as we move forward. We are confident that our current inventory position is at the right level to support our business and the content is fresh and forward facing, which should position us

Speaker 1

well for the fall and holiday selling seasons. As

Speaker 2

we discussed in June on our Q1 call, we're taking aggressive action and proactively addressing the trends that we've seen in the business this year in order to help improve sales and profitability as we move through the remainder of the year. I want to give a quick reminder of the key actions we're taking to drive the business. First, we'll continue to highlight and focus on our position as a value leader in the space across all customer touch points. 2nd, we're introducing new offerings in our assortment such as L. L.

Speaker 2

Bean, Fanatics and American Cornhole League to capitalize and customers desire for newness. We're also improving our advertising effectiveness with better targeted marketing that will be facilitated by our new customer data platform. We're continually enhancing our omni channel functionality and features to improve the customer experience. And lastly, we also expect a sales boost from the new stores we opened up in 2022 on 11 to 12 new stores opening this fall.

Speaker 1

Now, I'd

Speaker 2

like to turn the call over to our new CFO to walk you through the financials. Carl?

Speaker 3

Thank you, Steve. Good morning, everyone. It is an honor to be selected to follow Michael as the Chief Financial Officer of Academy Sports and Outdoors. I am excited about the opportunity to lead our finance organization into what I believe is a very bright future. I have been with the company since 2019 And I am proud of the work we have done to strengthen our balance sheet and improve our operating model.

Speaker 3

Academy is not the same company as it was then and I am excited about our long Net sales were $1,580,000,000 a 6.2% decline compared to the Q2 of 2022 with comparable sales of negative 7.5%. Sales were impacted by an 8.3% decline in transactions, partially offset by a 0.8% increase in ticket size. During the quarter, customers were more active during holiday periods And we saw an improvement in the comp during each month of the quarter. Gross margin rate was 35.6%, an increase of 180 basis points of lower freight cost, partially offset by a 21 basis point decline in merchandise margins and 37 basis points of higher shrink. Our merchandise margins improved sequentially as we benefited from our ongoing efforts to manage inventory Through system capabilities, price optimization and localization, we saw a 42 basis point sequential improvement in shrink, driven by actions taken to detect and deter losses.

Speaker 3

We continue to be able to operate substantially higher gross margin rates even in a challenging environment. During the quarter, SG and A expenses were 352 point $5,000,000 or 22.3 percent of net sales, an increase of 2 20 basis points compared to the Q2 of 2022. This deleverage is primarily driven by investments we are making in our long range plan. We are investing in new stores, Omnichannel, IT and digital marketing projects that support our growth initiatives. Approximately 80% This quarter's SG and A dollar increase is related to growth investments.

Speaker 3

When compared to Q1 of this year, SG and A expenses were 230 basis points lower as a percentage of sales. As we discussed during our Q1 call, we focused on aligning our With our revised sales guidance and the sequential improvement of our expenses as a percentage of sales reflects the hard work done across the organization to right size our spending. Examples of areas of the business we have focused on right sizing include Flexing store and distribution labor hours based on revised sales and inventory receipt expectations. Targeted distribution scheduling during non peak times and scaling back on projects that are not aligned with long term growth strategies or current year sales growth. Net income was $157,100,000 9.9 percent of sales, a 130 basis point decrease from the Q2 of 2022, resulting in GAAP diluted earnings per share of $2.01 Adjusted diluted earnings per share were $2.09 Moving to the balance sheet.

Speaker 3

At the end of the quarter, we had 311,000,000 borrowings on our $1,000,000,000 credit facility. Academy generated $191,000,000 in net Cash from operating activities during the Q2. This is a 19% increase compared to the Q2 of last year. We deployed this cash to invest in our growth initiatives and to repurchase approximately 2,000,000 shares for $107,300,000 and payout $6,900,000 in dividends. The Board has approved a dividend of $0.09 per share payable on October 11, 2023 to stockholders of record as of September 13, 2023.

Speaker 3

Capital expenditures were $69,300,000 For the full year, we still expect to spend between $200,000,000 $250,000,000 With that, I will turn the call over to Michael to provide an update on some of our key initiatives and our full year guidance. Michael? Thanks, Carl. Good morning, everyone. I want to say congratulations to Carl on his promotion to Chief Financial Officer.

Speaker 3

He has been a core member of Academy's finance organization for the last several years. During that time, Carl has been a key driver of our financial performance. I know that Carl and his team will continue to be excellent financial stewards of the business as we move forward with our long range plan. I'd like to take some time to update everyone on the progress of a few key initiatives that will drive the long range growth plan we described during our Investor Day this past April. As a reminder, the key components of the growth plan are: 1st, To open new stores to expand the store base by 50% in existing and new markets.

Speaker 3

2nd, to build a more powerful omnichannel business. 3rd, to drive our existing business by improving service and productivity in our stores, strengthening our merchandising and attracting and engaging customers through communication, content and experiences. 4th, to leverage and scale our supply chain And to achieve these objectives by building the best team in retail. I'll start with our new store initiative, which we expect will be the largest driver of sales and profit growth over the next few years. As a reminder, All of our mature stores are profitable and collectively have sector leading store productivity metrics.

