Q2 2021 Academy Sports & Outdoors Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Academy Sports and outdoor second quarter of fiscal year 2021 earnings Conference call. At this time. This call is being recorded and all participants are in a listen only mode.
Following their prepared remarks, there will be a brief question and answer session questions will be limited to analysts and investors. Please limit yourself to one question and one follow up to ask a question during the call. Please press star one if you require any operator assistance during the call. Please press star zero.
I'll now turn the call over to Matt Hodges, our Vice President of Investor Relations for Academy Sports and outdoors, Matt. Please go ahead.
Thanks, operator, good morning, everyone and thank you for joining the Academy sports and outdoor second quarter 2021 results call today participating on the call are Ken Hicks, Chairman, President and CEO, Michael Mulligan Executive Vice President and CFO, and Steve Barnes Executive Vice President and Chief Merchandising Officer.
Sure.
As a reminder, statements in today's earnings release, and the comments made by management. During this call maybe considered forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from expectations and projections.
These risks and uncertainties include but are not limited to the factors identified in the earnings release and in our <unk>.
<unk> with the SEC.
Company undertakes no obligation to revise any forward looking statement.
Today's remarks refer to certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are included in today's earnings release.
Which is provided on our Investor relations website.
Start Academy Dot com.
I will now turn the call over to Ken Hicks Yep.
Thanks, Matt.
Good morning, everyone.
Let me start by saying that our thoughts and prayers go out to everyone impacted by hurricane either.
I'm very proud to say that thanks to the tremendous efforts of.
Our stores' operations and supply chain teams that all of our stores impacted area are now open.
We are assisting affected team members and their families get the help they need to recover as quickly as possible and also supporting our customers and our communities.
We're working to get all of our stores in the impacted area fully stocked and staff. So that they can continue to support and serve their local community and customers.
Now shifting to our second quarter results.
Last quarter I said, we were focused on winning the summer season, especially the major holidays.
I'm very pleased to share that we achieved the highest sales weeks in the company's history for Memorial day father's day and fourth of July.
This was primarily driven by our customers coming back more often spending more and shopping more areas of the store.
The success of these events helped drive record second quarter sales of $9.0 billion.
Comparable sales of 11, 4%.
And sales growth up 44, 8% when compared to the second quarter of 2019.
Academy has now posted eight consecutive quarters of positive comparable sales and operating profit growth dating.
Dating back to the third quarter of 2019.
We also achieved record gross margin of $647.0 million driven by continued favorable product mix less promotional activity.
And fewer markdowns.
Our gross margin growth more than <unk>.
Higher product and shipping cost increases and we're still providing great value to our customers.
In terms of labor cost, we've made market adjustments as needed to reward and retain employees.
I'm also implemented changes using our labor management tools to reduce unproductive store activities.
Team members focus on serving the customer.
Overall, we ended the quarter with net earnings of 190 <unk>.
$5 million, the highest quarterly earnings in the company's history.
Our inventory position at the end of the quarter was up 24% compared to last year.
There's been a lot of discussion about inventory availability and supply chain constraints.
We've been working diligently with all.
Of our vendor partners to ensure merchandise flow and allocations give.
Given our strong relationship with suppliers, such as Nike Adidas and under armour, we are in a position us with sufficient supply right now and while there will be challenges I believe we have a good line of sight on what to expect over the next few months.
The team is doing an excellent job navigating this dynamic environment and we're excited about back to school and sport in the fall and holiday season.
Our consistent strong financial performance over the last two years demonstrates that the operational changes we implemented prior to the pandemic and the continued refinements being made to grow top line sales improved margin and profit and enhance customer satisfaction are working.
Along with our well performing operating model, we are a leader in the sports and outdoors category at a time when more consumer spending continues to shift to the estimated $100 billion sports and outdoors category.
People are making lasting lifestyle changes focused on health and wellness sharing.
Sharing outdoor experiences and nesting at home in their backyard Oasis.
In addition, as working from home has become more prominent customers are also shopping for more casual work attire.
We believe.
All these trends will continue for the foreseeable future and that.
Our broad assortment of quality and value products positions us as an excellent option for consumers to meet all of their needs.
