Academy Sports and Outdoors Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 21, 2024

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors 4th Quarter and Fiscal Year End 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 would now like to turn the conference 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 4th quarter and fiscal 2023 financial results call. Participating on the call are Steve Lawrence, Chief Executive Officer 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. Our considerations to the most comparable GAAP measures are included in today's earnings release, which is available at investors. Academy.com. Please note that we have posted a supplemental slide presentation on our website to accompany today's earnings release.

Speaker 1

I will now turn the call over to Steve Lawrence for his remarks. Steve?

Speaker 2

Thanks, Matt. Good morning to everyone and thank you for joining us on our Q4 earnings call. During our call today, we'll provide details on the results for both Q4 2023 full year. We'll also share a progress update on achieving our long range goals and our thoughts on initial guidance for 2024. First, I'd like to start with our Q4 performance.

Speaker 2

As you saw from the results we announced earlier this morning, we had an improvement in our trend during the Q4 with sales coming in at $1,800,000,000 which was up 2.8% in total and translated into a negative 3.6% comp. This was a 400 basis point improvement in comp sales trend versus the negative 7.6% we ran during the 1st 3 quarters of the year. Our adjusted earnings per share for the 4th quarter came in at $2.21 an increase of 8% versus last year. We would characterize the cadence of the quarter as reverting back to the traffic patterns and volume progression that we traditionally saw pre pandemic. There was less pull forward of demand in early November than we'd experienced over the last couple of years when customers shopped early based on scarcity of supply.

Speaker 2

We then saw the traditional acceleration in business during Thanksgiving and Cyber Week, followed by a low in traffic during the middle part of December. We finished holiday with a strong surge of sales and traffic the week leading up to Christmas sustained into the post Christmas time period and early January. The sales increase we ran in December made it the strongest month of both the quarter and the past year. Based on these results, when you pull back and look at the full year 2023 sales, we came in at $6,200,000,000 or negative 6.5 percent comp. These results were at the high end of our annual guidance and on a 52 week basis remain roughly up 25% versus pre pandemic levels.

Speaker 2

Moving on to gross margin, the quarter came in at 33.3%, which is a 50 basis point improvement above last year. This increase was primarily driven by inventory and freight savings, partially offset by our merchandise margins. Holiday season played out as we anticipated. It was more promotional than the past couple of Christmases, but still not back to the discount levels that were common pre pandemic. For the full year, our gross margin rate came in at 34.3% or 30 basis points below last year, which was at the high end of our guidance, remains roughly 500 basis points higher than the margins we ran pre pandemic.

Speaker 2

The combination of sales and margin performance allowed to generate adjusted earnings per share for the full year of $6.96 Now I'd like to give you an update on our progress against the long range plan goals we issued in April of 2023 and our path towards achieving them as we move forward. 2023 was a busy year for us and we made progress across multiple fronts. We opened 14 new new stores, which is 5 more stores than we opened in 2022. The team is applying learnings for the prior year's openings and as a result, e stores are projected to have a higher year 1 volume than the 2022 vintage. We also installed our new customer data platform, which is going to be a huge unlock for us moving forward as we gain greater insights in our customer shopping patterns.

Speaker 2

This new tool allows us to increase our targeted marketing capabilities, which we believe will drive more store visits and greater sales through our conversion rates. The team also laid the groundwork for the launch of our new warehouse management system or WMS for short, which will be rolling out to all of our distribution centers over the next 18 months to 24 months. We're also proud to give back to the communities we serve. 2023 through direct giving, partnership support, merchandise discounts, various organizations, Academy distributed over $30,000,000 of our customers and local and national charities. Another important accomplishment for us was the strengthening of our executive team with the addition of Chad Fox as our new Chief Customer Officer and Rob Howell as our Chief Supply Chain Officer.

Speaker 2

The addition of these 2 talented and experienced executives, coupled with combining supply chain and stores under President Sam Johnson, provides the right structure and team to help accelerate our progress against our long range goals. While we made good headway across multiple fronts, one place we failed to make progress is growing our top line sales. We believe that the primary driver of our sales decline was underlying weakness in our consumer spending on durable goods due to weakening in overall consumer health. In Baptist, we're increasing our focus around delivering an outstanding value proposition to our customers in order to help them stretch their wallet as they outfit their family for all their sports and outdoor activities. A great example of this is a promotion we just ran to kick off baseball in early March.

Speaker 2

The team created a package where we provided a parent all the gear their child would need to start t ball, including a glove, hat, helmet, pants and bag, all for under $100 In other cases, we'll be lowering prices in key categories such as bikes and grills as we head into the summer months. Turning to Slide 5 of the supplemental deck. While we continue to manage through the short term choppiness in the business, we remain focused on delivering against the long range goals that we articulated last spring. To reiterate a few of the key metrics, our plan is to grow top line sales to $10,000,000,000 plus generate earnings of 10% or greater achieve a 13.5% adjusted EBIT margin rate driver.com penetration to 15% of total revenue or greater and thoughtfully invest in our cash flows into initiatives that drive a 30% ROIC. We've learned a lot over the past year and as we move forward, we will continue to refine the tactics for us achieving our long range goals.

Speaker 2

We've done a deep dive on the 23 stores that we opened up in 20222023 and are applying the lessons we've learned from these 2 vintages for our new store opening plans moving forward. Page 7 of the supplemental deck details how we're fine tuning our forecast for new store openings. Initially, we modeled 120 to 140 stores with a year 1 volume target of $18,000,000 that will mature over 5 years. The majority of the stores that we've opened up over the past few years have been in newer markets. As we've discussed previously, we're seeing faster ramps stores open in existing markets.

Speaker 2

We have higher brand awareness and slower ramps stores open in newer markets, so the customers are less familiar with Academy. Based on this, we're revising our new store forecast for year 1 sales volume to be between $12,000,000 to $16,000,000 with a 5 year ramp to maturity. The second change is how we're building out and sequencing our new store pipeline. Moving forward, we'll strive for a better balance each year with roughly half the new stores being opened in existing markets and the other half in new or adjacent markets. It's also important for us to balance our openings by time of year.

