Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q3 2022 Earnings Call Transcript

Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q3 2022 Earnings Call Transcript December 7, 2022

Academy Sports and Outdoors, Inc. beats earnings expectations. Reported EPS is $1.69, expectations were $1.59.

Operator: Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors Third Quarter Fiscal 2022 Results Conference Call. . I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please — please go ahead.

Matt Hodges: Good morning, everyone, and thank you for joining the Academy’s. Participating on the call are Ken Hicks, Chairman, President and CEO; Michael Mullican, Executive Vice President and CFO; and Steve Lawrence, Executive Vice President and Chief Merchandising 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. 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. Unless otherwise noted, comparisons are to 2021 with 2019 comparisons also provided where appropriate, to benchmark performance given the impact of the pandemic in 2020 and 2021. I will now turn the call over to our CEO, Ken Hicks.

Kenneth Hicks: Thank you, Matt. Good morning, and thank you all for joining us today. As we anniversary our second year as a public company, I’m proud of the operational and organizational initiatives we’ve undertaken that have transformed the company and helped drive our solid financial performance. Our talented team of retail leaders have improved every aspect of our company when compared to pre-IPO Academy, including improving our merchandise planning and allocation processes, building an outstanding assortment of good, better, best products for our customers while maintaining our focus on value, significantly enhancing our e-commerce capabilities, increasing customer loyalty through the launch of the Academy credit card, modernizing our marketing along with our store experience and meaningfully improving our financial stability.

We are in excellent financial health capable of self-funding all of our capital priorities, which include new store expansion, omnichannel growth, technology enhancements, increasing supply chain capacity and rewarding shareholders through share repurchase and dividends. The third quarter was challenging and our reported net sales of $1.49 billion, a negative 7.2% comparable sales were below our expectations. We saw sales increases in footwear and apparel, but experienced sales decline in outdoors and sports and recreation. Steve will discuss our sales results in more detail later in the call. When comparing third quarter sales to 2019, we maintained a 30% growth trend, which is in line with what we have seen year-to-date. We believe this is a strong indicator that our business is baseline at a much higher level post pandemic, and there is ongoing durable consumer demand for the sports and outdoors category.

Looking at our third quarter profitability. Adjusted earnings per share were $1.69, which is below last year, but in line with our expectations. We maintain a 35% gross margin rate with an improved mix of products, increasing merchandise margin rates and controlling cost. We also held a double-digit EBIT margin. And for the second year in a row, expect to end the fiscal year with an annualized EBIT margin rate above 10%, which is 1 of our long-term financial goals. The freshness and in-stock position of our inventory across most of our categories is in very good shape. We believe we have the right amount of product from key partners like Nike, adidas and Under Armour to offer customers what they are looking for this holiday. There will likely be more promotional activity in the marketplace this holiday season, but we are prepared to be competitive with our own plan promotions as well as our everyday value positioning, which is in our plans.

While we know that our customers have been under inflationary pressure and do not have the stimulus money they had last year, they are still focused on health and wellness, pursuing their hobbies and winning their kids to participate in their sports and activities. Our good, better, best assortment of top national brands and strong private brands available at everyday value prices allows them to continue to do that at an affordable price. As a reminder, the majority of our customers are in the middle 3 quintiles ranging from $50,000 to $150,000 in annual household income. There’s also an ongoing population migration to our base in the South and Southeastern United States. We currently operate in some of the fastest-growing markets in the country, such as Austin, Texas; Atlanta, Georgia; and Raleigh, North Carolina.

We are uniquely positioned to benefit from this shift and intend to capitalize on it by executing our growth plan of opening 80 to 100 new stores between 2022 and the end of 2026. During Q3, we opened 4 stores in Richmond, Virginia; Atlanta, Georgia; Lexington, Kentucky; and Jeffersonville, Indiana. We have also opened 3 stores in Q4, 1 here in Houston, 1 in Tampa Bay, Florida and 1 in a new state for us, Barboursville, West Virginia. These store openings were a mix of locations in existing, adjacent and new markets. We are measuring and analyzing the different market types and all aspects of the opening process, marketing, merchandising, localization, seasonality and staffing to gain a better understanding of our approach and optimize our process as we open even more stores in 2023 and beyond.