Speaker 3

We opened 9 stores in 2022 And even though they opened in a challenging economic environment, they are as a group meeting expectations and already positively contributing to EBITDA. As I have said in the past, 2022 was a test and learn year and we are in the very early innings of this initiative. While our current new store pro form a assumes approximately $18,000,000 of sales in year 1, inclusive of omni channel sales, We have learned that new market stores need time to build brand awareness and may have longer sales maturity ramps, while stores in existing markets generally come out of the gate faster. Our sample size is limited and the current economic environment is challenging, but we continue to learn and refine our And we are pleased with the learnings that we have implemented. Given the positive preliminary results of the stores we opened in 2022, we are confident that we can take our unique Academy brand, Concept and business model to many new markets with great success.

Speaker 3

In the Q2, we opened 1 store in Peoria, Illinois, which was our 2nd store opening this year. We have 6 scheduled openings in Q3, including our 1st store in the Indianapolis, Indiana area, which opened last Friday. We are on track to open another 5 to 6 stores in Q4. Steve and Karl mentioned the challenging economic environment, but I want to emphasize that in So we have a large runway for growth in front of us. In addition, with other retailers scaling back their outdoor product offerings, there are many markets that are favorable for market share gains.

Speaker 3

Our past experience has confirmed that our market research and due diligence identifies locations where stores will be successful for the long term. We launched our new customer data platform in July to drive further sales growth. This valuable tool will allow us to aggregate customer data from multiple sources within our organization, creating a comprehensive view of our customers. With this new perspective, We will have the ability to create and develop a robust customer portfolio segmented by cohorts, shopping behaviors, outdoor interests, sports fandom and many other filters. We can use this refined customer data to proactively design We look forward to updating you about this exciting new capability as we develop and refine it further.

Speaker 3

Finally, a brief update on our supply chain initiatives. As we discussed at our Investor Day in April, part of our long range plan is to generate 100 basis points of adjusted EBIT margin improvement from our supply chain. We intend to do this by increasing our unit productivity, Leveraging existing distribution capacity, lowering our e commerce fulfillment costs, decreasing lead times and leveraging transportation costs. A major component of achieving this goal is the implementation of a new warehouse management system in partnership with Manhattan. We are on track to convert 1 of our distribution centers to the new system in 2024.

Speaker 3

We are also taking other steps to improve supply chain logistics Productivity by implementing consistent processes and procedures, increasing cross docking and multi store deliveries and investing in technology to improve visibility of product flow. I expect us to achieve our EBIT margin contribution goal by the end of the long range plan. To sum it all up, based on our results, current trends and back half expectations, we are reiterating our full year sales and net income guidance, while updating our earnings per share forecast to reflect the share repurchase activity in the Q2. Net sales are still expected to range From $6,170,000,000 to $6,360,000,000 with comparable sales ranging from negative 7.5 percent to negative 4.5 percent Gross margin rate between 34% 34.4 percent GAAP income before taxes is still expected to range from $675,000,000 to $750,000,000 and GAAP net income between $520,000,000 $575,000,000 GAAP diluted earnings per share are now expected to range from $6.65 per share to $7.35 per share. Adjusted diluted earnings per share are expected to range from $6.95 per share to $7.65 per share.

Speaker 3

The earnings per share estimates are calculated on a share count of 78,100,000 diluted weighted average shares outstanding for the full year and do not include any potential future repurchase activity. Finally, we still expect to generate $400,000,000 to $450,000,000 of adjusted free cash flow. With that, I will now turn the call back over to Steve for his closing remarks.

Speaker 2

Thanks, Michael. As we move forward, I think it's important to note that despite some short term headwinds, Academy is a much stronger company than we were before the pandemic. Our sales and gross margin rate remained significantly above 2019 levels, driven by the operational improvements made over the past few years that have structurally enhanced our earnings power. We have a strong and flexible balance sheet, a very productive four wheel operating model that is scalable and transportable, a solid team with a track record of executing and delivering results and high customer affinity within our core markets. Longer term, we believe we have a compelling growth strategy with multiple ways to capture market share And drive growth through new store expansion into adjacent new and existing markets.

Speaker 2

We have an improving dotcom business with significant upside. We have the ability to continue to refine and drive more productivity out of our existing store base. Most importantly of all, this growth can be funded from the free cash flow generated by the business, We're also returning value to our shareholders through dividends, strategic share repurchases. In closing, I'd like to thank all of the Academy team members for their dedication and hard work and helping deliver an outstanding experience to our customers. Now, let's go have fun out there.

Speaker 2

We'll now open the call up for your questions.

Operator

Thank you. The company will now open the call up for your questions. We will pause for a moment to wait for the queue to fill. Thank you. Our first question comes from the line of Daniel Imbro with Stephens.

Operator

Please proceed with your question.

Speaker 4

Yes. Hey, good morning guys. Thanks for taking our questions.

Speaker 1

Good morning, Dave.