Speaker 2

We've learned that stores opened in the first half of the year get out of the gate faster than stores opened up in Q3 and Q4. Based on this, starting in 2025 and forward, we're building our new store pipeline to support roughly 50% of the stores for each year to open up the 1st and second quarters. Another win is that we've seen strong results in smaller and mid sized markets. While these stores may have slightly lower volume potential, the favorable expense structure it takes to run these stores helps ensure the profitable investments and clear our ROIC hurdles. As we build out our future pipeline, we're opening the aperture of our consideration set to include more single or 2 store markets versus focusing primarily on large multi store markets.

Speaker 2

Once again, it will be a balanced approach between various market sizes. Finally, over the past 18 months, we've opened up 4 new stores in Southern and Central Indiana. While they did not all open in the same weekend, having a cluster of stores that opened in a relative post time proximity to each other helped us gain greater efficiencies across multiple fronts with the clear win being and driving greater marketing synergy. As we move into 2025 and beyond, our goal will be to go into new markets with a greater density of new store openings around the same time. The end result of all this work is that we believe we have an opportunity to open up even more stores than we initially modeled in our long range plan.

Speaker 2

As you can see on Slide number 7, our revised new store growth plan now projects 160 to 180 stores over the next 5 years with a target of 15 to 17 of them opening up in 2024. The second pillar of our growth strategy is driver.com penetration 15% of total revenue. On the surface, this doesn't seem like an overly audacious goal when you consider that many other retailers are already at or above this level of penetration. However, when you consider that we're expanding our store base by greater than 50% during the same time period, it means that we'll to double our dotcom sales over the next 5 years in order to hit this goal, which we would characterize as challenging but achievable. The major driver of this strategy will be to have a laser focus on the customer with a mission to seamlessly streamline the shopping experience across all touch points.

Speaker 2

This was the primary reason we recently created our new Chief Customer Officer position and hired Chad Fox to fill this role. You combine our marketing, customer analytics and e commerce teams into 1 organization to make us more nimble while also driving greater synergies across the organization. Chad is a seasoned executive who has helped other large retailers such as Walmart and Dollar General accomplish these same goals. He's a data driven merchant who is going to help us lever our new customer data platform, drive greater consumer engagement and new customer acquisition. Key focuses for chat over the next year will be driving increased traffic to our physical and digital stores, dramatically improving the site experience on both academy.com and our mobile app and improving customer identification engagement with the rollout of an expanded loyalty program.

Speaker 2

The 3rd leg of our growth plan is to drive greater productivity out of our existing businesses and assets. We've made a lot of progress in upgrading our merchandising, processes and procedures along with our store execution over the past several years, which has resulted in the volume and margin gains that we've made. While these initiatives are in the middle to later innings, we believe that there's still opportunity for improvement on both these fronts. The work that Chad and his team are focused on will also help accelerate growth from these initiatives. Where we believe we have the most untapped opportunity to improve efficiency is the work we're undertaking to strengthen our supply chain infrastructure and capabilities.

Speaker 2

Hiring Rob Howell as our new Chief Supply Chain Officer will be a huge unlock for us as we build out our supply chain capabilities. He's a skilled strategist who helped develop a world class supply chain for Cisco. His deep experience in working with Manhattan, it also helped us ensure that the WMS rollout we're embarking on over the next 18 to 24 months goes as smoothly as possible. In the short term, we're focused on improving our cross stock receipt flow and speeding up the pace at which receipts move out to the stores. This will allow us to reduce the average inventory we carry, resulting in increased turnover, while also freeing up cash flow.

Speaker 2

Rob will also be reviewing the current assumptions in our long range plan to identify ways to drive greater efficiencies across all of our existing assets. One preliminary outcome from this review that we now believe we can deliver improved utilization of our existing DC network. Result of this is that our forecasted need of a 4th distribution center will move from a 2026 go live to 2027 or 2028. As you can see, we're making solid progress across multiple fronts. That being said, as we turn our focus to 2024 guidance, the short term economic outlook remains cloudy.

Speaker 2

The customer continues to be under pressure and is being very thoughtful over when and how they will spend their money. The upcoming election coupled with a compressed holiday calendar also adds a degree of uncertainty to the outlook for the year. Based on these factors, we are conservatively modeling a negative 4% to plus 1% comp for next year, which would translate into a negative 1.5 plus 3% total sales growth for the year. We believe this is a prudent base to build our expense and receipt plans off of, knowing that we can chase the business if we see the headwinds abate, they'll start trending upward. I'm now going to turn it over to Carl Ford, our CFO, to walk you through a deeper dive on our Q4 and full year financial performance, along with an expanded look at our 2024 guidance.

Speaker 3

Carl?

Speaker 4

Thanks, Steve. Good morning, everyone. While our top line in Q4 and full year was impacted by our customer being financially pressured, we diligently controlled inventory and operating costs, which enabled us to generate healthy cash flows and profits as well as invest in future growth drivers. I will now walk you through the details of our 4th quarter and full year results. Our 4th quarter net sales came in at $1,800,000,000 with a comp of negative 3.6%.

Speaker 4

This was at the upper end of our expectations led by December sales that were higher than last year. So we were pleased with the trajectory change from prior quarters. While customers were financially stressed, they responded to our strong value message across a broad assortment of products. For the quarter, ticket size increased by 1%, while transactions declined by 5%. E commerce sales were 14.7 percent of total merchandise sales compared to 13.5% in the Q4 of 2022.

Speaker 4

Our Q4 2023 had an extra week of sales. So when discussing divisional sales to last year, we are providing comparable sales by division instead of total sales for a more accurate comparison. The best performing division was Outdoor, whose sales increased 6.3% compared to Q4 of last year, driven by strength in hunting and camping. Within camping, the standouts were Stanley and YETI. Both brands did an outstanding job of driving newness through color and product extensions, such as the barware collection that YETI rolled out prior to holiday.