I want to give a big thanks to all of the team members who helped execute through successful store openings. The Academy team remains focused on executing our priorities to achieve our vision to become the best sports and outdoors retailer in the country, while providing fun for all through assortment, value and by delivering a great experience for our customers and creating value for our stakeholders. I will now turn the call over to Michael to provide more detail on our third quarter’s financial results, new stores and provide an update on our 2022 guidance. Michael?

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Michael Mullican: Thanks, Ken, and good morning, everyone. Academy delivered another profitable quarter for shareholders despite ongoing macroeconomic headwinds by prudently managing inventory, expanding merchandise margins and controlling expenses. Since going public more than 2 years ago, we have consistently demonstrated that we have achieved a material step-up of our earnings potential and free cash flow generation compared to years past. In the third quarter, net sales were $1.49 billion, with comparable sales down 7.2% as we anniversaried a strong Q3 2021 comp of 17.9%. The sales decline was a result of lighter traffic and fewer transactions compared to last year. But overall, we have maintained the market share gained over the last 2 years in each of our merchandise divisions.

We saw share gains this quarter in apparel and footwear, resulting in our sales mix being more balanced between hard and soft goods compared to recent quarters. Our e-commerce sales increased 10.5%, marking the fifth consecutive quarter of double-digit growth and represented 9.5% of merchandise sales. When compared to Q3 2019, our e-commerce business has grown 173% and the penetration rate has more than doubled. As we have stated before, we believe academy.com is a competitive differentiator for us in a very meaningful part of our future growth that we intend to invest in for the foreseeable future. As Ken said, we have completed all 9 of our planned store openings for 2022. Academy stores have the highest store productivity in our peer group, making our new stores an effective use of our capital with a high return on investment.

During Q3, our existing store productivity was once again best-in-class. Trailing 12-month sales per square foot were $351 per foot and trailing 12-month operating income per store was $3.2 million. Gross margin dollars during the quarter were $522.5 million with a rate of 35% only 20 basis points below last year’s record third quarter of 35.2%. As Steve will tell you more about in a minute, we increased our merchandise margins compared to last year despite various external pressures as our refined merchandise planning and allocation processes continue to generate margin opportunities. We also saw a shift in our sales mix towards soft goods. These margin gains were partially offset by an increase in e-commerce shipping costs and shrink during the quarter.

Since the pandemic, we have over-indexed on the hard goods side of the business that as our mix shifts back to soft goods, our gross margin rate should benefit. SG&A expenses were 23% of sales, a 140 basis point increase compared to last year. The change was primarily a result of fixed cost deleverage from the decline in sales and additional preopening expenses associated with opening new stores. Operating income for the quarter was $179.5 million or 12% of sales. Academy has now delivered double-digit operating margins for 7 straight quarters. Through the first 3 quarters of this year, we have generated over $640 million of operating income, which is more than the company earned in all of fiscal 2019 and 2020 combined. This is a clear indicator that the operational and organizational improvements made over the past few years have structurally changed and enhanced the earnings power of Academy.

Third quarter GAAP diluted earnings per share were $1.62 per share compared to $1.72 per share last year. Adjusted diluted earnings per share were $1.69 per share compared to $1.75 per share last year. Looking at the balance sheet. Academy ended the quarter with $318 million in cash and had no outstanding borrowings on our $1 billion credit facility. Our positive cash flow generation remains strong as we delivered $50.8 million in net cash from operating activities. During the third quarter, we executed on our capital allocation plan, in part by investing in the following: opening 4 new stores, repurchasing 2.2 million shares for approximately $100 million, paying out $6 million in dividends, investing in supply chain and technology enhancements and lastly, maintaining a healthy cash balance.

In addition, the Board recently declared a dividend of $0.075 per share payable on January 13, 2023, to stockholders of record as of December 20, 2022. Looking at our inventory, our ending inventory balance was $1.5 billion, a 12.8% increase compared to Q3 2021. When compared to Q3 of 2019, inventory dollars were up 12.3%, while units declined by 10% on the 30% sales increase. This demonstrates that we have effectively managed our inventory while experiencing significant sales growth. To illustrate, when comparing revenue versus inventory per square foot this quarter to Q3 2019, revenue per square foot has increased 28%, while inventory per square foot has only increased 10%. Lastly, based on our year-to-date results and current trends, we are narrowing our sales and earnings guidance and raising our full year 2022 earnings per share forecast as follows: comparable sales are expected to range from down 6% to down 5%.