Speaker 3

I want to start

Speaker 4

Just broadly on the consumer trends that you're seeing, we've talked in the past about Academy benefiting from a more discerning customer, maybe looking for value. Do Do you see any signs of that this quarter, whether it was new customers shopping the store, any trade down within the store? And then also one within the quarters kind of improvement, Was any of that attributable to the new marketing plan? Or is that really going to

Speaker 2

be on the comp for

Speaker 4

the back half of the year when you think about the sales cadence?

Speaker 2

Yes. This is Steve. I'll start with the first part. I'm sure Michael will jump in. We definitely see the customer under stress and under pressure.

Speaker 2

We see that reflected a couple of different ways. We talked about customer gravitating towards value. We see that in terms of growth in private label, which represents kind of the value end of our assortment. We see them also taking bigger advantage of deals or clearance when we sell that. So there definitely is a move towards customer Seeking out value.

Speaker 2

On the flip side, we also see them seeking out newness, right? We see them going after things that are new and innovative to Market like we talked about BOG Bags or OOFO Slides. That's why we're excited about some of the new brands that we're launching this fall between L. L. Bean and Fanatics and ACL.

Speaker 2

So that's definitely a trend we've seen. We've also seen the customer shop during kind of the key appointment shopping time periods And aggregate the purchases there. And then we've also seen them kind of when we get past those key shopping time periods pull back a little bit. And that's really how we And our marketing, our promotions throughout Q2 and all the way through the remainder of the year. With regards to the targeted marketing from the CDP, That was really put in place really late in the quarter.

Speaker 2

So we really didn't get any benefit off of that. We think we'll start seeing some benefit off that in the back half of the year.

Speaker 3

Yes. Daniel, on the CDP, we've been flying a propeller plane in a dogfight holding our own against fighter jets for the past 3 or 4 years. And now we have our own fighter jet and we're learning to fly it. Most of that benefit will start to come next year. We should A little bit this year, but it will not be a meaningful driver of comp this year.

Speaker 3

The big benefit will come in the out years.

Speaker 4

Super, super helpful. And then maybe a follow-up just on gross margins. Obviously, there's discussion from peers or maybe higher promotions. Your margins held in well. I'm curious, when you look at your competitive pricing analyses, are the peers coming down to where Academy is priced?

Speaker 4

Are they actually Undercut you on certain items, is there any granularity on that or changing promotional backdrop? And then tied into that, unit shrink improved, I think, a

Speaker 3

little bit quarter over quarter. What was

Speaker 4

the main driver there? Anything worth calling out there for the back half? Thanks.

Speaker 2

Yes. I'll start and answer the question on promotions, then we'll have Karl jump in on Tranc. Definitely, it's more promotional out there this year than it was a year ago at this time. We talked about in the past call where we really started Seeing promotions creep into the marketplace in the back half of last year and then carry forward into the first half of this year. That being said, as I just said earlier, we're definitely seeing Those promotions most effective during those key shopping moments, we're certainly leaning into that as we move forward.

Speaker 2

That's we did have a 20 basis point erosion in merch margin that came from some additional promotions. But probably the best thing that we've done Help manage through that is our inventory management. When you think about all the strong disciplines we put in place in terms of our planning allocation, Assortment planning, all those things have really helped us control inventories and control margins and not see the same erosion that maybe other people have seen.

Speaker 3

Let me I'll take shrink. It's a real issue. In spite of the headwinds we faced from higher shrink, as Steve said, we were able to meaningfully Expand our gross margin rate compared to last year. We sequentially improved our gross margin from last quarter. We've taken a lot of actions, Many of which are confidential and frankly clandestine in nature and we can't talk about many of them, but they're working.

Speaker 3

One thing that we do from a process We count our stores regularly throughout the year and we take our high strength store inventories earlier in the year that gives us some chance to adjust them and to take some actions and perhaps count them again. So we have visibility into trends throughout the year. It's a difficult environment. I will tell you that good leaders adjust and that's what we've done. I do have to take the time to thank all the Academy team members in our stores, the folks in the blue shirts that have been so attentive in helping us manage these issues.

Speaker 3

They want to do what they do best and that's help customers, have fun. And the best way to prevent shrink is to provide great customer service in the stores. We can do that and provide more labor and more customer service because our stores are significantly more productive than our peers. So we can have people in the stores helping customers. Our LP department has worked very hard with law enforcement.

Speaker 3

We've got great partnerships with law enforcement and we've been able to frankly Help intervene and take down some organized crime rings that have helped shrink. So, last thing I'll mention here on this issue, Because it is a big issue and we've heard a lot of people talking about it. If you reflect back on many challenges facing retailers over the past few years, we'll start with the COVID pandemic. During the peak of the COVID crisis, I believe we managed that better than anybody else. We got our stores open more quickly.

Speaker 3

We were able to help the community get back on their feet more quickly. If you look at ballooning freight costs over the past few years, we've managed that better than most other folks in the space. If you look at back to a year ago when many retailers were overbought and didn't manage their inventory well, we did that better than others. We're going to do the same with shrink. We have a great team.

Speaker 3

We're nimble and we're going to manage it. We're not going to use it as an excuse to not hit our gross margin goals.

Operator

Our next question comes from the line of Greg Malek with Evercore. Please proceed with your question.