Speaker 4

Apparel was our 2nd best division with a 6% sales decrease. We saw growth in work apparel and fleece driven by Carhartt and Nike offset by declines in outdoor and athletic apparel. Footwear sales declined 8.8%. We continue to see outperformance in key brands such as Brooks, Hey Dude and Nike. One area that struggled was our cleated business.

Speaker 4

Cleats were one of our last businesses to fully get back in stock and we faced strong sales from Q4 of last year that were still being driven by some scarcity in the marketplace and the World Cup. Last, sports and recreation sales decreased 8.9%. Growth in outdoor cooking and games was offset by continued weakness in fitness and

Speaker 5

bikes. For the

Speaker 4

full year, net sales were $6,200,000,000 with comparable sales of negative 6.5%. E commerce sales were 10.7 percent of total merchandise sales, which was the same as last year. Looking at gross margins, the gross margin rate in the 4th quarter was 33.3%, a 50 basis point increase compared to Q4 of last year. Merchandise margins declined by 40 basis points and shrink was 37 basis points worse than Q4 of last year. These declines were offset by inventory and freight savings.

Speaker 4

For the full year, our gross margin rate was 34.3%. Freight savings were offset by merchandise margin and shrink declines leading to a 30 basis point decline compared to last year. This is the 3rd consecutive year that our gross margin rate has exceeded 34%. This demonstrates that the merchandising and operational changes made over the last few years such as the investments made in price optimization and planning and allocation as well as better clearance and promotions management and disciplined inventory management are now reflected in the long term margin structure of Academy. We continue to find opportunities in these areas to drive margin improvement through technology enhancements and stronger processes.

Speaker 4

During the Q4, our SG and A delevered by 80 basis points. We are focused on managing our cost structure while investing in the pillars of our long term growth strategy. More than 75% of the dollars spent above last year were for investments in our growth initiatives, new stores, omnichannel, customer data and supply chain. For the full year, over 90% of the SG and A dollar growth was spent on our growth initiatives. Overall, we controlled inventory, promotions and expense to deliver net income during the Q4 of $168,200,000 a 6.7% increase over last year.

Speaker 4

GAAP diluted earnings per share was $2.21 for the 4th quarter and $6.70 for fiscal 2023. Adjusted diluted earnings per share was also $2.21 for Q4 $6.96 for fiscal 2023. Looking at the balance sheet, our inventory at year end was 1,200,000,000 a decrease of 7% compared to fiscal 2022. Total inventory units were down 7.2% and this includes having an additional 14 stores compared to fiscal 2022. On a per store basis, inventory units were down 11.8%.

Speaker 4

We have had a balanced approach to capital allocation since going public in October of 2020. The 3 pillars of our strategy are maintaining adequate liquidity or financial stability, self funding our growth initiatives and increasing shareholder return. Our cumulative shareholder return over this time period is more than 500%, driven by operational execution and more than $1,000,000,000 of share repurchases. We have also reduced our debt by almost $1,000,000,000 and paid more than $50,000,000 in dividends. As a result of these actions, Academy is one of the highest returning stocks from the class of 2020 IPOs.

Speaker 4

During Q4 fiscal 2023, Academy continued to generate positive net cash from operations. In Q4, we generated approximately $235,000,000 $536,000,000 for the full year. We utilized the cash to pay down $100,000,000 of the company's term loan, reducing the outstanding balance to $91,800,000 After the pay down, we have $348,000,000 in cash, dollars 484,600,000 of total debt and no outstanding borrowings on our $1,000,000,000 credit facility, which was recently amended and extended through March of 2029. During Q4, we repurchased approximately 3,000,000 worth of shares. For all of fiscal 2023, we decreased our net share count by 3,700,000 through 204,000,000 in share repurchases.

Speaker 4

As of the end of the fiscal year, Academy has $697,000,000 remaining on its share repurchase authorization. In addition, the Board recently approved a 22% dividend increase to $0.11 per share payable on April 18, 2024 to stockholders of record as of March 26, 2024. Heading into 2024, we have the cash to fund our growth initiatives and to continue to execute our capital allocation plan. Turning to 2024 guidance and Slide 8 of the deck, we expect to operate in a challenging economic environment as the current macro dynamics are still impacting our customers. We are going to run the business as efficiently as possible, while also making investments that support our long term strategic opportunities as outlined on Slide 6, opening new stores, growing our omnichannel business, leveraging our customer data platform and modernizing and scaling our supply chain.

Speaker 4

Based on this, Academy is providing the following initial guidance for fiscal 2024. Net sales ranging from $6,070,000,000 to $6,350,000,000 At the midpoint, this is 2% growth compared to fiscal 2023 when excluding the $73,000,000 in sales related to the 53rd week comparable sales of negative 4% to positive 1%, Gross margin rate between 34.3% 34.7%. GAAP net income between $455,000,000 $530,000,000 resulting in GAAP diluted earnings ranging from $5.90 per share to $6.90 per share. The earnings per share estimates are calculated on a share count of approximately 77,000,000 diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity. In 20 24, we will no longer be guiding adjusted net income or adjusted earnings per share.

Speaker 4

Any adjustments such as stock compensation will be provided in the quarterly results. SG and A expenses, which includes stock based compensation expense of $30,000,000 or approximately $0.30 of earnings per share are expected to be approximately 100 basis points higher than in 2023. Interest expense is expected to be $38,000,000 down from $46,000,000 in fiscal 2023 due to our reduced debt levels. We expect to generate $290,000,000 to $375,000,000 of free cash flow, including $225,000,000 to $275,000,000 of capital expenditures. As we begin a new year, we are focused on addressing our opportunities to return to growth and delivering long term value to our customers and stakeholders.

Speaker 4

I will now turn the call back over to Steve.

Speaker 2

Thanks, Carl. As we turn our focus to 2024 and beyond, we remain committed to our long range targets. We've taken the lessons we've learned over the past year and have leveraged them to help improve our go forward strategies. We believe that this refined approach to new store openings, coupled with an increased focus on improving customer experience and driving more productivity of our supply chain, were the keys to driving growth and unlocking value for our shareholders. We've put in place a strong, talented team to help guide the company through our next phase of growth and we're energized and optimistic about the future for Academy.