Given the strength of our balance sheet, our consistent financial performance and our confidence in our future I am excited to announce the Academy's board of directors has authorized a $500 million.
Share repurchase program, we are establishing a disciplined capital allocation strategy built on prioritizing the financial security of the company.
Reinvesting in the business for growth.
And returning capital to shareholders.
Lastly, based on our strong Q2 sales were increasing our full year 2021 comparable sales and EPS guidance once again being mindful of numerous ever changing external factors.
I will now turn the call over to Michael for a review of the financials.
Michael.
Thanks, Ken and good morning, everyone. Our second quarter results set company records across key financial metrics, including revenue gross margin pretax income and net earnings.
I will start by reviewing our record second quarter results, then discuss our updated 2021 outlook, which we are raising and based on the continued strength of our business and healthy market trends.
Net sales were $9.0 billion with comparable sales of 11, 4% on top of last year's 27% comp.
When compared to Q2 2019 sales increased 44, 8%.
As Ken mentioned it is our eighth consecutive quarter of positive comparable sales of what's the last five have been double digit increases.
The growth was broad based and is the third consecutive quarter that all four merchandise divisions have had positive comparable sales growth.
The growth was driven by an increase in transactions average unit retails and ticket size.
Our differentiated value based assortment and excellent service is resonating with our customers in a time, where everyone is looking to have more fun.
We are pleased with the progress of our ecommerce business sales were down slightly minus nine tenths of a percent for the quarter. However, when compared to the second quarter of 2019 sales increased 207%.
The sales penetration rate in Q2, 2020 was eight 4% of sales more than doubled the penetration rate in Q2 2019.
Buy online pick up in store sales exceeded 50% of E. Commerce sales and continues to be a very effective and profitable way for us to transact with our customers.
The investments being made in omni channel such as the July launch of our mobile App more relevant product recommendations enhanced ship to store capabilities and new search and checkout functionality will drive continued growth in fact academy Dot comp sales were positive for the last several weeks of the quarter. So the sales trajectory is encouraging.
Merchandise margins were once again very strong similar to the first quarter margins benefited from a shift towards a normalized product sales mix higher average unit retails and fewer markdowns.
The gross margin rate expanded by 500 basis points to 35, 9% leading to a record gross margin dollar performance of $647.0 billion.
29% increase over Q2, 2020, and a 67% increase over Q2 2019.
SG&A expenses were $388 million or 21, 7% of sales, which was 220 basis points higher than Q2, 2020, but 360 basis points lower than Q2 2019.
Last year due to the onset of the pandemic, we reduced certain operating expenses, such as advertising and payroll compared to a more normalized run rate this quarter.
This year. We also recorded one time stock compensation expenses associated with some accelerated share vesting <unk>.
Excluding the nonrecurring expenses SG&A expenses would have been 19, 2% of sales.
The record sales and margin results lets a pretax income of $249.0 million or 42, 8% increase compared to $175.0 million last year.
After applying the second quarter tax rate of 21%. We finished the quarter with record net income of $195 million.
Q2 diluted earnings per share were $100.0 per share compared to $2.25 per share in Q2 2020.
The decrease was due to the number of shares outstanding compared to the prior year quarter and a lower tax rate at the company was not subject to federal income tax prior to the October 2020 IPO.
Pro forma adjusted net income, which excludes the impact of certain extraordinary items.
Creased 67, 1% to $230.0 million compared to $138.0 million in Q2 2020.
Pro forma diluted earnings per share were $36.0
<unk> to $82.0 per share last year.
Looking at the balance sheet, we are in a strong financial position with $554 million in cash at the end of the quarter.
We remain undrawn on our ABL facility with over $850 million of borrowing capacity.
Yeah.
In addition, after reducing our term loan by 99 million this quarter and lowering our leverage ratio or debt was upgraded by Moody's and S&P.
The ending inventory balance was $2.0 billion. This is 24% higher than Q2, 2023% higher than at the end of last quarter and 7% less than Q2 2019.
During Q2.
The company generated $170 million and adjusted free cash flow.
Yeah.
Lastly, capital expenditures are expected to be approximately $90 million in fiscal 2021 as we've accelerated certain growth initiatives.
At the beginning of the fiscal year, we identified four main sales driving opportunities those opportunities were.