Speaker 5

Hi, thanks. First, I wanted to just look at the comp. Were transaction counts getting better sequentially? And did that drive the negative 7.5 comp or was it more average ticket?

Speaker 2

So for the quarter, transactions, which is also proxy for us for traffic was down high single digits, AUR up slightly, units per Transaction down slightly. We did talk about how the comps successfully got better as the quarter progressed. You can infer traffic improved Totally as we got less negative as we got through the quarter.

Speaker 5

And it sounds like given the I guess the midpoint of the guide now would have you to sort of a negative 4.5%, 5% comp in the back half, that's is that where we're running now?

Speaker 2

So we obviously don't give inter quarter guidance, But the performance of the business continues to be within the guidance range that we've shared.

Speaker 5

Got it. And then I want to follow-up on this. Thanks for the answer on shrink. That was good and pretty holistic. Freight benefits or supply chain was a benefit That helped grow gross margin or hold stabilize it.

Speaker 5

Could you quantify that and maybe sort of give us an idea as to how you're thinking about that into the back half?

Speaker 3

Yes. Greg, this is Carl. So freight was a tailwind of 88 basis points during the quarter, quarter over quarter improvement. So up 30 basis points in gross margin, the puts and takes on that were freight was a positive 88, Merch was a negative 21%, shrink was a negative 37%. And we continue within the guidance To see that as a tailwind throughout fall.

Speaker 5

Got it. Thanks and good luck.

Speaker 2

Thanks.

Operator

Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Speaker 6

Thanks. Good morning, guys. Can you talk about what you're seeing in some of the key COVID winning categories, whether it's hunt or exercise equipment, bike and so forth. Are you seeing the bottom form in the business Such that we can start to look forward to improvement in comp, but then ultimately positive as you think about the out year? Or are those Like basically relative to 2019, are things stabilizing and we can start Think about the business more seasonally?

Speaker 2

Yes. On a TYLY basis, when you look at just the comparison of those bigger business, big ticket This is some of the surge categories you talked about. There's still challenge, right? I mean our fitness business continues to be fitness equipment in particular The hunt business we talked about between firearms and ammo continues to be challenged. As we get through this year, the comps get a little less Daunting the further we get through the year.

Speaker 2

So we're counting on some of that improvement as we move through the year. But going back to the later part of your When you look at these businesses versus 2019, they're still all really, really healthy. When you look at like the hunt business, it's Still up in the mid-40s versus 2019 and you take a category beneath the surface or like ammo, it's still up in like 96% versus Where it was in 2019. So it's certainly falling back a little bit from the activity we've seen in the last couple of years, but still maintaining a really healthy spread And once we kind of see this business start to stabilize and I think it is going to stabilize at a higher level than where it was in 2019, I think that's when we'll start being able to move more towards growth from a total company perspective.

Speaker 6

So I guess just to Focusing on that. So in these categories or broadly in the business, do you feel more confident Today than a quarter ago that we are getting to that point of, okay, we're seeing a bottom form and you have better visibility as you look forward?

Speaker 2

They're becoming more predictable for us. We certainly can are getting a lot closer to the pin in terms of forecasting those businesses. They're still running negative though. I mean, I don't want to not mislead you on that. They're running negative.

Speaker 2

But as we get through the year, These headwinds start to diminish a little bit. That's really we're counting on as part of our guidance.

Speaker 3

Chris, one other thing. I think if we're looking out long term And again, we're focused on the long term. We're more differentiated in this space than we were a few years ago. I think there's fewer competitors and some of the largest competitors have really Backed away from this space. So short term, definitely, as Steve said, we're still running down in some of those categories.

Speaker 3

It is stabilizing. I think long term, we've got a great opportunity to pick up meaningful share and new customers as we really support and lean into this category.

Speaker 2

Yes. A lot of the categories that you're talking about have major cross shop across the company. And ultimately, even though we're fighting through some Short term shop on this. We believe the diversified assortment, the complementary nature of the businesses and how they cross shop It is the right place for us to be. We're a sports and outdoor retailer and candidly as more people pull back from the outdoor space, we become Maybe the only player in this space with a large footprint.

Speaker 2

Got it.

Speaker 6

And then my follow-up question is, Any help here on the back half in terms of cadence from a top line and gross margin perspective as we think about the models? Thanks very much.

Speaker 3

Yes. No, I think our from a guidance Perspective, we're comfortable with the annual guidance of down 7.5 to down 4.5. The Flexibility or the variability as you think about that is on consumer health. We're going to continue to lean into value. We're going to continue to lean Newness.

Speaker 3

It's completely related to consumer health. And on the margin guide from 34.4 down to 34.0, we feel comfortable with that. We've delivered that consistently over the past 2 years. It's up 500 basis points since pre COVID. And all of those business disciplines that Steve kind of walked through of what we this leadership team Started doing in 2019 really coming back to merchandise planning and allocation, the systems enhancements, Planning and buy execution, open to buy discipline, having that markdown lifecycle management, we're doing those consistently.

Speaker 3

That's what we're doing day in and day out is managing the business. And so we feel comfortable with the margin guide and we've delivered it for the past 2 years.

Speaker 6

Thank you.