Speaker 2

With that, we'll now open it up for questions.

Operator

Thank you. The company will now open the call up for your questions. Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Speaker 6

Hey, guys. Thanks for the question. My first question is on thinking about the normalized comp rate for the business. It's 3 years sort of post COVID and the business did really well, but it is still comping negative. And I don't know if it's taking longer in your mind to turn the corner or not, but because it is, does that affect the normalized comp rate going forward, especially since you're adding more stores?

Speaker 2

Yes, thanks for the question. So how we would characterize it is, we have a challenged customer, not necessarily a challenge strategy. We really believe in obviously the long range goals that we put forward out there. If you go back, as you pointed out, we obviously had a pretty strong growth in 2020 2021. And then we saw a pullback in 2022.

Speaker 2

We think that was started with rebaselining coming out of COVID that continued into 2023. I think as we got through 2023, that's why we put some commentary in there around. We're starting to see the kind of the builds on a weekly, monthly basis return to pre COVID time period. So we feel like we're past a lot of that rebaseline. What we're dealing with right now is primarily a challenged customer.

Speaker 2

And I think that's pretty well documented. Obviously, inflation continues to be pretty high, consumer debt is pretty high. And what that's really translating into is a customer who is behaving in a specific way. They're shopping for newness, they're shopping for value and they're coming out and shopping at key time periods during the year when they need to shop, whether it's a replacement cycle as a kid starts a new sports season or a gift giving time. And so that's really how we've modeled our business and built it moving forward.

Speaker 6

And the one follow-up related is, I think just to clarify what you said, the stores that you're opening in existing markets, those are performing better relative to either new space productivity or a comp waterfall second, 3rd year, then you thought it's the stores that are in markets in which you don't have a presence that have been ramping more slowly. Is that a fair characterization?

Speaker 2

Yes, that's correct. I mean, and that's why we went into some pretty good detail on that. I mean, it stands to reason where we've got high brand awareness. We're seeing those stores start out very, very strong. In some of these smaller markets where we're going in with 1 or 2 stores at a time, it's taking a little longer to build brand awareness.

Speaker 2

We're changing kind of how we think about modeling these new stores going forward and building performance, which we detailed in the call as well as on the supplemental material that we provided. But over time, I mean, the expectation is that these stores are going to have a 5 year ramp with outsized growth in the 1st 5 years. Over the next 5 to 10 years beyond that, we would expect them to continue to grow maybe slightly faster than the chain and settle in around the average of what an average store volume does for us. But new stores, new markets, low brand awareness are definitely a little more slow to start out than stores in existing markets with high brand awareness.

Speaker 6

Makes sense. Okay, thanks. Good luck.

Speaker 2

Thanks.

Operator

Our next question comes from Kate McShane with Goldman Sachs. Please proceed with your question.

Speaker 7

Hi, good morning. Thanks for taking our question. You mentioned in the prepared comments that you're going to focus on value and price, and I know that's pretty much always where you've been focused. But do you think that you've got a little bit away from where you've been historically and that could be part of the reason why you've seen some pressure on the comps? And how should we think about just this renewed emphasis on value going forward in 2024?

Speaker 2

I think you said it best in your question, Kate. It's not a renewed focus. It's always a focus for us. We see ourselves and our customers see us as the value provider in our space. And we deliver value on a multitude of fronts.

Speaker 2

A lot of that's driven by our private label, which is about 22% of our total business. We have strong, strong value in those items and they're priced every day at really low prices compared to like items in the marketplace. At the same time, we also deliver value on a lot of well known national brands where we provide a price, a split ticket price on there where we're selling that at a slightly lower price than competitors are selling at an MSRP. And then the third way we develop or deliver value is promotions, right? And so we generally aren't a promotional retailer, but we certainly do promote during key time periods during the year, certainly holiday being one of the biggest one of those.

Speaker 2

And I think we leaned into those 3 different ways to deliver value for Holiday. And we think that's what we saw in inflection during Q4. We saw a negative 3.6 comp versus the negative 7.6 that we're running through the 1st 3 quarters of the year. So we think that that really kind of broke through during that time period. So I wouldn't say it is much of a new focus.

Speaker 2

It's just a continued focus and then looking for ways to expand it. I mean, that's what the customer is telling us they're voting on. So you're going to look at ways that we're going to add some more, we call them key value items. So really sharp items on well known categories like bikes and grills at really sharp prices. We're expanding some of the offerings there.

Speaker 2

And I think you're going to see us continue to lean into promotions during those key moments on the calendar when the customer is really shopping.

Speaker 7

If I could just ask a quick follow-up on the promotions. I know there's been a lot of vendor support for promotions over the last year or so. Are you expecting the same level of vendor support in 2024 as what you saw in 2023?

Speaker 2

Yes. I mean, obviously, we have really strong partnerships with our vendors. I don't see any reason why they wouldn't support us to the degree that they've supported us in 'twenty three and beyond. I think that candidly, we're seeing more vendor support on a multitude of fronts, not just obviously margin or price support, but on marketing and other initiatives, because they look at us as a growth partner. And that means we're getting access to more products, newer products, more innovative products, it means better support on the marketing front.

Speaker 2

So we actually see our vendor support growing in the future, not declining or maintaining.

Speaker 7

Thank you.

Speaker 2

Thank you.

Operator

Our next question is from Greg Malek with Evercore ISI. Please proceed with your question.

Speaker 8

Hi, thanks. Maybe just to help us on the what's driving the growth of that inflection you talked about, Steve. In the Q4, ticket was still positive and transactions running down 5. If you look at the guide this year, would you expect that all the improvement to be on transactions and transaction growth if we get back to a 0 comp actually being positive this year?

Speaker 4

Yes, I'll take it, Greg. This is Carl. Embedded within the 2024 guidance, if you just kind of look at the midpoint, how we see it is ticket slightly up and traffic slightly down. We're very aware that the consumer is challenged. We're going to monitor it throughout the year.