Capitalizing on the shopping velocity of new and existing customers.
Replenishing and growing categories, where inventory was constrained throughout most of 2020.
The growth of several product categories that were challenged last year, but would benefit from the reopening of the economy.
And improving our management of seasonal categories, where demand exceeded supply in 2020.
Here's a midyear report card.
First the number of existing customers, who made a purchase in a new category over the last 12 months and then purchase that category again continues to increase.
Second ending inventory constrained categories has improved for example, we are back in stock in categories like bikes and fitness equipment.
Third compared to the first half of 2020 team sports apparel and footwear have exceeded the company's comp sales growth rate.
Fourth.
Sales in seasonal categories like water sports and outdoor furniture, where we didn't have enough supply last year have also exceeded the company's second quarter call.
We are growing the business by having the right products to stock at the right price at the right time by driving deeper engagement with existing customers and gaining market share.
As a result, our stores are becoming more productive and profitable over the trailing 12 months, we have increased our average sales per store and sales per square foot by 20%.
EBIT for the same period grew by 125% $10.0 million per store compared to $3.0 billion and when compared to 2019 sales per store have increased 31% and EBIT per store has grown 320%.
On a trailing 12 month basis, a 100% of our stores are profitable and accretive to earnings.
Now to our updated outlook for fiscal 2021.
Based on Q2 results recent trends and the visibility. We currently have into Q3 and Q4, we are raising our comparable sales forecast from up 6% to 9%. So an increase of 14% to 70% for the full year.
On a two year basis, this will represent comp growth of 30% to 33%.
GAAP diluted earnings per share are now forecasted to range from $5.45 per share to $85.0 per share based on $101.0 million diluted weighted average shares outstanding for the full year.
This EPS range does not include the impact of any potential share repurchases.
This guidance accounts for various market scenarios and possible outcomes for the remainder of the year varying from business as it is today to a challenging environment with more supply chain constraints or a much more promotional and competitive marketplace.
With that I will now turn the call over to Steve for more details around merchandising and operations Steve.
Thanks, Michael now.
Now I'd like to give you a little more color around our second quarter performance as.
As we already mentioned our growth trend continued and we delivered an 11, 4% comp versus 2020, which was up 44, 8% when you compare it against 2019.
Pleased to see the momentum in the business carry into Q2 with all four divisions posting increases which was significant since we're up against her largest comp from last year at plus 27%.
Looking at the results by Division apparel and footwear once again, our two strongest divisions during the quarter apparel sales were up 19% versus 2020, and 37% when compared to 2019.
Footwear ran a 15 comp was up 27% when compared against 2019.
One common theme across both of these divisions was the strength, we saw in our youth apparel and footwear businesses.
Both of these categories outperformed I believe this demonstrates the continued strengthening of our position the young families, particularly in our newer markets.
With a more normalized back to school. This year youth businesses should continue to be a growth driver for us into Q3 and beyond.
I'd also note that our businesses with key national brands, such as Nike Adidas under armour, Columbia, and the North face all had strong performance, which was attributed to improving inventory positions better content and more.
Joel distribution in the marketplace.
Partnerships with our key national brands are only getting stronger which is helping a stand stock while also delivering new innovative offerings that our customers love.
We're also excited that our private brand business outperformed the total company comp we.
We saw continued momentum driven by our tuner Rollouts for 2021, Magellan outdoors pro and freely both of which continue to outpace our original plans.
We expect private brands to continue to be sales drivers for us in the back half of the year fueled by the rollout of women's freely.
Plus sizes, along with the launch of our first collaboration in Magellan outdoors or partner with Wattenberg or to deliver a fun co branded limited edition capsule.
As we'd expected our licensed sports business trended up as enthusiasm for live sporting events they started to increase.
We expect this business, while we get stronger as we head into the fall College and pro football seasons.
Our sports direct division also posted a double digit comp at plus 14% versus 2020 was up 50% versus 2019.
We saw continued strength in our team sports business fueled by the return of youth sports being played across our footprint.
We had solid growth in the key spring Summer sports baseball and soccer and football started kicking in at the tail end of the quarter.