Operator

Our next Question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question. Hi. This is Emily Gauche on for Kate. We wondered how you were thinking about the overall health of the marketplace currently and into the second half of the year.

Operator

It sounds like there are some areas where there's

Speaker 2

Yes. I mean certainly, We've talked about we're very comfortable with where our inventory position is. We also know that competition sometimes has some issues out there and those That being said, some of the headwinds you're talking about, there's definitely increased promotions out there, The heavy inventory as you mentioned and customers are under pressure, right? There's the credit card debt is higher than it's been. Inflation is real.

Speaker 2

But When you think about some of the other tailwinds we have, we've got this everyday value positioning that is kind of core and fundamental to who we are. And I think customers will continue to gravitate towards value. We've got strong offerings of new brands and a really strong private label business that customers resonate with. So we've got some new things coming in, combination of all those things. We feel like the guidance we gave is thoughtful and Encompasses both an upside and a downside scenario.

Speaker 2

And we're just going to read the situation and react as we go, much like we've done all year.

Speaker 3

Yes. And going back to a year ago, there was, I think, a number of retailers weren't happy with their inventory positions at that time, and we certainly More than we're able to hold our own based on the strength of our inventory management. Reiterating what Steve said, we're in an environment where we certainly believe that value will be more important In the future than it is today and then it was a year ago and we think we're the best positioned to benefit from that. At the risk of tripling up, our units are down 5% on a per store basis. We feel like we've really leaned into this inventory management thing and We've been doing it consistently.

Operator

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

Speaker 7

Hi, this is Alex Perry on for Robbie. Just first, could you give us some more color on how back to school is shaping up? Has the July momentum that you've Dean sort of continued. And then I think the high end implies a same store acceleration in the back half. Is that based on the trends And then what are sort of the buckets that would drive an acceleration in the back half?

Speaker 7

And then also I think you're lapping in Astros win as well. Can you just remind us how much of a headwind that could be to same store sales if that's not repeated? Thanks.

Speaker 2

Well, I wrapped up the next question. We'll do our best to tackle it. As we said before, we don't give inter quarter guidance. That being said, Our back to school is earlier than a lot of other people. So our back to school really starts kind of the back half of July.

Speaker 2

We already told you July was the best performing quarter for or best month of the quarter for us. A lot of those trends that we saw happen at the end of July carried into August in terms of strength in key back to school areas like youth apparel, Footwear, backpacks, hydration, all those things were really strong for back to school for us. That being said, we saw a lot of the quarter ahead of us. We talked about how we see the customer shop During those key appointment time periods, but once you get back to school, right now we have kind of a kickoff of tailgating and hunting season that we go into a little bit of a lull in the later part of the quarter Until we get to the holiday shopping time period. So we certainly got that modeled into our forecast.

Speaker 2

In terms of the Astros, we are up against an Astros win. I hope you're not counting the Astros out yet. We're tied for 1st place I think at this point And we also by the way have the Rangers still in this as well as the Braves I think are still in the hunt. So we've got a lot of teams still in the hunt and that's one of the One of the fun things about the license business is that there's always something that happens, right? And while we We certainly try to take those out of our forecast.

Speaker 2

We know that if we do get one of those teams to get into the World Series and win the World Series, that would be upside to what we're forecasting.

Speaker 3

And Alex, one more thing on the license business. We're not odds makers and we don't take the field and play the game. We like when the local teams win, but we don't really plan for that. No matter how strong we think the seasons that we may have can be, so anything there that's beneficial to us is beneficial to It's beneficial to us. It's beneficial to the forecast.

Speaker 2

And then back to kind of the remainder of your question, the things we've talked about on the call that we think give us a belief that Business is our forecast is achievable. The focus on value that we have, leaning into the newness that we have, the new store initiatives where We've got somewhere between 14, 15 stores this year. We should have another 11, 12 open up in the back half of the year. That's going to be a tailwind for us. We start to anniversary some of the new store openings from last year and they start falling into the comps.

Speaker 2

So there's a lot of different things that give us a belief that our forecast It's pretty solid for the back half

Speaker 3

of the year. I just want to say the forecast that we put out there, although non comp, it includes 13 to Total new stores in this year.

Speaker 7

Perfect. That's all really helpful. And then just on margins to follow-up there. I think the High end of the guidance implies year over year increases in the back half. What would sort of be the buckets of drivers there for 2H Gross margin improvement.

Speaker 7

Maybe just give us some color in terms of how you're thinking about shrink versus freight versus the promo environment? Thanks.

Speaker 3

Yes. I mean the 34 Actually represents a little bit of a give back from what we've had last year.

Speaker 6

It's still

Speaker 3

in that same general range. It's up 500 basis points To pre pandemic, the I think the 3 buckets that you saw this quarter, merch margins, shrink and Freight are going to be the main players. We're not going to throw anything new at you in the Q3 or the Q4. We started seeing shrink start to turn last year beginning in Q3. We were up 40 basis points in the Q3 Of FY 2022 to the previous year, so Michael talking about taking those year round physical inventories.