Speaker 4

But at the midpoint, that's how we would model it.

Speaker 8

And in terms of a progression, just given how it sounds like it's the Q1 would be the weakest and then we'll get slowly better over time or do the comparisons get harder by the end of the year given how December was strong?

Speaker 2

I think you stated it correctly the first way you said it. The way we see the quarter progressing or the year progressing is, obviously, customers are still under pressure. That didn't change as we turn the page to 2024. So we think that's going to continue into the first part of 2024. So we do expect Q1 to be the softest quarter and that's how we modeled it.

Speaker 2

We expect Q2 to build upon that. We expect the back half of the year to be better than the first half of the year.

Speaker 8

Got it. And just to clarify that the SG and A that now including the stock comp, and thanks for that. It's nice to make it clean. Is that 100 bps increase that you flagged, is that a new run rate that we should think of in terms of stock based comp or was there something about this year that sort of steps it up versus last year?

Speaker 4

No, I think the $30,000,000 fair to use going forward. But I do want to kind of speak to what's embedded within FY24 in the holistic SG and A. It's about at the midpoint, it's about 100 basis points of deleverage and expense. And I want to take you back to our long range plan where we said we anticipate 200 basis points of expense deleverage offset by about 150 basis points of supply chain and overall like gross margin benefits, which is inclusive of private brands and whatnot. So the deleverage that we're seeing is from a dollar perspective what we anticipated.

Speaker 4

What is causing the deleverage from a rate perspective is running a negative 6.5% comp. To Steve's earlier point and I think it's been very well discussed in the retail industry this year, the consumer is under pressure. So that is what we are experiencing. That does not make us second guess the strategies that we're building this long range plan on. We're going to continue to open stores.

Speaker 4

We're going to continue to invest in omni channel. We're going to continue to invest in customer data and supply chain. But specific to stock compensation, dollars 30,000,000 in the next year is a fine run rate to think about, but we'll obviously update you year by year.

Speaker 8

That's great. Thanks and good luck.

Speaker 2

Thanks. Appreciate it.

Operator

Our next question is from Chris Harbors with JPMorgan. Please proceed with your question.

Speaker 9

Thanks and good morning guys. So a couple of follow ups there. So first on the comp, do you expect the Q1 to be within the range of the year? And sort of are you essentially expecting 1Q to look like the quarter to date trend? And then as you think about it, can you talk about like the gross margin puts and takes?

Speaker 9

You mentioned rolling out WMS over the next 18 months. You talked about some efficiencies that the new head of supply chain has seen. How are you thinking about the gross margin good guys in 2024 and what are the offsets?

Speaker 2

Yes. So, we'll probably tag team this one. In terms of the comp progression, I think it plays out exactly as I said before, where we see the Q1 being the weakest. Certainly, we're coming out of Q4 last year with the down 3.6% trend. If you look at our low end of our guidance, it's negative 4%, which is basically in line with that.

Speaker 2

And then as you progress forward through the year, we expect the Q2 to be better and then obviously the fall will be better than that. So you can kind of model it based off of that feedback. In terms of margin puts and takes, there's several, right? And Carl's got a long list here. A couple I just hit on is private brand continues to be a tailwind for us there, mixing into higher margin mix and private brand is a big tailwind for us.

Speaker 2

Promotional intensity is kind of settling into a more normalized state moving forward. So I don't expect that we're going to see a tremendous uptick in promotions. Carl, I know you've got a couple you want to hit on as well.

Speaker 4

Yes. From a gross margin going forward standpoint, we're seeing what's going on with international shipping. We don't put quite as much through the Red Sea as perhaps others do, But there is a delay coming around Africa and kind of the equipment that's being used. And so there might be modest deleverage there, but we've got we've talked about like outbound transportation and how we run our trucks between our distribution centers and our stores. We've got opportunity there associated with WMS, just keeping out the trucks and doing multi stop shuttles, which we don't really do in any large way now.

Speaker 4

The second would be just in that broader supply chain space, if you think about kind of the labor management aspect associated with what we're doing within the distribution centers. Yes, we get a new tool in WMS that is a lot more sophisticated than the almost 30 year Exeter system that we're using now. And just from an overall labor management standpoint, I would say the merchants are really leaning into this as well. As we think about cross dock penetration or how much stuff doesn't need to be put away and separately re picked, That's a big opportunity at the company and Matt McLean, the Chief Merchant and Rob Howell, the new Chief Supply Chain Officer are in lockstep on this. We've seen that there's betterment there and we started executing on that.

Speaker 4

Yes, I won't reiterate kind of the merchandising stuff, but I am excited about our private brands offering. Freely and Roe are doing well and we're seeing customers resonate with that value opportunity. The last thing I would say as it relates to specific to FY 2024, I want to be clear, we did not make our sales plan for FY2023. Although we ended with an inventory that was down 7% and we feel is well managed and the merchants really did a herculean effort at bringing that in where they wanted to. There was some promotional activity associated with pockets of inventory when you're planning on something a little bit higher and it comes in after we reguided in Q1.

Speaker 4

They took some actions and we're ending clean now. We like our inventory position. And so we don't think that we'll have to kind of execute in that manner for FY 2024.

Speaker 9

Got it. And then my follow-up just on the new store maturity ramp. You lowered the year 1 given the new market mix. But as you think about like where can you remind us what you said about where do they get in year 5? Because it sounds like you said there's this very steep ramp to year 5 and that over the next 5 years that will get to the average of the chain 10 years out.

Speaker 9

So can you maybe just provide some more color, because typically we think of double digit comps in year 1 and then by year 5, you're floating with the overall business?

Speaker 2

Yes. So we in our long range plan, we initially modeled this, we said 18,000,000 in year 1 and then ramped 5 years from there. We didn't put an endpoint associated with where we think they matured over time. We said it would come in close to where the average store volume is. We don't think that necessarily changes.