It's also good to see we sustained momentum in many of the categories such as outdoor cooking exercise equipment, and Watersports, which ran positive comps despite being up against historic sales increases the volume levels during last year's Covid shutdown.
In our outdoor division, we drove a low single digit comp versus 2020 and were up 59% versus 2019.
The camping coolers in shooting sports categories, all had strong performance during the quarter.
The one soft spot was the fishing business training decrease versus a large surge we saw last year in the second quarter, but it is running up strong double digit increase versus 2019.
On the margin front, we achieved a 35, 9% gross profit rate in the quarter, which is up 500 basis points higher than last year.
Key factors that are driving our merchandize margin growth are first of all the work we've done around refining our allocation strategy, coupled with more targeted localization effort has improved overall inventory productivity, that's driving higher AUR through better regular price selling.
Second we continue to see a less promotional marketplace. This has allowed us to scale back discounts during high traffic time periods third the strong sell through at regular price when coupled with our markdown optimization strategy has helped reduce the amount of goods, we're taking the clearance along with driving higher AUR some better margins on the <unk>, we do have.
Turning to page inventory, probably the biggest challenge facing us and the industry are the numerous disruptions to the supply chain. Despite.
Despite all these challenges our inventory is improving in terms of overall level and content.
We ended the quarter with our inventories up 24% to last year versus starting the quarter at plus 7% to last year.
We're still not at optimal levels across all areas, we're fully back in stock and many of the categories that have seen accelerated demand such as fitness fishing bikes apparel and footwear other.
Other categories, such as ammunition are not 100%, where we'd like them to be but we have enough supply to start building back our inventory levels in stores.
Looking forward, we believe we have the strategies in pipeline of inventory, coupled with strong relationships with our key partners to keep receipts flowing and driving sales growth.
As we look to the back half of the year. Several factors lead us to believe that we will carry our momentum forward and continue to see improvements in both sales and margin first consumer demand for the sports and outdoor merchandize, we carried strong and we expect this to continue for the foreseeable future SEC.
Second the dotcom business is accelerating and we expect it to continue to be a tailwind for us on a long term basis third over the last 18 months, we've demonstrated that we can overcome external challenges and build our overall inventory levels and in stocks, which should help propel the business trying to back half of this year.
We're improving the overall effectiveness of our marketing spend through more targeted communications, which improving conversion rates and driving sales.
With several of our key brands have tighten their distribution, which continue to funnel more product more customers into our stores and finally, we believe that all of the strategic work we've done over the past couple of years to improve allocations kind of better localization efforts and improve execution or DC. The stores should drive sales will also help to offset the cost pressures that result with some.
Fly chain challenges that the industry is facing.
Thanks for your time today, and now I'd like to turn the call back over to Ken.
Thanks, Steve.
The third quarter is off to a very strong start driven by a robust back to school and sports season, as we are prepared and in stock on the most popular items, including backpacks use apparel footwear and team sports equipment.
With the fall sports season, kicking off our license apparel business is also experiencing a very good start to the quarter.
Academy is entering a growth phase and the team is focused on maintaining this positive momentum while retaining the gains achieved over the last year.
Market and consumer trends remained strong and we are in a favorable position to capitalize on a tremendous opportunity.
Our goal remains the same to be the best sports and outdoor retailer in the country. We will do this by executing our priorities.
You are building a stronger omnichannel business, improving our in store and online shopping experience continuing our power merchandising efforts, increasing our targeted marketing strengthening our supply chain and preparing for future store growth.
Thank you we will now open up the call for questions.
Yeah.
The company will now open the call up for your questions to ask your question. Please press star one.
We will pause for a minute to wait for the queue.
Okay.
And our first question is from Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question. Your gross margin is on pace to be in the mid 30% range. This year.
Tears to 29, 6% prior to the onset of the pandemic market seems to be struggling with what is the right ongoing run rate full year gross margin, how do you respond to that.
Yes, Michael we've been gradually expanding our margins well before the pandemic began as you know we've been working on a lot of initiatives to do that if you think about the expansion I'd say a large part of it has been because we've been able to take AUR is up smartly again as we think about.
Our products, we've talked a lot about products that were accommodation items than we had priced too low categories like bicycles that we were the lowest price in the market, but we were providing a service that was stronger than our peers that part of it it should be pretty sticky there will be probably some give back as more promotions entered the environment.
