Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q3 2023 Earnings Call Transcript

Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q3 2023 Earnings Call Transcript November 30, 2023

Academy Sports and Outdoors, Inc. misses on earnings expectations. Reported EPS is $1.38 EPS, expectations were $1.64.

Operator: Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors Third Quarter Fiscal 2023 Results Conference Call. At this time, this call is being recorded and all participants are in a listen-only mode. Following the prepared remarks, there will be a brief question-and-answer session. Questions will be limited to analysts and investors. We ask that you please limit yourself to one question and one follow-up. [Operator Instructions] I would now like to turn the call over to your host, Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

Matt Hodges: Good morning, everyone. Thank you for joining the Academy Sports and Outdoors third quarter 2023 financial results call. Participating on the call are Steve Lawrence, Chief Executive Officer; 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. The company undertakes no obligation to revise any forward-looking statements.

Today’s remarks also refer to certain non-GAAP financial measures, reconciliations to the most comparable GAAP measures are included in today’s earnings release, which is available at investors.academy.com. I will now turn the call over to Steve Lawrence for his remarks. Steve?

Steve Lawrence: Thanks, Matt. Good morning, and thank you for joining us on our third quarter earnings call. As you saw from the results we announced earlier this morning, we had a challenging quarter with sales coming in at $1.4 billion, which was down 6.4% in total and translated into a negative 8% comp. Based on these sales, adjusted earnings per share for the third quarter was $1.38. Now, one of the key themes we saw emerge in the first half of the year carried through into Q3. The customer is clearly under pressure and is being careful about when they decide to shop and how they want to spend their money. We’ve also seen a continuation of the trend with customers coming in during the key shopping moments on the calendar and then retreating during the lulls.

Another key theme continues to be customers looking to expand their buying power by focusing on the value offerings in our assortment such as our private brand merchandise, the promotions that we run, or in clearance events that take place at the end of each season. Similar to prior quarters this year, we also continued to see customers gravity towards new and innovative brands and items in our stores and online. Breaking the quarter down by month, August sales were down mid-single digits. As we discussed on our Q2 call, we saw good momentum early in the month, driven by our back to school business. Once we got past Labor Day and into September, we saw a slowdown in sales that lasted the entire month, resulting in a low-double digit negative comp.

We attribute the softness in September to the lack of a natural shopping event on the calendar, coupled with much warmer than average temperatures, which suppressed early sales on fall seasonal categories. This trend carried forward into early October, but we did see an uptick in sales later in the month that we believe was driven by a combination of some cooler temperatures, coupled with increased sales in our outdoor business. The end result was that we saw sales improvement versus the September trend, with October coming in at a negative mid-single digit comp. Looking at the results by division, our best performing business for Q3, sports and rec, which ran a 2.7% decrease. Declines in fitness and bikes were partially offset by continued strength in outdoor cooking and furniture, as well as our team sports business.

Our outdoor division ran down 6.9% for the quarter. But as I mentioned earlier, we saw this business pick up towards the end of October as we approached hunting season, started to lap softer comps from last year. Our apparel and footwear businesses started out strong during back to school, but then tapered off as we moved into September. Apparel ran a 6.9% decrease for the quarter or slightly better than footwear, which was down 8.2%. We believe the primary driver of the soft business was caused by the above-average temperatures we experienced in September and early October, which tamped down demand for fall seasonal (ph) items. Moving to gross margin, quarter came in at 34.5%, which was a 50 basis point erosion versus prior year. This was primarily driven by our merchandise margin coming in 49 basis points below last year.

We believe that the warmer temperatures we experienced during the quarter resulted in softer sales versus last year in the high-margin fall seasonal products. Customers instead gravitated towards the lower-margin summer clearance, which mixed our margin down. Promotional activity for the quarter was in line with our expectations. And our gross margin rate through three quarters sits at 34.7%, which is above our annual guidance continues to remain roughly 500 basis points above our pre-pandemic levels. Now, I’d like to give you a couple of updates on our progress against some of our long range plan initiatives, starting with new stores. During the third quarter, we opened five new stores with locations in Virginia, Indiana, Missouri and Texas.

During November, we opened up our final seven stores for the year, bringing our total to 14 for 2023. November openings represent the largest number of new stores that we’ve ever opened in a single month, with five on a single weekend. This is a huge accomplishment for our company, and I want to take a moment to recognize all of our team members that help make this possible. As we open new locations, we continue to gain insights into what factors ensure a successful launch of a new store or getting better with each grand opening. While the sample size is still small, as we analyze and learn more from our new store openings, what is becoming clearer is that stores open in legacy markets where we have a high brand awareness as a group are on track to meet or surpass through your own (ph) sales targets.

