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

Academy Sports and Outdoors, Inc. (NASDAQ:ASO) Q4 2023 Earnings Call Transcript March 21, 2024

Academy Sports and Outdoors, Inc. misses on earnings expectations. Reported EPS is $2.21 EPS, expectations were $2.34. ASO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors Fourth Quarter and Fiscal Year and 2023 Results Conference Call. At this time, this call is being recorded. [Operator Instructions] 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.

Matt Hodges: Good morning, everyone. And thank you for joining the Academy Sports and Outdoors’ fourth 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. 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. Please note that we have posted a supplemental slide presentation on our website, to accompany today’s earnings release. I’ll now turn the call over to Steve Lawrence for his remarks. Steve?

Steve Lawrence: Thanks, Matt. Good morning to everyone, and thank you for joining us on our fourth quarter earnings call. During our call today, will provide details on the results for both Q4 and 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. As you saw from the results we announced earlier this morning, we had an improvement in our trend during the fourth quarter, with sales coming in at $1.8 billion, 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 first three quarters of the year.

Our adjusted earnings per share for the fourth quarter, came in at $2.21, an increase of 8% versus last year. We would characterized 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 years, when customers shopped early based on scarcity of supply. We then saw the traditional acceleration in business, during Thanksgiving and Cyber Week, followed by a lull 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, but 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 $6.2 billion or negative 6.5% 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. 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. A combination of sales and margin performance, allowed us 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 stores, which is five more stores than we opened in 2022. The team is applying learnings for the prior year’s openings, and as a result, these stores are projected, to have a higher year one volume, than the ’22 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 into our customer shopping patterns. 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 we’ll be rolling out, to all of our distribution centers over the next 18 to 24 months. We’re also proud to give back to the communities we serve. 2023, through direct giving, partnership support, merchant-wise discounts, various organizations, Academy distributed over $30 million 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. In addition to these two talented and experienced executives, coupled with combining supply chain and stores under our 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 a weakening in overall consumer health. In that this, 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 of their sports and outdoor activities.

A great example of this, is a promotion we just ran to kick-off baseball in early March. 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, pant 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 billion plus, generate earnings of 10%, or greater, keep a 13.5% adjusted EBIT margin rate, drive our .com penetration to 15% of total revenue, or greater, and thoughtfully invest in our cash flows into initiatives that drive a 30% ROIC.

We learned a lot over the past year, and as we move forward, we’ll continue to refine the tactics, for us achieving our long range goals. We’ve done a deep dive on the 23 stores that we opened up in 2022 and 2023. We’re applying the lessons we’ve learned from these two 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 one volume target of $18 million that would mature over five years. The majority of the stores that we’ve opened up over the past two years have been in newer markets. As we’ve discussed previously, we’re seeing faster ramps in stores open in existing markets. We have higher brand awareness and slower ramps in 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 one sales volume to be, between $12 million to $16 million with a 5-year ramp 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. We’ve learned that stores open in the first half of the year, get out of the gate faster than stores open up in Q3 and Q4. Based on this, starting in 2025 and forward, building our new store pipeline, to support roughly 50% of the stores for each year, to open up in first 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. Once again, we have balanced approach between various market sizes. Finally, over the past 18 months, we’ve opened up four 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 close-time proximity to each other, helps 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. As you can see on Slide 7, our revised new store growth plan now projects 160 to 180 stores over the next five years, with a target of 15 to 17 of them opening up in 2024. The second pillar of our growth strategy is to drive our .com penetration, to 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 have to double our .com sales over the next five years in order to hit this goal, which 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. This was the primary reason we recently created our new Chief Customer Officer position, and hired Chad Fox to fill this role. We’ve combine our marketing, customer analytics, and e-commerce teams into one organization to make 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’s going to help us lever our new customer data platform, drive greater customer engagement, and new customer acquisition.

The key focuses for Chad 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, improving customer identification and engagement, with the rollout of an expanded loyalty program. The third 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.

But what the Chad and his team are focused on, will also help accelerate growth from these initiatives. While 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. 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 will help develop a world-class supply chain for Cisco. His deep experience in working with Manhattan, would also help 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 with steep flow and speeding up the pace at which we speak to 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. While I’ll 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. The result of this is that our forecasted need of a fourth distribution center, will move from a 2026 go live, 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. 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’re conservatively modeling a negative four to plus one 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.

Carl Ford: 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 fourth quarter and full year results. Our fourth quarter net sales, came in at $1.8 billion, with a comp of negative 3.6%. 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% of total merchandise sales, compared to 13.5% in the fourth quarter of 2022. Our fourth quarter 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. Apparel was our second 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. 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 bikes. For the full year, net sales were $6.2 billion, with comparable sales of negative 6.5%. E-commerce sales were 10.7%, of total merchandise sales, which was the same as last year.

