Michael Mullican: 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 as well.
Operator: Our next question comes from the line of Seth Basham with Wedbush. Please proceed with your question.
Seth Basham: My question is around the store productivity. By our calculation, so again, this quarter, I’m wondering if there’s anything associated with the new store in terms of locating your timing? That’s my first question.
Michael Mullican: Sure. We’re pleased with the progress of the new stores. We’ve opened three stores this year, all three have been out of footprint. All three much more successful than the out-of-footprint openings we had back in 2018, 2019, the last store we opened was in the 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 five 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. And as I said many times over, the 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, fool 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 to finally gets hot. And that’s meant to illustrate that many times, people fail to account for the lag time when they’re studying cause and effect. And so this initiative, we’re going slowly here. The punch line is when you have these large initiatives when you can implement them slowly and not all at once, you can study the impact of those decisions, and that’s what we’re doing. We’re still studying the 2022 vintage. We feel like we’ve got some good learnings and we’re applying them, but very, very happy so far.
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. So now we’re reinvesting that to open more stores.
Steve Lawrence: The other thing I would add, that is as we continue to open stores out of our traditional footprint, that’s all market share opportunity for us. to pick up market share in those markets.
Michael Mullican: And it helps the dot-com business as those customers now have awareness to Academy.
Seth Basham: That’s helpful. Just a follow-up. So the 2022 class, you’re still expecting, on average, $18 million in sales for that — those stores. And then the 2023 class with more of those opening outside your footprint, do you expect that $18 million figure again? Or could it be lower than that?
Michael Mullican: Yes. On average, that’s how we underwrite the stores, and that’s what we expect 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, tracking ahead of that tracking ahead of that, that’s a pretty attractive return.
Operator: 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.
Jackie Sussman: This is Jackie on for Simeon. 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 deleverage in the model over time as you open new stores and ramp up your growth investments? Or how should we think about that?
Carl Ford: 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&A, for example, in near term in the current quarter, up $13 million year-over-year, that investment is really in those long-range strategic priorities. And our free cash flow, Michael spoke to it, but $190 million in cash flow from operations during the quarter, that’s actually up $30 million year-over-year compared to last year, I think, 19% increase in a tough environment when you got a downside 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.
Jackie Sussman: You go ahead. Just if I can squeeze in a quick follow-up, I know you guys don’t guide Q3, Q4 gross margin. But given that to 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 as well?
Michael Mullican: I’ll take it. I’m just going to reiterate the 34% to 34.4%, the three things that are going to move it are the three things that you saw move it 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. 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 second quarter. From a shrink perspective, we’re beginning to lap some stuff from last year that we saw, but I’m not expecting the environment to 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 in those spaces.
Steve Lawrence: So I 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 I want to make sure you guys realize the team is simultaneously focused on two things. We’re going to continue to navigate through the short-term headwinds while the customers are under pressure. 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 planning of objectives. 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.
Michael Mullican: Thank you.
Operator: Ladies and gentlemen, the call has now concluded. Thank you for your participation. You may now disconnect.