Speaker 3

We kind of got ahead of this a little bit. I'm not saying it's the Environment is going to change, but we had already baked some of that into our accrual rate. With that being said, the 2nd quarter was up 37, approximately 40 basis From a merch margin standpoint, I think it begins and ends with inventory management, and just providing the customer with value options on Stuff that they really want and freight as I previously stated, I think that's going to be a tailwind for fall. So that's what's embedded within the guidance.

Speaker 2

Yes. I would reiterate that point. We get this question every quarter around margin. And when you look back and you think about where we are as a company, I think a couple of times we said it, we're a different company than we were pre pandemic. We're Sustaining right now at about 27% ahead where we were in 2019 from a sales perspective.

Speaker 2

The margin is about 500 basis points higher And that's really built on the back of a lot of really strong meaningful operational changes that we've made to the business in terms of how we Buy and allocate our regular price markdown optimization work we do, the better size profiling we do and getting the right goods for the right stores. We also think that mix should benefit us as the soft goods business starts to kind of normalize and become a bigger percentage of the business That provides a gross margin tailwind. Private brand becoming a bigger percentage of the business provides margin tailwind. So we feel like we've Made the right moves long term to structurally improve the margin. Promotions are going to be what they're going to be.

Speaker 2

And we certainly participate in promotions during Those time periods. But at our core, we are an everyday value retailer. We talked about on previous calls that roughly 75% of our sales Come from regular price, which is driven by our value pricing, right? So promotions are out there. They're certainly going to be what they're going to be.

Speaker 2

We like we've got them planned appropriately, but we feel like the strength of the margin is structural and foundation and we're going to hold on to it.

Speaker 7

Perfect. That's really helpful. Best of luck going forward.

Speaker 3

Thanks, guys.

Operator

Our next question comes from the line of Anthony Chukumba with Loop Capital. Please proceed with your question.

Speaker 1

Good morning and thanks so

Speaker 8

To be respectful to my peers who might also want to ask questions on this call, I will just ask one question. So you talked about the SG and A expense and leverage drivers, the new store investments, omni channel technology and digital marketing, obviously the new store investments We'll continue given the fact that you have a very aggressive new store opening plan. But I guess my question is when do we start to anniversary

Speaker 3

Did you say anniversarying the bulk of the I'm sorry, Anthony, one more time?

Speaker 8

Yes. When do we start to anniversary the bulk of the omnichannel Technology and Digital Marketing Investments.

Speaker 3

Hey, Anthony. It's Carl. When we launched our long range Plan back in April, we actually baked in about 100 basis points of expense deleverage into it. It was really around the things that we viewed as strategic priorities to invest in. New stores, we think there's a ton of white space there.

Speaker 3

Omni channel capabilities, we think we have a lot of upside there and we're just starting to get into the cockpit of the Fighterjet associated with the customer data platform. So I really think you can expect us to continue to lean into that. We're going to be responsive from an expense standpoint as we look at a challenge macroeconomic environment and kind of always optimize our And structure, but you're going to see us consistently leaning into investing in those areas throughout the long range plan.

Speaker 2

I was going to say, I think particularly in the realm of .com, the investment never stops, right? You're continually reinventing your site, adding new capabilities. We're adding some new PAM4 capabilities currently, we're going to have Sezzle online in the next couple of weeks, which is a big win for us. So I don't think you're going to see us I don't necessarily discontinue those investments or they're going to stop, they're going to be continual as we evolve the business. But we're going to be very thoughtful about where and how we invest dollars to make sure that they really pay for themselves.

Speaker 2

This new marketing platform, I think we're really early innings. As a matter of fact, I'd say we're at the start of the game on this one. And there's going to be more investment against that, but I guarantee you that everything we do, we run an ROIC against and we're going to get paid back in space for those investments.

Speaker 3

In funding those initiatives with existing cash flow. That's the one of the more important parts.

Speaker 8

That's helpful. Thank you.

Operator

Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your

Speaker 2

Hi, good morning. So I'll follow Anthony's lead and only ask one question as well, but with multiple parts. First off, congratulations, Carl. We look forward to working with you. Appreciate it.

Speaker 2

So the question I have, look, you're doing you've done a fantastic job of managing the business through some crosscurrents out there. Comps are still negative. The guidance you provided to balance sheet would suggest they stay negative through the year. So I guess the question I have is, How do we think about these negative comps? Is it a what portion of it is lapping some of these post pandemic type categories Versus an underlying more challenged consumer.

Speaker 2

And then really what are the as you look at the business beyond the current year, what are the building blocks to get back to that So it's steady positive comp for the company where it should be. Yes. So when we thought about coming out of the pandemic last year And 2022, I mean clearly during 2020 2021, the business grew to an outsized kind of state of proposed, right? It was Inflated by one time customers coming to our stores, we're the only store open, etcetera. We had some of these surge categories, there's extra stimulus in the economy.

Speaker 2

We saw last year's kind of that reset year and really intended to move back to growth this year. I think the thing we weren't counting on coming into this year was how How much pressure the customer is under. So I'd attribute a lot of what we're seeing this year is negotiating through that short term kind of chop that's being created by the state of the economy, The inflation we talked about, high credit card debt, etcetera. So as we move forward, the thing that's going to that we have to keep Advocating through that short term chop. When we see the customers start to get a little healthier and stabilize, I think that's when we start moving back to growth.

