Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q4 2022 Earnings Call Transcript

Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good morning, ladies and gentlemen and welcome to Academy Sports and Outdoor’s Fourth Quarter and Fiscal Year-End 2022 Results Conference Call. At this time, this call is being recorded. I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Autos. Matt, please go ahead.

Matt Hodges : Good morning, everyone. Thank you for joining the Academy Sports & Outdoors Fourth Quarter and Fiscal 2022 Financial Results call. Participating on the call are Ken Hicks, Chairman, President and CEO; Michael Mullican, Executive Vice President and CFO, and 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 in 2021, the 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.

Ken Hicks : Thank you, Matt. Good morning, and thank you all for joining us today. As we wrap up and reflect upon fiscal 2022, we closed out a year that was both rewarding and challenging. During the fourth quarter and the full year, we faced pressure from the uncertain macroeconomic environment and comp periods of our strongest financial results. Our team effectively executed against our strategic plan. And as a result, we delivered solid earnings generated and returned a significant amount of free cash flow, grew market share and created value for our stakeholders despite not meeting our sales expectations. Turning to our fourth quarter results. We reported net sales of $1.75 billion and negative 5.1% comparable sales. During the quarter, we had our highest sales day ever on Black Friday and a strong Cyber Monday.

We then saw the return of the traditional shopping level the first couple of weeks of December, followed by consumers returning the week of Christmas. Overall, footwear and apparel sales grew, while outdoors and sports and recreation experienced sales declines. Steve will discuss our sales results in more detail later in the call. In terms of profitability, fourth quarter adjusted net income grew 12.5% to $163.5 million or $2.04 of adjusted diluted earnings per share, led by gross margin expansion from lower freight costs, a sales mix shift towards soft goods and efficiently managing our SG&A expenses. During the year, led by our dedicated team members, Academy accomplished many of the strategic and operational goals we set at the beginning of the year.

For example, we strengthened existing markets and entered new markets with the successful opening of 9 new stores. This was our first year of opening new stores since 2019 and we’re pleased with the overall performance of this class of stores. Each opening also provided unique opportunities that we are learning from and leveraging to improve future store openings. We grew our omnichannel business by adding new features to enhance our customer shopping experience. In 2022, e-commerce sales were 10.7% of total merchandising sales up 140 basis points from 2021 and 1 year ahead of our goal to achieve a 10% penetration rate. For the full year, approximately half of our e-commerce sales were buy-online-pick-up-in-store and over 75% of all e-commerce sales were fulfilled through our stores.

In addition, our mobile app saw a 180% increase in the number of downloads compared to 2021. Our omnichannel business is a competitive advantage for us as it utilizes our store base to drive higher sales conversion with healthy margins. We provided a great customer experience. We continue to invest in the look and feel of the stores to increase engagement. In 2022, we remodeled 11 existing stores. We also upgraded our technology throughout the store chain to improve checkout times and to manage store labor, resulting in more customer-facing hours to focus on delivering an enjoyable and fun shopping experience to our customers. We also continue to enhance our product assortment with our preferred vendor partners as well as new ones to ensure we’re in stock with the inventory our customers want while not losing our focus on value.

In 2022, these efforts led to record customer service scores exceeding last year’s strong results. We invested in and completed several internal projects to increase efficiency of our store operations, merchandise planning and allocation and supply chain. These efforts will pay dividends for years to come. We increased our engagement in meaningful ESG practices by publishing an updated ESG report in May, followed by a greenhouse gas emission supplement reporting our Scope 1 and 2 emissions in December. And we generated solid profits and cash flow. We used our cash flow to execute our comprehensive capital allocation strategy in order to increase total shareholder return. In 2022, Academy returned $614 million to stakeholders through $490 million worth of share repurchases, $24 million in dividend payouts and $100 million in debt reduction while also supporting our growth initiatives and financial stability.

The team’s accomplishments in 2022 has strengthened the foundation we have built over the past several years and positioned Academy for a major growth phase as we head into fiscal 2023. I’d like to thank all of the Academy team members for their efforts over the past year. As we begin fiscal 2023, we anticipate that consumers will remain pressured and mindful of their spending due to the current economy. With this as a backdrop, our market position as a value leader is more important than ever. We appeal to a wide demographic of consumers with our everyday value proposition and broad assortment of good, better, best national and private brands to meet our customers’ needs of having fun at an affordable price. Our focus in 2023 will be investing for the long-term growth.