Speaker 2

It's starting from a lower pace, right? So, obviously, the $12,000,000 to $16,000,000 is meant to encompass a couple of different types of stores, right? Smaller stores in smaller markets where we have less brand awareness probably would be towards the low end of that $12,000,000 versus new stores in the existing geography where you have I brand awareness probably to the high end of that range. We would expect them to grow at a faster rate, at least 2 times faster than the company growth during the 1st 5 years. That wouldn't get them all the way to the average for the new store.

Speaker 2

That's why when you look at it over a 10 to 15 year time horizon, we expect them to get there. And we've really seen this play out over time. If you go back 10, 15 years, Northern Florida was a new market for us. And when we looked at those stores initially, they started off with lower volumes because it was a new market. And as we look at them today, we've been in that market now over 10 years.

Speaker 2

Those stores are doing on average store volume. So that's how we're looking at it over time. But it's a 5 year faster ramp and then 5 to 10 year after that, they settle in at the company average.

Speaker 9

Thank you very much.

Operator

Our next question is from Robbie Olmos with Bank of America. Please proceed with your question.

Speaker 10

Hey, good morning guys. Can you talk a little more about you've mentioned how well the private label is doing. How are you thinking about getting the athletic apparel, the outdoor apparel, some of the branded athletic footwear? Are there things you can do to get those businesses to be a little stronger or any initiatives underway? How are things like L.

Speaker 10

L. Bean doing? I'd love to get some color on that.

Speaker 2

Yes. So I would say in general, a theme we've seen happen over the past couple of years is new ideas have done very well. So a lot of the new brands you've heard us mention like L. L. Bean or BOG Bags continue to do very well and we're expanding a lot of these categories.

Speaker 2

You think last year we had Birkenstocks and a small number of doors or OOFOS and a small number of doors. We're expanding those very rapidly. We've got new brands we're introducing this year like Crush City Bates that's already off to a fast start. So new brands are working for us and we're scaling them out very rapidly. In terms of some of these larger legacy brands where they're a little more challenged, we're partnering with them around making sure we've got a strong pipeline of innovation flowing out to our stores.

Speaker 2

And we're optimistic as we partner with our large brands that we're going to start seeing that turn the tide as we move through 2024. We've got great partnerships. I think Carl called out on the call, Nike, that's been one of our stronger businesses. That's certainly our largest business. So having that work has been a really good thing for us.

Speaker 2

And where we've got some brands that are a little softer, I think we've got good plans in place with those teams to turn them around and get them moving in the right direction.

Speaker 10

Thanks. And then my follow-up is, actually I want to follow-up on Kate's question. When you look at the vendor community, are you seeing prices coming down?

Speaker 2

I wouldn't say we've seen prices coming down. Certainly, there are places where we've negotiated better deals on things, but we haven't seen as freight settle in that necessarily translate through

Speaker 3

a ton of cost reduction

Speaker 2

so far, but we continue to work and negotiate with vendors on

Speaker 10

Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 5

Good morning. Thanks a lot for taking my question. So Steve, when we compare Academy's results to especially in the footwear and apparel categories to several other retailers, especially those retailers that also index the lower income segments. The footwear and apparel categories in particular seem to be doing worse at academy than many other players out there suggesting it's ceding market share. A, why do you think that is the case?

Speaker 5

And B, outside of some of the factors that you pointed to, what do you think is the principal strategy that's going to allow Academy to stabilize its market share? Because if it's simply a function of its core customer base getting healthier that might prove to be elusive? Thanks a lot.

Speaker 2

Yes. I'd start with, I'm not sure I agree with the premise of the question. We can tell you, we look at market share on a monthly, quarterly, annual basis. We use Surcona as primary source for that. And if you look at Surcona data, they will tell you that we picked up market share broadly across the business in 2023.

Speaker 2

We'd also say that we picked up market share over a 4 year stack pretty aggressively considering the fact we're still up about 25% versus where we're in 2019. And I would also say when we look at our comparison in footwear and apparel to other retailers in general, the results I've seen, as others have called out and gone through the earnings cycle for the most part are at or maybe a little better than broad based retail. I mean, we do have a competitor who is outperforming us right now. I think we have a different customer than they have. I think we've got a more middle income consumer versus a high end consumer.

Speaker 2

We've certainly seen the high end consumer continue to spend a little bit more than the middle or lower income consumers a little more pressured. So, one of the ways we combat that is continuing to build out the better best end of our assortment and get access to more premium product from our existing vendor base like a Nike, like a New Balance. And we've had some really good success on those fronts. We continue to bring in new brands, so that we're ahead of the curve there and have them, in some cases, first to market. And it's going to be a journey for us as we move forward, but we are not losing market share.

Speaker 2

The data doesn't really support that. And we actually feel like we're picking up market share from every data point we see.

Speaker 5

My follow-up question is on the gross margin how much would you see an improvement in sales if you were willing to sacrifice some of the gross margin gains that you've achieved? And as a quick housekeeping note, how much will SG and A grow how much will SG and A dollars grow this year due to investments that you might be making in wages or labor within the store?

Speaker 2

Carl and I are going to tag team this one. I'll start on the margin front. It's a question that I think every retailer asks themselves on a regular basis. If I promoted more, would I see a higher sales trend? And you certainly understand the math is, Michael, that if you sell a discount of 25 off, you got to sell 33% more units to offset that.

Speaker 2

And so what we've seen candidly throughout the course of 2023 and part of 2022 is when we've leaned into promotions during kind of non peak time periods when the customer is not willing to shop, we've seen a trade down in AUR and we haven't seen an offset in terms of unit growth to offset the sales decline. So we've been very thoughtful about where we that strategy has worked for us. I mean, if you look at our margin, our merch margin for Q4, it was down about 50 basis points. We had offsets on other lines to help pull the total gross profit up. But we did certainly lean into promotion a little bit during Q4 and I think that that definitely helped.

Speaker 2

So I think you'll see us continue to run those plays as we move forward. But broadly promoting all the time, we don't think is the pathway to success.