Speaker 2

And that's when a lot of these initiatives that we're still investing in, Right. I mean that's one of the things we talk a lot about is, these investments we're making in new stores, these investments we're making to our CDP or to our dotcom site, they're all long term investments and that's when they're really going to start paying off is once we come out of this Short term dislocation we're having in the market, you're going to see those really kick in. Got it. That's really helpful. I appreciate it.

Operator

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Speaker 9

Good morning. Thanks a lot for taking my question. How much lower can Academy take its Operating expenses without having a negative impact on the customer experience, Especially if comps remain negative into 2024?

Speaker 3

Yes. Well, I think we've got our expense structure in a pretty good place. We're happy with it. I would reiterate, We are more productive on a sales per square foot basis. We're more productive in a profit per square foot basis.

Speaker 3

We're more productive in the competition when you look at productivity for employee and That's important. I know that others have had some actions with their employees, but we're more productive than our competition in most of the sector when it comes to productivity For employees. So, I think we've got our expense structure in a pretty good place from a SCOR standpoint. We are looking very diligently, as you know, to improve our expense structure in our supply chain. And we've got a very long lived initiative that we're undertaking there that really won't start benefiting us So next year.

Speaker 3

So look, we are working hard on the initiatives that Steve talked about to turn the comp trajectory. We do anticipate that that will happen based on the initiatives again, not this year, but hopefully shortly thereafter. And as The other initiatives that we have on the expense side, particularly in the supply chain take hold, we should have some good offsets there.

Speaker 2

But your question is a great question. I mean that's something we spend a lot of time talking about Just making sure that as we're managing through this, we're not doing anything to hurt the customer experience. We're more productive in our stores because we've taken Non customer facing tasks off the plate, and that's allowed us to flex our labor down there and we'll continue to flex as we need to. But there is a certain to your point base level of service we want to provide to the customer. As business comes down, receipts come down a little bit and that So I think we've got some natural flexes still in the business based off of How receipts come in, how customers are shopping that we can flex up or down, but we also always want to make sure to your point, we don't want to erode that customer experience.

Speaker 9

Got it. Thank you so much. My follow-up question is some of your key vendors are going to soon expand the distribution Of their products and the perception is that as there is more expanded distribution, this is going to put pressure on the profit pool That Academy plays in, which in term is lowering the operating profit margins for some of your key competitors. So A, how have you factored in this expanded distribution into your outlook? And B, over the next few years, if we see Your competitors have their margins drift lower.

Speaker 9

What is it about Academy's model that would enable you to maintain the margins that Academy has right now?

Speaker 2

Yes. I'd start with the distribution question. We got this last quarter because it was right around that time it was announced that I think Nike is going back into a couple of retailers apparel in Macy's, and I believe footwear in DSW. And No, our response then is the same as it is now. A lot of where Macy's is picking up apparel, they're mall based or Non mall based, we really don't anticipate that impacting us too much.

Speaker 2

DSW tends to be a little more off mall based. So certainly That you could worry about maybe a little bit of traffic from there. But when we look at their assortment and what they traditionally have carried, it's not Same level of assortment that we carry. So having more people, having access to brands isn't a positive thing for us, but we think we've got it accounted for And appropriately projected in our margin forecast, longer term, I keep coming back to the margin Improvement that we've seen over the past 4 or 5 years is foundational and it's how we manage the business. And I think Carl said it a couple of times in this call.

Speaker 2

It starts With inventory management, that is a key foundational thing. As a company, we used to carry way too much inventory that created way too many markdowns and inefficiencies in the system. Managing the inventory, managing the receipt flow has so many positive benefits in terms of not creating markdowns on the back end, in terms So inventory management is a big one and then just how we manage through Our pricing and make sure that we present a value price on a day in, day out basis and offer great value. I think The combination of those disciplines we put in place and our everyday value model, I think are 2 things that help us believe that our margin is going to be sustainable on the

Speaker 3

And then again, back to the other initiatives, we believe very strongly that we've got 100 basis points of benefit coming from the supply chain. More cross stock, more multi stop deliveries, better use of variable labor. I mean our workforce on our DC today is frankly highly fixed. So we've got opportunities there. And then with more effective and efficient marketing being able to target customers directly instead of using a blunt instrument using a scalpel will help our margins

Operator

Our next question comes from the line of Seth Basham with Wedbush. Please proceed with your question.

Speaker 10

Thanks a lot and good morning. My question is around new store productivity. By our calculation, it slipped again this quarter. I'm wondering if there's anything associated with the new store you open in terms of location or timing. That's my first question.

Speaker 10

Thanks.

Speaker 3

Sure. We're pleased with the progress of the new stores. We've opened 3 stores this year. All 3 have been out of footprint. All three much more successful than the out of footprint openings we had back in 20 eighteen-twenty 19.

Speaker 3

The last store we opened was in Westfield, Carmel, Indianapolis. And even though, to be quite honest, not an ideal time to open a new store, it's one of the better openings we've had out of market in the past 5 years. So We are seeing the 2022 stores a little slower ramp than we had planned, but again, the chain is down. It's they're opening stronger than they did in 2019. The economy is challenging and it takes time to build some brand awareness.