Being said, we still think the mix hasnt normalized so there should be I would say 50.60 basis points of improvement still to come as the mix returns back to normal.
You know from a clearance standpoint, we don't expect to go back to a clearance levels that we had in the past.
<unk> has been a headwind as you know that's why we've been tackling the supply chain initiatives help offset that in the future I think the days of us going back below 32, 32, and a half of those are well behind us.
So somewhere between 32 and a half of 35, where we're at today is where we would expect to be long term.
That's very helpful.
My follow up question is you're sitting on well over half a billion dollars in cash.
And your balance sheet just authorized.
A very large share repurchase program is setting the stage to deploy capital to.
Opening new stores in the coming quarters, how are you prioritizing this potential deployment of cash flow to create value your stock trades.
Very low multiple.
And the the earnings growth.
Any guidance that you gave today.
You have a lot of opportunities to create value for shareholders.
Michael I agree with that and our priorities remain the same first.
To ensure the financial stability of the company, making sure that we have the proper amount of cash to run the business.
Second is to pursue our.
Substantial growth opportunities.
Starting with new stores, continuing our efforts in Omnichannel.
Continuing to improve our operations with things like our.
The work, we're beginning in our supply chain continuing the efforts that we've got going on in our.
Rising with.
Better systems and processes, there, which have helped our margins.
<unk>.
We will continue to provide and ensure that we have adequate capital to.
Two.
Support the significant growth that we have and will continue to have in stores Omni channel and our operations and then the third priority is making sure that we reward and recognize our stakeholders. The step we took.
As a big nod to that.
We will continue to be good.
Managers of the capital and provide for those three key priorities.
Thank you very much and good luck.
Thank you Michael Thanks, Michael.
And our next question is from Kate Fitzsimons with Wells Fargo. Please proceed with your question.
Yes, hi, thanks, very much for the question and congrats on the strong results. Thank.
Thank you Kate.
111.
One point of clarification on the EPS outlook of $50.0 to $84.0
I presume. This is GAAP your year to date earnings are running about 40.
Above on a pro forma basis should.
Should we think about the updated guidance of about $90.0 to $26.0 on a pro forma basis I'm just trying to rationalize.
The pro forma with the GAAP outlook. Good question the guidance update we provided as GAAP EPS.
Okay.
Pro forma basis, yes, you'd want it you'd add the 40.
Great great.
Thanks for the clarification.
And I guess, just a higher level you know your business has been really remarkable consistency versus Q1 relative to 2019 level.
Category, particularly Navy asunder these lower take rate categories start to normalize. Thank you.
Yes, we feel very confident in the long term.
Durability of the business, we see people continue to come back with.
The things that they started both before and during the pandemic.
We are at a much higher level, we've comp the comps.
And headed to comp the comps comps.
And we're going to keep.
Keep driving the business forward as we stated.
In our script that.
Third quarter is off to a good start.
And we're pleased with that.
We have.
Some pretty big wholesale ahead of us, but the customer continues to accommodate it.
Some point people have to quit asking.
Is this going to continue because it continues and I think that that's important to understand that.
The business that we're in and what we're doing is.
Really got some long legs, and we've got expectations great expectations.
The future Covid I would just tag onto that a little bit we have absolutely as an organization leveled up operationally many initiatives that we put in place they've made a difference before the pandemic they've made a difference during the pandemic and now we're anniversarying, yet and markets frankly that had been opened largely for more than a year consumer demand is still there.
Very very strong and in a world we read about this all the time, where people were looking to escape the rat race and live in the moment. That's what we do we help people do that and have fun.
And be able to participate in a lot of these new activities. We are seeing our existing customers return more frequently they're spending more when they return that hasnt changed and customers that are trying new categories that are new to the division, whether they're new or existing theyre spending more on that first visit and they are coming back more than they did in the past so all of the <unk>.
Trends in our business are very healthy right now and I think we still have a lot to work on organizationally to help us capture that demand.
Great. Thanks best of luck in the back half.
Thank you.
Yes.
Our next question is from Gregg Melnick with Evercore ISI. Please proceed with your question.