We plan to continue the progress made over the last few years by continuing to improve our operations and focusing on the things we can control as a company to grow the business. The main growth priorities for Academy in 2023 are: expanding the store base in existing and new markets with the opening of 13 to 15 new stores, continuing to build a more powerful omnichannel business, driving growth from our existing stores by improving service and productivity, strengthening our merchandising assortment, and attracting and engaging customers and leveraging and scaling our supply chain to support our future growth. These priorities, along with our established differentiated market position, built on value, assortment and service as well as our strong relationships with key vendors give us an excellent runway for growth in 2023 and beyond.

The Academy team is excited about the opportunities that are in front of us as we strive towards achieving our vision of becoming the best sports and outdoors retailer in the country, while providing fun for all and creating value for our stakeholders. Finally, I’d like to extend an invitation to you to tune into Academy’s upcoming Analyst and Investor Day on April 3 and 4 here in Katy, Texas, where we will introduce the company’s new long-range plan with financial targets. More details will be announced soon. I’ll now turn the call over to Michael to provide more details on our fourth quarter financial results, new stores and provide our initial 2023 guidance. Michael?

Michael Mullican: Thanks, Ken. Good morning, everyone. I will start by reviewing our fourth quarter and full year performance and then move on to discuss our initial financial outlook for 2023. Net sales for the fourth quarter were $1.75 billion with comparable sales of negative 5.1%. Sales were lower than planned due to fewer transactions, partially offset by an increase in average ticket size. When compared to 2019, Q4 sales increased by 27.4%. For the full year, net sales were $6.4 billion, with comparable sales of negative 6.4%. When compared to 2019, our full year sales increased by 32.4%. We maintained or gained market share in all product divisions for the full year, and our market share is well above 2019 levels. Switching to gross margin.

In the fourth quarter, gross margin was $572.5 million with a rate of 32.8%, a 50 basis point improvement over Q4 of last year. The rate improvement was driven primarily by lower freight costs and a sales mix shift towards soft goods, partially offset by more promotional activity. For the full year, gross margin was $2.2 billion with a rate of 34.6% of sales. This rate is 10 basis points below fiscal 2021 of 500 basis points higher than fiscal 2019. This is the second consecutive year Academy has finished with an annual margin rate above 34%. We are realizing sustainable benefits driven by the merchandising changes made over the last few years, including more thoughtful inventory management, systems upgrades and greater localization. In the fourth quarter, our operating income rate increased by 70 basis points to 11.7%, making this the eighth quarter in a row Academy has reported double-digit operating income rates.

Taken all together, net income grew 11.2% in the fourth quarter to $157.7 million. When compared to Q4 2019, net income increased by more than 780%. Fourth quarter GAAP diluted earnings per share increased 25.5% to $1.97 per share. Fourth quarter adjusted diluted earnings per share increased 26.7% to $2.04 per share. For the full year, net income was $628 million, or 9.8% of sales compared to $671.4 million or 9.9% of sales in 2021. Fiscal 2022, GAAP diluted earnings per share increased 5.2% to a record $7.49 per share. Fiscal 2022 adjusted diluted earnings per share increased 1.3% to $7.70 per share. Our balance sheet remains very strong with $337 million in cash and no outstanding borrowings on our $1 billion credit facility at the end of the fiscal year.

Academy continues to generate meaningful positive cash flow delivering $242.8 million in net cash from operating activities during Q4 and $552 million for the full year. During the fourth quarter, we continued to execute our comprehensive capital allocation plan by returning cash to our stakeholders in the following manner: repurchasing 1.9 million shares for approximately $100 million, paying out $6 million in dividends and paying down $100 million of our term loan, reducing our total debt to $595 million, which is not due until 2027. In addition, the Board recently approved a 20% dividend increase to $0.09 per share payable on April 13, 2023, to stockholders of record as of March 23, 2023. Our year-end inventory balance was $1.3 billion, a 9.5% increase compared to Q4 2021.

When compared to Q4 of 2019, inventory dollars were up 16.7% while units declined by 7%. Drilling down to store level metrics. Sales per square foot in 2022 were $340 per foot and operating income per store was $3.2 million. When compared to 2019, sales per square foot have increased 29%, and operating income per square foot has grown by more than 350%. These industry-leading productivity measures give us great optimism as we increase the pace of our store opening program. 2022 was a test-and-learn year as we built up the capability to open new stores at scale again. We opened a brand new markets such as Virginia and West Virginia. We also built new capabilities by retrofitting takeover spaces and designing and implementing new store layout.