Speaker 3

And as I've said many times over, it's a test and learn year. Our 2022 stores, we're still learning from those. We've got 13 to 14 that will open this year. The analogy that I've used internally around this initiative is Milton Friedman's pool in the shower. You turn the water hot and it doesn't get hot and then you turn it cold and when you turn it cold it finally gets hot.

Speaker 3

And that's meant to illustrate that many times people fail to account for the lag time And so this initiative, we're going slowly here. The punchline is when you have these large initiatives, when you can, implement them slowly And not all at once, you can study the impact of the decisions. And that's what we're doing. We're still studying the 2022 vintage. We feel like we've got some good And we're applying them, but very, very happy so far.

Speaker 3

Again, the key things to keep in mind is that all of our mature stores are profitable. We've got more white space than almost any retailer that I can think of certainly in our sector, only being in 18 states. And we're funding all of this growth through existing cash flow. The stores that we opened in 2022 are already creating cash flow. They're accretive to cash flow.

Speaker 3

Now we're reinvesting that to open more stores.

Speaker 2

The other thing I would add to that is, as we continue to open stores out of our traditional footprint, That's all market share opportunity for us.

Speaker 3

100%. We continue

Speaker 2

to pick up market share in those markets.

Speaker 3

It helps the dotcom business as those customers now have awareness for to Academy.

Speaker 10

That's helpful. Just a follow-up. So the 2022 class, you're still expecting on average $18,000,000 in sales for that for those stores. And then the 2023 class, with more of those opening outside your footprint, do you expect that $18,000,000 figure again or could it be lower than that?

Speaker 3

Yes, on average, that's how we underwrite the stores and that's what we expect on average. They may be different depending again, we've tried some different things. We've got some smaller format Stores, I would say that are below the 62,000 prototype, those will be smaller. Again, 20% ROIC hurdle For really every store and they will achieve that both vintages based on what we've seen.

Speaker 2

They're tracking ahead of that.

Speaker 3

Tracking ahead of that. That's a pretty attractive

Operator

Thank you. Ladies and gentlemen, we have time for one more question, which will come from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Speaker 11

Hey, thanks so much for taking our question. This is Jackie on for Simeon. I'm just looking forward, What is the right kind of comp level that you would need to drive leverage in the business? Should we expect there to be some degree of Leveraging the model over time as you open new stores and ramp up your growth investments or how should we think about that? Thanks so much.

Speaker 3

Yes. From a long range plan standpoint, we modeled in low single digit comps and 100 basis points of Expense deleverage, we do have some things that offset that in the supply chain space. And we've seen nothing that Says that that's not what we're expecting. If you look at SG and A, for example, in the near term, in the current quarter, up $13,000,000 Year over year. That investment is really in those long range strategic priorities.

Speaker 3

And our free cash flow, Michael spoke to it, but $190,000,000 in cash flow from operations during the quarter, that's actually up $30,000,000 year over year compared to last year, I think 19% increase in a tough environment when you got it down 7.5 comp. We're creating the cash flow that makes us feel like we have permission to continue to invest in these strategic priorities and that's what we're doing.

Speaker 2

Great. Go ahead.

Speaker 11

No, you go ahead. I just if I can squeeze in a quick follow-up. I know you guys don't guide Q3, Q4 gross margin, but given that 2 gross margin kind of came in line with normal seasonality versus Q1. Should we think about whether Q3 and Q4 from a margin cadence should follow seasonality

Speaker 3

I'll take it. I'm just going to reiterate the 34 to 34.4. The 3 things that are going to move it are the Things that you saw move at this quarter, merch margin, shrink and freight. From a merch margin standpoint, Units down 5. We feel pretty good from a sales to inventory spread standpoint.

Speaker 3

We feel like from a promotional standpoint, We're going to do that, but we're going to do it during those key time periods and that really worked for us in the Q2. From a shrink perspective, we're beginning to lap some stuff from last year that we saw, but I'm not expecting the environment Change magically. We're doing the things that we think help prevent and deter and in some cases follow-up on Losses that is having a beneficial sequential impact and freight, it's still going to be a tailwind Into fall. So those are the three things. We're not going to give guidance on Q3 and Q4 specifically, but those are the three things that are going to impact it and we feel like we're managing what we can manage And we feel like we're managing what we can manage in those spaces.

Speaker 11

Great. Thanks so much.

Speaker 2

Thank you. So just want to close and kind of reiterate, we believe that Academy represents A compelling growth opportunity in the retail space for investors. We have one of the most compelling growth opportunities out there. And want to make sure you guys realize the We're going to continue to navigate through the short term headwinds, while the customer is under pressure. But At the same time, we're going to be working against our long range plan and make sure we're setting ourselves up for success in the long term to achieve our long range plan and objectives.

Speaker 2

So with that, I want to thank everybody for joining the call out there. And thanks to all of our academy associates and everybody should have a good Labor Day weekend. Thanks. Thank you.

Operator

Ladies and gentlemen, the call is now concluded. Thank you for your participation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Academy Sports and Outdoors Q2 2024
00:00 / 00:00
Remove Ads