GAAP income before taxes is expected to range from $790 million to $810 million with an expected gross margin rate of 34% and 34.5%. GAAP net income of between $610 million and $620 million. GAAP diluted earnings per share of $7.25 per share to $7.40 per share. Adjusted diluted earnings per share, which excludes certain estimated expenses such as stock compensation and store preopening expenses are now expected to range from $7.50 per share to $7.65 per share. The earnings per share estimates are calculated on an updated share count of 84 million diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity using our remaining $400 million authorization. We remain confident that our business model, driven by our transformed retail capabilities and the everyday value of our products positions us well to navigate this uncertain environment and to win this holiday season, but also to drive long-term sales and profits.

With that, I will now turn the call over to Steve, who will give you more details around our merchandising and operations performance. Steve?

Steven Lawrence: Thanks, Michael. As you heard earlier, our Q3 sales came in at $1.49 billion, which was a 7.2% comp decline versus 2021, but up 30% versus our 2019 baseline. This is a little lower than the first 2 quarters, which were up 36% versus ’19, but we’re pleased that we continue to hold on to the large majority of the gains from the past couple of years despite a more challenging macroeconomic environment. It was also good to see 3 of our 4 divisions showing an improvement in the trend versus last year during third quarter. Footwear was our best performing division 32% versus ’19. And — We got off to a strong start during back-to-school and footwear and saw the momentum carried throughout the quarter. As you’d expect, a lot of the categories that spike during back-to-school such as kids shoes and cleats or some of the leading performers during the quarter.

We also continue to see strong sales in key brands such as Brooks, Crocs and SKECHERS along with a very successful launch in Haidu across all of our stores. Apparel sales also rebounded in Q3 with an increase of up 0.5% versus last year, which was a dramatic improvement versus our spring trend. White footwear. We continue to run double-digit comps for 2019 baseline of up 24%. Back-to-school results were also strong in apparel and the momentum that started early on carried forward into the remainder of the quarter. This momentum, coupled with an improved inventory position and top brands such as Nike, Columbia and Carhart, versus last year, helped spark selling in fall seasonal categories, such as fleece and outerwear. While our sports and direct business in Q3 was down 4% to last year, it was also an improvement versus our spring trend and was up 40% versus 2019.

We continue to see solid gains in our sporting goods business with the strength across key categories such as football, baseball and golf. The softest category in this area remains the home fitness business, which declined double digits versus last year but has stabilized at up over 25% versus our 2019 baseline. Our biggest challenge during Q3 was our outdoor business, which posted an 18.3% decline and was the only category where Q3 sales softened versus the first half trend. It’s also important to note that we continue to hold on the majority of the gains we picked up over the past couple of years in outdoor with this business still rang up 30% versus 2019. Soft goods category was hunting where we struggled to anniversary high double-digit comps in ammunition from last year.

We’re up against the sales spike driven by large receipts that were helping us get back in stock during Q3 of 2021. Broadly speaking, the overall inventory level from ammunition have stabilized across the industry over the past year. We started to see a lot of the stock up surge activity by consumers drop-off, which has resulted in slowing demand. While running negative comps versus last year, the ammunition business continues to run up triple digits year-to-date versus 2019, and we saw the declines versus 2021 start to lessen as we got deeper into the quarter. To sum it up, the miss in outdoor, largely driven by ammunition, comprised over 100% of our drop for the company, so stabilizing this business is a clear priority for us. Shifting to margins.

As planned, we held on to most of the gains we’ve made over the past couple of years. Gross margin rate for Q3 came in at 35%, which is a 20 basis point decline versus ’21, was up 340 basis points versus 2019. Similar to the last couple of quarters, beneath the surface, our merchandise margin was up 60 basis points versus last year and continues to run well ahead of 2019 levels. We attribute the continued strength in gross margin to a combination of the hard work the teams have done over the past couple of years around improved buying and planning and allocation disciplines, coupled with a favorable mix of sales in the higher-margin categories of apparel and footwear. As we finish out the year, we built in a well thought-out promotional calendar for this Q4.