What has also started to become apparent is that stores open in newer markets outside our current footprint will need additional time and investment to build brand awareness and therefore will likely take longer to ramp sales maturity. After we get through this year, we’ll have more data on the sales ramp of the stores that opened up in 2022, as well as additional data on traffic, ticket and conversion from both the ’22 and the 2023 stores will be used to refine our expectations for future store openings. As we look forward, we’re excited about the pipeline that we’ve identified. We’ll have good guidance around the number of new stores that we plan to open in 2024 during our next earnings call. Another one of our growth initiatives is to accelerate the growth of our dot-com business.

While this channel has faced the similar challenges that our brick and mortar customers feeling this year, we’ve made some meaningful advancements in the third quarter that we believe will help drive growth in the future. During last quarter’s earnings call, we announced our new partnership with Fanatics. While it is early days, we’ve dramatically expanded our offering in NCAA with this partnership, offering over 2 times the number of styles to our customers we started the quarter with just in time for the holiday gift giving season. We will continue to leverage their extensive catalog and add more SKUs as we start each league’s new season. Over time, our online offerings with [indiscernible] larger, allowing us to greatly expand our reach else best service a much wider fan base.

In addition to SKU growth, we’ve also been working hard on expanded functionality such as adding Sezzle, a new pay-in (ph) for option that supports additional categories such as hunting. As we head into the holidays, we believe with this expanded assortment and additional capabilities that we’re well positioned to capture the surge in demand from all the key online shopping events, including Cyber Week and Green Monday. The third initiative that I’d like to update you on is our new customer data platform. During our last call, we discussed adding this new tool to our toolbox at the end of Q2. Q2. Team has spent the last quarter fine-tuning our customer segmentation work, along with developing playbooks to help drive greater traffic and increase spend from our various customer segments.

We have two main focuses in our CDP work, improving customer identification and increasing engagement, both of which will help us build a deeper connection with our customers and drive incremental sales revenue. While we’ve just begun to leverage some of our new capabilities for this tool, our initial marketing tests have yielded promising results. First test was to grow our addressable customer file in order to help expand the reach of our various marketing channels. During Q3, we monitored (ph) a reactivation campaign that helped us increase the number of customers reaching with our emails by 25%. Another example of how we’re leveraging our customer data platform, the small tests that we ran with a focus on increasing both frequency of shop and spend with a subset of our best customers.

We sent targeted offers to this group, managed to drive an incremental trip at a higher basket size. What was exciting about this use case was that we saw continued growth with this group after the initial discount we offered at [indiscernible]. While we don’t expect all the tests we’re running to have a huge impact on core results, we do believe that we’ll be able to start scaling these learnings and they will start moving the needle in 2024 and beyond. The final initiative I’ll touch on is the work we’re doing around improving our supply chain. The team has been working hard on getting ready to install and roll out our new warehouse management system, planning to go live with our Georgia DC in the spring of next year. This implementation is a key enabler of many of the supply chain efficiencies that we’re anticipating in our long range plan as we continue to open new stores.

Now, I’d like to turn it over to Carl Ford, our CFO, who will walk you through a deeper dive of our Q3 financial performance, along with an update for 2023 guidance. Carl?

Carl Ford: Thank you, Steve. Good morning, everyone. We appreciate you joining the call. Let me walk you through the details of our third quarter results. Net sales were $1.4 billion, a 6.4% decline compared to the third quarter of 2022, with comparable sales of negative 8%. The decline in sales was driven by an 8.1% decline in transactions, partially offset by a slight increase in ticket size. Consistent with overall sales performance, we experienced pressure in our e-commerce channel. E-commerce sales represented 9.4% of total merchandise sales, compared to 9.5% in the prior year quarter. As Steve mentioned, our gross margin rate for the third quarter was 34.5%, compared to 35.0% last year. The margin decline was due to a 49 basis point decline in merchandise margins, driven by an increase in planned promotions and a higher mix of clearance sales.

Higher overhead costs, lower vendor allowances and a slight increase in shrink were offset with freight savings. As a company, we continue to operate at substantially higher gross margin rates than pre-pandemic, demonstrating that the operational changes made to the business over the past few years are structural. During the quarter, SG&A expenses were $345.9 million or 24.7% of net sales, an increase of 170 basis points compared to the third quarter of 2022. As consumer demand remains challenging, we are focused on optimizing profitability through expense control and investing in our future. We reduced our variable operating expenses versus last year, while more than 100% of the increase in SG&A was driven by the investments we are making in areas that support our long-term growth initiatives such as new stores, omnichannel, supply chain and customer data.