To summarize, we have proven over the last several years that our business model is durable and able to produce profits through various macroeconomic environments. 2022 was the second consecutive year that Academy has delivered gross margins greater than 30%, operating margins above 13% and free cash flow margin greater than 6%. Our free cash flow has enabled us to repurchase more than $400 million of shares and pay down $100 million of debt in each of the last 2 years. Turning to 2023. We entered the year in a very strong financial position. with good inventory levels and a healthy cash balance. Our goal is to improve our ability to increase sales and profits over the long term through new store openings, omnichannel expansion and increasing the productivity of existing stores, all while generating significant free cash flow.

Academy is providing the following initial guidance for fiscal 2023. Net sales of $6.5 billion to $6.7 billion which is 2.5% to 5% growth. Comparable sales are expected to range from negative 2% to positive 1%. Gross margin rate between 34% and 34.4%. GAAP income before taxes is expected to range from $705 million to $780 million, GAAP net income of between $535 million and $595 million. GAAP diluted earnings of $6.70 per share to $7.45 per share. Adjusted diluted earnings per share, which excludes certain estimated expenses, such as stock compensation, are expected to range from $7 per share to $7.75 per share. The earnings per share estimates are calculated on a share count of 80.2 million diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity using our remaining $300 million repurchase authorization.

Fiscal 2023 is a 53-week year for us. We expect this extra week to add approximately $85 million of sales for the year. Here, our additional modeling assumptions reflected in our additional guidance. SG&A expenses are expected to be approximately 100 basis points higher than in 2022. This is the result of the 53rd week and from investments in new stores, technology to support growth and an increase in digital marketing. Interest expense is expected to be $43 million, down from $46 million in fiscal ’22 due to our reduced debt levels. Capital expenditures are forecasted to range from $200 million to $250 million. We expect to generate $450 million to $500 million of free cash flow. With that, I will turn the call over to Steve for more details around our merchandising and operations performance.

Steve?

Steve Lawrence: Thanks, Michael. As you heard from Michael and Ken, our Q4 sales came in at $1.75 billion, which is a 5.1% comp decline versus 2021, it was up 27% versus our 2019 baseline and it was fairly similar to our Q3 trend, which was up 30% versus 2019. In terms of how the quarter played out, we saw the traffic patterns return to a more normalized pre-COVID holiday season. We did not get the same pull forward of demand in November that we’ve seen in the past couple of years when there is scarcity of supply in the market across many key categories. Improved inventory levels across most retailers allow customers to wait later in the calendar to take advantage of the deals they anticipated would be out there. As we expected, we did see customers turn out to shop during the normal kick off the holiday that is the Thanksgiving weekend and have a large shopping day in the company’s history on Black Friday.

Similar to pre-COVID years, once we got past Thanksgiving, we saw the early December low return with the shopping and traffic ramping back up the last week leading up to Christmas. Overall, while the holiday season had its challenges, we are pleased that we held on the majority of the gains we’ve made during the past couple of years. Breaking Q4 now by division, we saw continued sales momentum in the soft goods half of the business, the footwear up 2.2% for last year and apparel running a 1.8% increase versus ’21. The footwear business was driven by strength on our big brands such as Nike, Brooks and SKECHERS along with new brands like Haydude. We also continue to benefit from more controlled distribution by some of our key vendor partners as it allows us to get access to more products while also driving consumers to our stores.

On the apparel side, we benefited from having a much better inventory position across all of our cold weather seasonal categories from key national brands such as Nike and Carhart, another win for us on the softwood side of the business was the performance of key private brands such as BCG and the gentleman freely enrolled. These brands are packed with value and continue to be growth engines for us. The hardwood side of the business had a more challenging Q4 with sports direct sales down 7.2% and outdoor sales down 9.3%. In terms of our sports direct business, we saw strength in our sporting goods products with continued softness in some of the COVID surge categories, such as bikes and fitness equipment. On the auto front, our biggest challenge remains the hunting business, which while still up 15% versus 2019 was down 7% versus last year.

While we ran a decline for last year, Q4 was an improvement over the third quarter of as we continue to anniversary large surges in demand by the scarcity of supply that we’re still prevalent a year ago. Shifting to margins. Our gross margin rate for Q4 came in at 32.8%, which was a 50 basis point increase versus 2021 was up 580 basis points versus 2019. Merchandise margin was down 110 basis points versus last year, which was in line with where we planned it. Knowing that this year is going to be a return to a more normalized promotional holiday, we strategically layered in discounts around key time periods to help drive traffic and provide great value offerings to our customers while maintaining strong profitability. Our fourth quarter merchandise margins, while down to last year, was still up 490 basis points versus 2019.