This cadence is more aggressive than the past 2 holiday seasons and is focused on driving traffic to our stores by providing our customers with outstanding deals on giftable items. These additional promotions are accounted for in the guidance Michael discussed earlier. And our expectation is that despite this uptick in discounting, we will continue to hold on to most of the margin gains from the past couple of years. We also believe that our everyday value pricing, coupled with our thoughtful promotional strategy, will allow us to maintain our position as a value leader in our space and gain market share during Q4. In terms of inventory, our teams continue to do an outstanding job in managing through a challenging environment. We ended the third quarter with inventory up 13% versus last year, which is lower than the 17% increase we entered the quarter with.

Our inventory levels and content are in the best position they’ve been in over the past couple of fourth quarters putting us in a prime position to take advantage of the holiday traffic surge. Another sales driver for us is continuing to lean into new initiatives and brands that resonate with our core target customers. couple of funding ideas that we put in place for this holiday, including launching Christmas themed Magellan Outdoors apparel, expanding into gas powered ride-ons from Coleman along with adding and BioLite FirePit into our outdoor heating. All of these ideas should help reinforce Academy as the best destination for all things sports and outdoors. The team has worked hard to get back in stock and ensure that our inventory is much better balanced to the position in the key brands and categories will drive customers into our stores for this holiday.

Our everyday value pricing, coupled with a strong well-thought-out promotional cadence will allow us to deliver a strong value proposition this holiday. When you combine that with our broad assortment of the most desirable brands and our strong in-store experience, we believe that we have a winning formula to continue to pick up market share. Finally, we also continue to lean into more digitally targeted advertising, while reducing our reliance on traditional broadcast and print. This shift helps improve our overall marketing reach and effectiveness while also allowing us to be much more nimble in reacting to pricing promotions. In closing, we believe that we have the proper strategies in place and are well positioned to drive the business and continue to gain market share during the very important Q4 time frame and beyond.

Now I’d like to turn the call back over to Ken for some closing comments. Ken?

Kenneth Hicks: Thank you, Steve. Despite the challenging macro environment, we’ve delivered a solid operational and financial performance this year. We’ve made significant improvements over the past several years, resulting in our profitability being materially higher than just a few years ago. This is the result of our dedicated team working diligently toward our vision of becoming the best sports and outdoors retailer in the country. Academy is well positioned to have a successful holiday season. This past Black Friday was the largest sales day in the history of the company, and we are maintaining the 30%-plus sales trend compared to 2019. That being said, we still have the biggest 3 weeks of the year ahead of us, but we are confident in our plan.

Academy has enormous future potential growth opportunities from opening new stores, expanding omnichannel, improving existing stores and from operational improvements. There’s a lot to be excited about, and we are prepared to execute to achieve our near- and long-term goals. I’d like to close by thanking all of the Academy sports and outdoors team members and wishing everyone a joyful holiday season. We’ll now open up the call for your questions. Thank you.

Q&A Session

Operator: . Our first question comes from the line of John Heinbockel with Guggenheim.

John Heinbockel: I wanted to start with as you think about the fourth quarter, right, the implied comp right at the midpoint is down 2. That’s the sort of same trend line. So not a multiyear improvement. But how — when you think about the 4 categories of the 4 divisions, and you think about the prospect for improvement, right, sequentially in each of those 4, where do you see the biggest opportunities, right, based on the merchandise content and the behavior of your customer?

Kenneth Hicks: John, thanks for the question. We obviously have seen good strength in our soft lines, apparel and footwear categories, and they continue to provide an opportunity as well as team sports, which has been a very good business with us. So those are 3 of the businesses that I think we have good opportunities with. That said, there’s still challenges out there in some of the outdoor areas. But I’ll let Steve provide a little more color.

Steven Lawrence: Yes. If you go back to a year ago, the supply chain was still pretty much in disarray. When you look at where we’re sitting today in terms of our ownership and seasonal categories, cold weather goods, giftable items for Christmas, we’re in a way better shape than we were a year ago. So we feel pretty confident about our inventory composition there. We feel like our inventory is under control and that it’s well balanced across all the areas. The 1 category called out as being challenging for us was the outdoor category and beneath that, it’s is really the biggest challenge there. The good news is we’re starting to see the trend line versus I get a little better. It’s still negative, but it’s less negative than it was early in the quarter, and we’re starting to see that business stabilize.