Net income for the quarter was $100 million or 7.2% of net sales, resulting in GAAP diluted earnings per share of $1.31. Adjusted diluted earnings per share were $1.38. Our balance sheet remains strong with $275 million in cash and no outstanding borrowings on our $1 billion credit facility at the end of the quarter. Our inventory balance was $1.49 billion, which was flat compared to last year in both dollars and units. On a per store basis, units declined 4%. Heading into the remainder of the holiday season, we believe that our current assortment and level of inventory is appropriate to support the business. During the third quarter, Academy generated $57.5 million in net cash from operating activities. This is a 13% increase compared to last year.

We continue to execute our capital allocation strategy by self-funding our growth initiatives and returning cash to shareholders. During the quarter, we repurchased approximately 864,000 shares for $44 million and paid out $6.7 million in dividends. As of the end of the quarter, we had approximately $100 million available on the current share repurchase authorization. On November 29, 2023, the Board approved a dividend of $0.09 per share payable on January 10, 2024 to stockholders of record as of December 13, 2023. Demonstrating the commitment to our capital allocation strategy, the Board also approved a new three year $600 million share repurchase authorization. Together with our remaining $100 million, the company now has $700 million of share repurchase authorization available for the next three years.

Year-to-date, the company has spent $152 million on capital expenditures. For the full year, we expect to spend between $175 million and $225 million. Shifting now to guidance. Based on our year-to-date results and current expectations for the fourth quarter, we are narrowing our fiscal 2023 net sales guidance from the previous range of $6.17 billion to $6.36 billion to $6.10 billion to $6.17 billion. This translates to a revised comparable sales range of negative 7.5% to negative 6.5%. Our full year gross margin rate is expected to finish between 34.0% to 34.2%. GAAP income before taxes is now expected to range from $670 million to $680 million and GAAP net income between $520 million and $530 million. GAAP diluted earnings per share are now expected to be $6.70 per share to $6.85 per share and adjusted diluted earnings per share are expected to range from $7.05 per share to $7.20 per share.

We now expect to generate $300 million to $350 million of adjusted free cash flow in fiscal 2023. The earnings per share estimates are calculated on a share count of 77.3 million diluted weighted average shares outstanding for the full year and do not include any potential Q4 repurchase activity. As far as providing guidance beyond fiscal 2023, we plan to give fiscal 2024 guidance in March on our year-end call. I will now turn the call back over to Steve for some closing remarks. Steve?

Steve Lawrence: As you can tell from our commentary today, the third quarter was challenging for us. That being said, we’ve seen the customer come out and shop during the key moments on the calendar, and there is no bigger moment than the upcoming holiday season. Team has been preparing for Q4 all year. And we’re off to a solid start in November. As we expected, we saw traffic patterns return to a more normalized pre-pandemic pattern with less pull-forward of demand during the early part of the month. We put together a strong set of promotions for Thanksgiving week. We saw strong reaction from the customer, yielding one of our biggest Black Friday events ever. While we still have a lot of business ahead of us, success of our Thanksgiving promotion helped generate some momentum as we head into December.

Looking forward into the remainder of holiday, we have a strong promotional cadence, supported by an aggressive marketing spend, which should help us deliver outstanding value to our customers. Our inventory is in the best position we’ve been in over the past three years with a focus on the key giftable categories, along with new brands and innovative items customers have been voting for all year. I’ve been in all three of our DCs and a lot of our stores over the past quarter, and I can tell you that teams are ready and excited for customers this Christmas. With that, we will now open it up for questions.

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Q&A Session

Operator: The company will now open the call up for your questions. [Operator Instructions] Our first question comes from Brian Nagel with Oppenheimer. Please proceed with your question.

Brian Nagel: Hi. Good morning.

Steve Lawrence: Good morning.

Carl Ford: Good morning.

Brian Nagel: My first question, looking at the results here over the last few quarters, maybe we talked about kind of the top line weakness. But recognizing you haven’t given guidance for ’24 and you plan to do so early next year, but I guess the question I have is, as we think about this comp trajectory and kind of the moving pieces, what are the puts and takes as you look at the business to get back to positive comps for the company?

Steve Lawrence: Yeah. I’ll start and Carl may jump in. But when we thought about this year, and I think we shared this on our last call, coming off the pandemic, having two back-to-back double-digit comp years, we anticipated ’22 was going to be kind of a year of reset. Thought we’d get back to growth this year. Clearly, the thing that is challenged this year is the customer is under pressure. So we feel like we don’t have a challenged strategy. We’ve got a challenge customer. So the things that we’ve been focusing on as we move forward is managing through the short term, making sure we’re delivering against the things customer is looking for. Customer is voting for value. So we’re delivering value in a couple of different ways: first, our everyday value proposition; second, the promotions that we run during key time periods during the year; and third, the clearance events that we run at the end of each season.