We continue to attribute the majority of the gross margin gain versus 2019 to the hard work the teams have done over the past couple of years around improving buying and planning and allocation disciplines and processes. We expect to see more promotions during 2023 and have accounted for this in our initial gross margin guidance that Michael shared with you earlier. Turning to inventory. We are pleased that our teams continue to show strong inventory management discipline. We ended the year with inventory up 9.5% versus last year, which is lower than the 12.8% increase we entered the fourth quarter with. When you compare against 2019, our sales were up 32.4% with only 16.7% more inventory. You may remember that last year, we still had several businesses that we’re operating with a constrained supply chain.

We are no longer in this situation and for the most part, we’re healthy stock levels across most categories. Beneath the surface, we’re also in a much better place in terms of our inventory content with a much greater emphasis on forward-facing spring categories. The supply chain was still fairly disrupted in Q4 of ’21. And as a result, we did not get the level of spring transitional product that we needed. With the more normalized supply chain this year, we’re running 2023 with our inventories in a much better place. As we turn the page and shift our focus to 2023, we have several reasons for optimism: First, the improved inventory levels in content that I just mentioned has positioned us well in many of our seasonal categories to take advantage when the weather warms up.

Second, we have increased our investment in hot trending businesses such as team sports and cleats, while also going after categories such as fishing and camping where competitors have continued to pull back. Third, we’re redoubling our focus on value with an expanded list of everyday value items across all of our categories, coupled with increased emphasis across all customer touch points and stores online and in marketing. Fourth, we’re continuing to lean into new initiatives and brands that resonate with our core target customer. Fundamental ideas, you’ll see in our stores and on academy.com for the spring includes such ideas as the launch of Birkenstock and footwear and extending Googan, which is one of our most popular brands in fishing basin equipment into apparel and rolling out BoGbags, the new must-have all-purpose summer tote that works ex well on the sideline worth Beach.

Finally, we continue to make strides towards having a much more digitally targeted advertising focus while reducing our reliance on traditional broadcast and print. There are several new enhancements coming this year, including a new and much more robust customer data platform combination of better tools, coupled with constantly improving and refining our strategies and tactics around digital marketing should allow us to continue to improve our overall marketing reach and effectiveness by increasing customer engagement. In closing, we believe that we are well positioned to grow sales and gain market share in 2023. Customers continue to gravitate towards the categories we carry and the work we’re doing to reinforce our position as the value leader in the space, coupled with our new store expansion, positions us well to pick up market share.

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

Ken Hicks : Thank you, Steve. Academy shown that the operational improvements we’ve made to our business over the past 4 years were structural and have driven higher levels of performance and profitability compared to when we began making them. By making the changes you’ve heard us describe many times on these calls, we have operationally and financially transformed the company and laid the foundation for an exciting growth phase. We expect to achieve this growth by opening a significant number of new stores over the next several years continuing to expand our omnichannel business, elevating the performance of the existing store base and leveraging and scaling our supply chain. We remain realistic about the challenges the macroeconomic environment presents, but we are confident in our plan and in our ability to navigate uncertain times with our value offering compelling assortments and position of financial strength as we strive to be the best sports and outdoor retailer in the country.

We look forward to sharing our new long-range plan with you in April. Until then, have fun out there. We’ll now open up the call for your questions. Thank you.

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Q&A Session

Operator: Our first question comes from the line of Robert Ohmes from Bank of America.

Alex Perry : This is Alex Perry on for Robbie. So I just wanted to ask a little bit about the gross margin. So it’s expected to come down year-over-year. Maybe just help us with the key components that you’re sort of contemplating there. It sounds like a more promotional environment and pressure on merch margins. But are you mixed tailwinds as the hunt business continues to remain under pressure? And how does freight play into this? And then how would you characterize the overall apparel environment right now? Is it promotional out there? There seems to be a a lot of mixed commentary there.

Michael Mullican: Alex, it’s Michael. I’ll take the first question and then pass it over to Steve. With respect to gross margin rate, I’d like to remind everyone, keep in mind, we’re starting from a pretty high place. We’re 500 basis points higher than we were in 2019. And so we’ve been hanging out on top of the gross margin rate Mountain for a really long time. merchandise margins next year, we believe, will be a bit lower to allow for some additional promotional activity and to maintain our everyday value positioning with our customer that they expect from us, particularly right now in this environment. That will be offset in some degree, by some supply chain tailwinds as we will see some supply chain savings next year due to lower container costs. All other gross margin puts and takes will maintain relatively consistent I think Steve can take the question on the apparel side.