Speaker 4

And I'll take from an SG and A standpoint, Michael, I said 90% of what we invested in this year from a SG and A rate standpoint was the investments. I also said like 100% of it. I'm actually pretty proud of the team when anything incremental that was over and above launching new stores, investing in omni channel, making investments on the customer data platform that we implemented last year were all really offset dollar for dollar with incremental savings. So if you think about how that is going to manifest itself on a start a little bit earlier in the year. So there's a little bit of capital investment late in 2024 that'll get us out of the gate good in FY 2025.

Speaker 4

That represents the wages that we pay to our associates and managers in those facilities, the rents, property taxes, the ceding of the market. Steve talked about where there's low brand awareness and now we've got a new tool with the customer database platform and some other tactics investing in advertising associated with those new markets. And the other thing would be just the technology costs associated with the WMS as a SaaS based system. There's going to be tech expense associated with that. The Treasure Data, customer data platform has a cost to it.

Speaker 4

And obviously, omni channel from the user experience investments that we're making there. So in short, the 100 basis points of expense deleverage that you should expect for next year and that was embedded within our long range plan, is all of the investment. That's the totality of the investment

Speaker 5

costs. Thank you very much.

Speaker 2

Thanks, Martin.

Operator

Our next question is from Anthony Chukumba with Loop Capital Markets. Please proceed with your question.

Speaker 11

Good morning and thanks for taking my question. So, just want to kind of tie a couple of things together in terms of my question. You talked about the outperformance in certain footwear brands. You specifically brought up Brooks. You also talked about the fact that you're definitely counting on some new products to drive growth in 2024 to help in 2024.

Speaker 11

So kind of tying those 2 together, any insights in terms of some of the sort of hot running brands, specifically HOKA and on any insights in terms of whether what your expectation is in terms of whether you can get 1 or both of those brands, particularly given you the fact you've had success with Brooks, which is a relatively sort of high ticket footwear brand? Thank you.

Speaker 2

Yes. No, I think you asked this question last time too. We don't have any updates on that front. I mean, as you know, you're right, those are 2 of the hottest brands that are out there. We would love to have access to those.

Speaker 2

And as I've said before, I don't think it's a matter of if it's when. We continue to have dialogue and we'll continue to put our ass out there. Right now, we don't have access to those. And so our mission and our plan is to win with the brands we have access to. And I think you're seeing that play out in some of the successes Carl called out with Nike, particularly in some of the higher end running shoes that we've gotten from them.

Speaker 2

Brooks, great call out there. Brooks has been absolutely on fire for us. We're seeing great success in brands like New Balance and other running brands. So we're going to win with the brands we currently have. We're going to continue to try to get the brands we don't have access to that the customer is telling us they want.

Speaker 2

And we're going to continue to seek out more brands and incubate new brands earlier in the cycle so that we're not trying to catch them when they're hot. We're going to have them at the moment they start to turn. So you'll see that and that's not just a footwork conversation. I think that's broadly across the store. We've got to get better at getting newness in the stores.

Speaker 2

And I think the teams really rallied around that. And you see that in a lot of the new brand initiatives we called out. And we're going to scale them very quickly and make them big and important, so that we don't have to have a conversation about why we don't have access to Oaken and on going forward.

Speaker 4

Yes. At the risk of double dipping, I will. So we've got 282 stores in 18 states. And when we talk with our vendors about what's on the horizon and we talk to them about 160 to 180 stores over the next 5 years. But longer term, we see runway to be an 800 plus store location that's nationwide and partnering with us and what has the unitary growth potential of an growth from pre pandemic and all the things that we talk about here.

Speaker 4

But we talk with them more about the future, what's over the midterm and the longer term horizon. And I think it really resonates of the growth potential associated with the company.

Speaker 11

Got it. And apologies for asking the same question 2 quarters in a row. Nothing is not consistent. Just one quick follow-up. So you talked about the stock based compensation that's like $0.30 So when I look at this initial guidance, so on a kind of apples to apples like adjusted basis that would say the guidance was really more like kind of 620 to 720 on an adjusted basis.

Speaker 11

Is there also the potential for there to be other add backs over the course? I mean, I know it's obviously hard to say and then you want to stick with the GAAP. But I'm just trying to make sure I'm thinking about this apples to apples. I mean, could there be other potential add backs to GAAP as the year progresses? Thanks.

Speaker 4

So I'm going to take that. As we think about add backs, we actually pride ourselves on the simplicity of our P and L. So stock based comp is the one and for the last 3 years there's been a small add back for early extinguishment on debt, which we think is the right thing to do for our business. We're not going to we disclose to you in the 10 ks what pre opening store costs are. But the SEC frowns upon a lot of add backs.

Speaker 4

And so we're really vanilla because our business just makes sense without the add backs. If you think about the guidance for next year, from an adjusted EBIT standpoint at the midpoint, it's about a negative 70 basis point decline. At the pretax income standpoint, it's about negative 60 basis points to FY2023 and net income is about 50 basis points of degradation at the midpoint. And literally all of it is related to our strategic initiatives that we have confidence and that are getting better with each vintage. And so yes, we're not there's probably I mean, who knows what comes, but we're not thinking about any new adjusting items.

Speaker 2

And Anthony, I just want to say, I don't have to apologize for asking the same question. It's a fair question. We always look forward to the challenging questions you post to us.

Speaker 11

Thanks for the kind words. Good luck with fiscal 2024.

Speaker 2

Thank you.

Operator

We have time for 2 more questions. Our next question comes from John Heinbockel with Guggenheim Securities. Please proceed with your question.

Speaker 3

Hey, Steve, can you just walk through CRM initiatives this year, right now that you've stood that up, whether it's reactivating customers' wallet share, how are you going to lean into that? And then the thought about personalized promotions, right? You talked about this pricing, bikes and fitness and stuff like that. Do you see an opportunity to do personalized promotions where you're not blasting that out to the marketplace, but being very surgical in how you attack that?

Speaker 2

Yes, it's a great question. So I would say a couple of things. First, we installed the new CDP last summer. We spent the back half of last year testing a lot of different use cases in terms of customer reacquisition, customer acquisition. I think as you move forward, you're going to see us lean into a couple of focuses.