And then on the other end of the spectrum, we’re seeing customers gravitate towards newness. So we’re also focused on delivering a steady diet of new brands and new ideas. That being said, another drag in our comp has been our outdoor business, which, through the first couple of quarters, was down double digits. We’ve seen that business start to get better as we started lapping softer comps. And so, I think as we move into next year — and you’re right, we’re not ready to give guidance for next year. I think the focus on value newness, leaning into our initiatives longer term in terms of opening new stores, the growth we think we have in dot-com and getting more productivity out of our existing base of stores, we think all of those things are the key ingredients to returning back to positive comps.

That being said, when the customers’ health turns around a little bit, that we can’t determine. What we can focus on are the things that are within our control, and that’s what we’re focused on.

Carl Ford: Yes, Brian. The only thing I would add there to the initiatives that Steve walked through, there’s a big comp sales waterfall embedded within them. He mentioned new stores and omnichannel. I would also say the customer data platform, we got it up and running in July. We’re running a lot of tests associated with it. They’re positive out of the gate. I think as we ramp our maturity, working with the tool and getting more customer data, I think that’s a tailwind for a long time.

Brian Nagel: No, look, that’s very helpful. Then the second question, again, I know we’re dealing with a very fluid demand backdrop in a relatively short amount of time. But as you look at your business, particularly relative to all the internal initiatives you’ve done with merchandising, are you capturing — do you think you’re generally capturing share across the board? Or are there parts where you potentially could be losing share here?

Steve Lawrence: Yes. Listen, we look at market share first on a broad basis, and we look at it over a longer horizon than just a month or a quarter. When we look at it on a yearly basis, we know we’re picking up a little bit of share. When we look at it on a longer-term basis, we’re very happy with that. If you look at our sales versus 2019, we’re still up about 25%. So broadly, we believe we picked up a lot of share over the past four years, and we’re holding on to that share. Beneath the surface, there’s always puts and takes here and there. But we believe we’ve picked up share and are holding on to it.

Brian Nagel: Okay. I appreciate all the color. Thank you.

Steve Lawrence: Thank you.

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

Michael Lasser: Good morning. Thank you so much for taking my question. With your gross margin down 44 basis points, how are you looking at the need to continue to make these types of discounting and other promotional investments in order to drive the top line?

Carl Ford: Yeah. From a gross margin standpoint, you referenced the 44 basis points. I would hearken back to kind of some of the structural improvements that we’ve made. We’re up about 500 basis points to FY ’19. I think about the early initiatives that we talked to you about around power merchandising and the things that we’ve done there have a lot of lasting power, and I just want to run through some of them. We exited a bunch of categories that weren’t really synonymous to sports and outdoors, toys, luggage, electronics. We implemented season codes, systemically driven clearance, life cycle management. We really optimized buy and overall inventory management with a pretty upgraded open-to-buy process. We’ve made allocation, replenishment, system enhancements, and those are learning.

They continue to get better and better. Pricing, system updates with reg price optimization, I really feel like we’ve done a good job there. And then to your last point, just managing promotions, but managing them from a position of inventory strength. And so, the 50 basis point decline was really driven by planned promotions and our customer gravitating towards that value side of our offering. It was included in our guidance. We are going to continue — like we’re an everyday value provider. So you’re going to see value every day. We’re really only going to promote during those key shopping moments, and we’ve embedded that within the guidance. And so, I do want to reiterate, our fourth quarter gross margin last year in the fourth quarter was 32.8%.

The high and the low range that we put out there in this guidance, on the low, it’s a little bit worse than that. On the high, it’s a little bit higher than that. We’re planning on promotionality, and we’ve got some tailwinds with the supply chain costs.

Michael Lasser: Look, my follow-up question is, as you look to next year, how much more room is there to reduce SG&A without impacting the customer experience and how are you thinking about that in the fourth quarter? Thank you.

Carl Ford: Yeah. I won’t get into next year’s guidance, but I will say, from an expense standpoint, this third quarter SG&A was up about $3 million to last year. That was — more than that was our strategic investments around new stores, omnichannel, customer data, supply chain. We’re flexing our variable costs really well, and we kind of keep a gauge on that by looking at our customer satisfaction scores, and we continue to be really proud of those. So if you think about the long range plan that we put out there, we had about 200 basis points of deleverage in SG&A along the span of this. Now, that was offset by gross margin improvements, largely driven by supply chain. The guidance implies about 200 basis points of SG&A deleverage in this year.