So that’s going to probably be a challenge for us throughout the remainder of this year. But we do feel like we’re seeing strength in the other categories, which is helping offset some of that.

Michael Mullican: And John, a couple of more points in addition to the categories. We expect to have a good finish to December. The guidance that we provided implies that we’re going to be up 30% to 2019, which is consistent with recent trends. That’s in line with our quarterly and monthly builds, which are usually a pretty reliable indicator of our performance. . In addition to being better in stock and key holiday programs, as Steve mentioned, we’re looking at the consumer and how they are behaving. We have some planned traffic dropping promotions, and we were not in a position to do that last year because we didn’t have the inventory. And if you recall, last year, there was a scarcity of goods in the market, which led to a lot of early purchasing.

This year, there’s an abundance of goods. And so we think that, coupled with a favorable calendar, there’s an extra Saturday this year before Christmas, we’ll probably see some late shopping the weather hasn’t been terribly helpful to sales. It’s been a pretty warm start to the holiday season. So we think the last couple of weeks, we’ll see a lot of sales coming late. And as a reminder, we’ve invested a lot in our buy-online-pick-up-in-store business. Our customers are leaning into that, and we’re going to be in a good spot to deliver for them down the stretch.

John Heinbockel: And then maybe as a follow-up, right, on supply chain, you’ve had this distribution initiative for a little bit. Where do we sit on that? And when you think about capacity, I know you’ve got capacity for the time being. But as you look out capacity in the 3 DCs and then at some point, I guess you’ll need a fourth DC, I guess, further north. How do you think about the network over the next 3 or 4 years?

Michael Mullican: You’re correct. At some point, we need a fourth DC and then we’ll need a fifth. And as we grow to reach the potential of the company, we’ll probably need a 6th at some point. For the next several years, we’re in good shape. We’ve got plenty of capacity. It is — we think about the next 5 years of the business, we will start to incur costs and frankly, think about adding a fourth distribution facility. We’ll be sit speak more about that later. But for the next several years, probably until 2025, 2026, we’re in a good position.

Operator: Our next question comes from the line of Daniel Imbro with Stephens.

Daniel Imbro: Congrats. I want to start on the top line, maybe following up on the last line of questioning. So you kind of implied in your continuation of 30% growth versus pre-COVID in the fourth quarter. I know it’s early to think about 2023, but I guess maybe could you qualitatively talk about how you’re thinking about next year? I mean, if you execute on your merchandising initiatives that Steve, you laid out with the new brand, I mean, can you grow on this new base? Have we rebased to a point where growth is possible as we look out to next year?

Steven Lawrence: I think 1 of the things that we’re pretty confident is that we have rebaselined at a higher level. If you go back each quarter this year, it’s been in that low to mid-30s in terms of the performance versus 2019. So we do feel like we’re going to be building off a higher base. That being said, it’s still too early for us, I think, to give guidance for 2023 at this point in time.

Michael Mullican: Yes. As Steve said, not prepared to provide guidance for 2023 at this time. I will say, look, we have a few categories that in this quarter comprised 100% of the drop, and they’re namely hunting categories, outdoor categories. Those categories are considerably stronger to 2019. And frankly, we expect most — to maintain most of that gain in 2019 this year and beyond. We’ve got some categories that were really strong during COVID and people call them COVID categories, COVID winters. Many of those actually haven’t reverted to 2019. A great example of the outdoor cooking and outdoor furniture, which collectively in the quarter were higher than they were last year. The rest of the business and the business as a whole is exceptionally healthy.

We took share in soft goods this quarter despite being up against a lot of clearance in the market, our inventory position is very healthy. We haven’t had to take drastic and dramatic measures to clear inventory like others, retailers in the space have. We’ve got best in sector free cash flow generation. We continue to deliver best-in-sector store productivity and our EBIT net income rates are higher than many in the sector. So I think we’re in a good position to finish this year strong, into next year is strong as we think about the plan for next year and beyond.

Daniel Imbro: Really helpful color. And then I guess just a follow-up on that. Mike, I know you guys were private during the great Recession, but could you provide any color of just in case study of the kind of benefit you saw from the trade down? It sounds like you guys are bullish that you’d see your everyday value offering maybe helped take share. Can you help quantify what you’ve seen during past downturns to the data you have on that?