Steve Lawrence: Yes. We’re actually very happy with where our apparel business is. It was one of our better trending categories for Q4, and we expect that to be a growth engine for us as we go into 2023. If you go back a year ago and you think about where we were, there was still a pretty constrained supply chain, and we really weren’t happy with the level of transition merchandise we got last year post Christmas setting in the spring. As we said in the prepared comments, the place we’re at today is a much better forward-facing inventory position, we feel really ready to take advantage when the weather turns warm. And that certainly was a win for us on the margin front in Q4 as we do mix forward with more are more or that is a tailwind for us, and we have that baked into the guidance that Michael shared with you earlier.

Alex Perry : Perfect. And then just my follow-up question is how are you thinking about transactions versus ticket this year, especially with the better inventory positions on a year-over-year basis, would you still expect traffic to remain under pressure. And then what is driving that? Is that still pressure from the lapping of the multi trips from the AMO stock outs?

Steve Lawrence: Yes. I think the consumers obviously under pressure, and that has an impact on traffic. That said, we believe that people still are excited about having the experience that they can have with sports and outdoors and we believe that while transactions may be challenged some in the coming year that the assortment that we have, what we’ve done with pricing, what we’re doing with our in-stocks will help us continue to grow and develop the business even though the consumer is challenged.

Michael Mullican: Just a little bit of additional color on that one, Alex. One of the things we look at when we’ve got businesses that are running down and our field business was down is whether the business is demand challenged or share challenge. And the biggest portion of our sales miss was really compartmentalized in our field division and that corresponds with some of the traffic decline that we’ve seen. We took share in the quarter in that business. We’ve taken a lot of share over the few years. Ammunition is the biggest piece of that. And we are seeing that stabilize. So we certainly think the traffic will rebound. Those trends are improving. So we look forward to that business stabilizing going forward.

Operator: Our next question comes from the line of Christopher Horvers from JPMorgan.

Megan Alexander : This is Megan Alexander on for Chris. Maybe a couple of related questions on the top line. So similar to what you provided on — are you able to strip out the MO headwind and kind of tell us how the business performed, excluding that? And then as you think about how you’re planning the business for ’23, are you still looking at 2019? Is the reference point and kind of assuming that trend ex Ammo holds, so broadly assuming normal seasonality? And if so, how should we think about the cadence of comps over the year?

Steve Lawrence: Yes, this is Steve. I’ll take the first part. When you look at our business, we called out strength in the softwood side of part where both rent increases for the year. As Michael said, the hunting category was probably the biggest headwind we faced. We also had some challenges in some of the search categories that we saw a pull forward of demand in the last couple of years like bikes and fitness equipment. As we got past holiday, a lot of those things start to even out. And as we look into this year, what we really see happening is that animal headwind and that hunting headwind starts to diminish as we go through the quarters and start to normalize. We’re up against one kind of last surge quarter in Q1. But as we get through the quarters, we expect them to sequentially get better and improve as we progress through the year.

Ken Hicks: And we’re seeing a good result in not just apparel and footwear, there are a number of other businesses. Steve talked about team sports and things like outdoor cooking. We look forward to seeing some of the camping areas come back. So this is — one of the strengths of the company is the breadth of our assortment and our ability to compete in a bunch of different classifications. With regard to 2023, we think that the pattern of the sales will get to be more normalized, more like historical or not some of the searches that we’ve seen in the last few years. That said, we’re moving off of the 2019. We set a much higher plateau, and that’s where we are. And I think 3 years, there’s enough to prove that we’re not going to fall back down to 2019.

So that’s where we’re moving from. We look at the business being more normalized in terms of the flow through the year. This year, as Michael said in the guidance, we anticipate the first part being a little bit more challenged, but we look forward to sequential improvement as we move through the year.

Steve Lawrence: And just to add 1 point to that. As Ken said, we expect it to be more of a normal cadence. But at a higher baseline, I mean, when you look at a lot of these certain categories that we talk about, we’re still way up to where we were in ’19. And as a matter of fact, those categories in aggregate are pacing ahead of the company average for that time period.

Megan Alexander : Got it. All really helpful. Maybe as a follow-up, Ken, there’s been a lot of investor speculation about you potentially the timing of you announcing your succession plan. So can you maybe share your thoughts on that today? And how you think about your role at Academy and what that could look like over, say, the next 1 to 3 years?