Speaker 2

1st, traffic is a challenge. I mean, the traffic and transactions for Q4 were down mid single digits. Our goal is to drive more customers coming into our store and drive traffic. So I think you're going to see us use the CDP and working with our various agencies and partners to generate more look alike audiences and to really start filling the top of the funnel up. That's going to be a big focus for us.

Speaker 2

I think you're going to also see us then look at our high value customers and look at ways to get them to shop with us more frequently and move people up the identity ladder and have them become have some customers who are more occasional shoppers become more loyal shoppers and move them up. So I think you're going to see a multi pronged focus there, but new customer acquisition and driving traffic is number 1 and then moving customers up that identity ladder to shop with us more will be the 2nd focus. In terms of more personalized promotions, I think you're dead on. I mean that is the future and that's where I think we're ultimately headed. We're probably a little behind on this one.

Speaker 2

That being said, it's an opportunity for us. And I think you're going to see us as we learn more about our customers have more one to one marketing and to have more targeted promotions, I think that will allow us to pull back on some of the more global promotions that we do run. And that will be a journey as we

Speaker 3

move forward. But there's definitely an opportunity for that and it's something we're

Speaker 2

looking at very closely. And Is that pre holiday? Our goal is to have it in place sometime this year. So pre holiday, definitely for sure. If we can get it in place before back to school, we'd like to, but we want to make sure whatever we roll out is fully vetted and we're very comfortable with.

Speaker 2

That being said, what I want to make sure you understand is we see this loyalty program as being a long term build over time. This is not something we don't want to come out with a bunch of benefits the customer may or may not want. We want to make sure whatever we include in the initial rollout is something the customers told us that they value. And so you probably see us take some things that have resonated well with our credit card customer, which is kind of the basis of our loyalty program and extend that more broadly to a broader range of customers. And then test into new capabilities as we progress forward.

Speaker 2

So it will be a slow burn and an add over time, but we definitely want to get something out in the marketplace before holiday.

Speaker 1

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Will Gardner with Wells Fargo. Please proceed with your question.

Speaker 1

Hey guys, thanks for squeezing me in here. So if we just talk about the new stores, can you just talk a little bit about lowering the guide for the new stores? I mean, where is the drag coming from? And then secondly, are all the new stores that you're opening, are they all EBITDA positive? Or is it vary by new store or new markets versus existing?

Speaker 1

And then what gives you confidence in increasing your store footprint, particularly as comps remain negative?

Speaker 2

Yes. So I'd go back to answer probably the last question first. I mean, we're investing in opening new stores because it's critical to our future. And so, we are going to keep pushing forward on this pace. Now that being said, we're moderating it a little bit, right?

Speaker 2

So, this year, candidly, we guided 15 to 17 new stores. We probably could have opened up a few more stores this year, but we pushed some out of Q4 into Q1 of next year so that we could get more densities and we won't go into a new market. So we're trying to be very deliberate and thoughtful about how we pace out these new stores. It's kind of going slow, so you can go fast in the future. In terms of the volume expectation, I think it's really driven by what we described in the call.

Speaker 2

Obviously, the stores that are in newer markets, it's taking a little longer to build brand awareness. So those would be at the lower end of that $12,000,000 range versus stores in existing markets being in or in larger markets being in the higher end of that volume range of 16,000,000. I think the key is in terms of the number of stores, looking at more midsized markets. I would say initially we were focused primarily on going into large metro markets. And I think as we've had some stores in more midsized markets be very successful, we've got a store in Christiansburg, Virginia that's done very well for us or Harlingen, Texas.

Speaker 2

And so I think we look at those stores and say, okay, there's an appetite for sporting goods stores such as ours, sports and outdoor stores such as ours to go into those markets and really take care of an underserved customer. So you see us kind of opening the window a little bit in terms of our consideration set. And that's what's really driving more stores. So it will be more stores, maybe a slightly lower volume, but because they're in smaller markets, the operating cost to run those stores are very favorable and more than offset the slightly lower volume target.

Speaker 4

And Will, I'll hit the last kind of two parts of your question. As you think about, I think you said like slowing new store growth in headwinds of negative comps. On a negative 6.5 comp this year, we generated $536,000,000 in cash flow from operations. We invested that $208,000,000 in the capital, $203,000,000 into share repurchases, dollars 103,000,000 into debt service and $27,000,000 into dividends and ended with $10,000,000 more in cash than we did the year before. And that's on a negative 6.5 comp.

Speaker 4

So I give all the credit to the merchants for their inventory management, but negative comps are not going to cause us to come off of this strategy. We have so much white space. We want to open great stores and we're going to methodically do that over our long range plan. As it relates to EBITDAs by vintage, they're all positive. I would tell you at $12,000,000 we're EBITDA positive depending upon the location that if it's in the city or something like that, below that, it gets tough to be EBITDA positive and that's why we're just being really discerning specifically with these new markets that we're going into.

Speaker 2

Okay. So with that sorry, I didn't know if you had another question.

Speaker 1

No, that's it, Steve. Thank you. Appreciate

Speaker 2

it. Okay. No, I appreciate it. I appreciate everybody joining us on the call today. Just in closing, our goal over the next year is to move back to top line growth.

Speaker 2

We'll continue to make investments that will drive returns in future years and allow us to achieve our long term objectives. We believe that we have a unique concept that resonates with a wide range of consumers and is scalable and transportable. While our long range plan encompasses targets that we plan to achieve over the next 5 years, our ultimate long term goal is to be the best sports and outdoor retailer in the country, the store is stretching across the continent and that is what we remain focused on. In closing, I want to thank all 22,000 of our Academy associates for all the hard work and efforts they put in over the past year. We continue to believe that our employees are the key ingredient in our secret sauce.

Speaker 2

And I know that every one of our team members is going to give us their best effort out there and help more people have fun out there in 2024. Thanks for joining us today and have a great rest of your day.

Operator

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Academy Sports and Outdoors Q4 2024
00:00 / 00:00
Remove Ads