Looking at gross margins, the gross margin rate in the fourth 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. 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 third 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. During the fourth quarter, our SG&A de-levered 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, omni-channel, customer data, and supply chain. For the full year, over 90% of the SG&A dollar growth, was spent on our growth initiatives. Overall, we controlled inventory, promotions, and expense to deliver net income during the fourth quarter of $168.2 million, a 6.7% increase over last year. GAAP diluted earnings per share was $2.21 for the fourth quarter and $6.70, for fiscal 2023.

Adjusted diluted earnings per share was also $2.21 for Q4 and $6.96 for fiscal 2023. Looking at the balance sheet, our inventory at year-end was $1.2 billion, 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%. We have had a balanced approach to capital allocation since going public in October of 2020. The three pillars of our strategy, are maintaining adequate liquidity for 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 billion of share repurchases.

We’ve also reduced our debt, by almost $1 billion and paid more than $50 million in dividends. As a result of these actions, Academy is one of the highest returning stocks, from the class of 2020 IPOs. During Q4 and fiscal 2023, Academy continued to generate positive net cash from operations. In Q4, we generated approximately $235 million and $536 million for the full year. We utilized the cash to paydown $100 million of the company’s term loan, reducing the outstanding balance to $91.8 million. After the paydown, we have $348 million in cash $484.6 million of total debt, and no outstanding borrowings on our $1 billion credit facility, which was recently amended and extended through March of 2029. During Q4, we repurchased approximately $3 million worth of shares.

For all of fiscal 2023, we decreased our net share count by $3.7 million through $204 million in share repurchases. As of the end of the fiscal year, Academy has $697 million 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 omni-channel business, leveraging our customer data platform, and modernizing and scaling our supply chain. Based on this, Academy is providing the following initial guidance for fiscal 2024. Net sales ranging from $6.07 billion to $6.35 billion. At the midpoint, this is 2% growth compared to fiscal 2023, when excluding the $73 million in sales related to the 53rd week. Comparable sales of negative 4% to positive 1%. Gross margin rate between 34.3% and 34.7%. GAAP net income between $455 million and $530 million, 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 million diluted weighted average shares outstanding, for the full year and do not include any potential repurchase activity.

In 2024, we will no longer be guiding to adjusted net income or adjusted earnings per share. Any adjustments, such as stock compensation, will be provided in the quarterly results. SG&A expenses, which include stock-based compensation expense of $30 million 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 million down from $46 million in fiscal 2023, due to our reduced debt levels. We expect to generate $290 million to $375 million of free cash flow, including $225 million to $275 million 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.

I will now turn the call back over to Steve.

Steve Lawrence: 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 if we leverage them, 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, with 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 of our Academy. With that, we’ll now open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] My first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman: Hi guys, thanks for the question. My first question is on thinking about the normalized comp rate for the business. It’s three years sort of post-COVID and the business did really well, but it is still coming 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?

Steve Lawrence: Yes, thanks for the question. So, how we would characterize it is we have a challenge 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 pretty strong growth in – 2020 and 2021, then we saw a pullback in ’22. We think that was the start of the rebase lining coming out of COVID that continued into ’23. I think as we got through ’23, 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 periods. We feel like we’re past a lot of that rebase lining. What we’re dealing with right now is primarily a challenge customer, and I think that’s pretty well documented.

Obviously inflation continues to be pretty high, consumer debt’s pretty high. What that’s really translating into, is a customer who’s 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 modeled our business and built it moving forward.

Simeon Gutman: 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 order fall second and third 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?

Steve Lawrence: Yes, that’s correct. I mean and that’s why we went into some pretty good detail on that. I mean, it stands for reason. Where we’ve got high brand awareness, we’re seeing those store start out very, very strong. And some of these smaller markets where we’re going in with one or two stores at a time, is taking a little longer to build brand awareness. 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 outside growth in the first five years. Over the next five to 10 years beyond that, we would accept 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.

Simeon Gutman: Makes sense. Okay. Thanks. Good luck.

Steve Lawrence: Thanks.

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

Kate McShane: 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 have 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 24?

Steve Lawrence: 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 in our customer see us as the value provider in our space. And we deliver value on a multitude of fronts. A lot of that is 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 deliver value is promotions.

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. And I think we leaned into those three different ways to deliver value for holiday. And we think that’s what we saw in inflection during Q4. We saw a negative three, six comp versus a negative seven, six at running through the first three quarters of the year. So we think that that really kind of broke, through during that time period. So I wouldn’t say it’s as much a renewed focus. It’s just a continued focus. And then looking for ways to expand it. And 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. 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.