Hi, Thanks.
Two questions I wanted to start on SG&A.
Thanks for calling out the nonrecurring part of it.
Just wanted to see.
Should we should we get back to a clean point of if we can comp high single digits, we're showing leverage or is there something unique about the year over year in the back half that we should be aware of.
No no if we get to the low single digit comp will continue to lever that's.
That's certainly what we're planning to do good sales help you do that we plan on having good sales and we worked very hard to make sure that we manage the expenses and.
So that we're capable of leveraging.
And quite.
Quite frankly, whatever sales level we're at.
Perfect and then the second question was on the capital allocation. So with the 500 million buyback I mean, it looks like your free cash flow is still it's probably around that number but I think the authorization is good for three years. If we continue at this rate it will it will it take three years to use that or whats your thought process in terms of allocating that capital to you.
Other.
Building more cash opening stores.
We're executing the buyback.
We are not defining what the terms are of the $500 million buyback at this point.
We also do foresee continued expansion and the growth we are opening eight to 10 stores next year as we stated.
We plan on those stores being successful, we're working very hard to do.
Ensure that they are successful and that will give us the opportunity to continue to grow there we will continue to invest in the.
Omnichannel field, and we will continue to work to improve our operations. So.
The good news is that we are able to do all three of our priorities.
Ensure our financial security.
Provide for the significant growth.
You've heard me say before I don't think Theres another retailer that has the.
The omnichannel.
Organic the operational and new store growth opportunities that we have and then.
Recognize that.
We can support our our investors at the same time.
That's great Congrats and good luck.
Thank you very much Greg have a good day.
And our next question is from Robby <unk> with Bank of America. Please proceed with your question.
Hey, good morning, Congrats on another great quarter I was hoping.
You could.
Maybe you can or and or Michael can you just remind us on the profitability ecommerce business.
That is today maybe versus 2019.
You are mentioning.
Missing on Omnichannel initiatives can you give some more detail on.
Where do you think you can take Omnichannel for Academy sports from here and what we should be looking for near term, yes with regard to the profitability or our omni channel is.
It is profitable and not quite as profitable as the stores, but it is it is approaching that level.
Our ability to serve our customers both.
Through.
Shifting to their home, but also buy online pickup in store has allowed us to have a profitable dot com business.
We couldnt have.
The increase that we've had over the last two years of over 200% in omni channel with the increase in profitability. If it wasn't profitable and we continue to work to make it profitable.
And so that's important the second thing I think to do.
The second part of your question.
We are doing a lot of things with our Omnichannel, we've talked about improving search payment capabilities, we've added new payment.
Capabilities, and we'll continue to add things like that we introduced a new app.
In the past month.
<unk> gotten off to a very good start we will provide capabilities on the app that will.
Thank you.
More customers to use it and be supportive of our customers.
We are using.
New technology to communicate with our dot com customers.
We are going to continue.
<unk> continued to improve our customer database between the stores and omni channel.
So we still have a lot of word class we were late to the game.
In Omnichannel and we.
We will look to the customers to decide.
How big it should be.
We haven't said, it's got to be this percentage, but I would.
Envision omnichannel is probably going to be over the next you know.
Year to 15, 20% of our business and the penetration will continue to go grow.
Double the penetration of our dot com.
This year over 2019, and we will continue to see that improve but one of the things. We're working hard are two of the things we're working hard to do one is.
Ensure that it's connected with all of our customers to include our store customers and that it's a profitable business and we arent just trying to grow it to grow it.
That sounds great. Thanks, so much Ken that was a mouthful hopefully I got it.
Your point.
Okay.
Thanks Robyn.
And our next question is from Daniel <unk> with Stephens Inc. Please proceed with your question.
Yes, good morning, guys. Thanks for taking my questions.
Ken I wanted to start on the unit growth side, I think you talked about that in your remarks, obviously with capital here being able to start accelerating that I think last year you guys cited some really attractive unit economics with smaller format stores. How replicable do you think those kind of returns will be and how do you envision a role maybe the small format maybe infill.
Market is it more expansionary market how are you viewing that as we get into next year too.
Two things one one.
Important point that Michael likes to.
Having to call out is that all of our stores are profitable on a 12 month trailing basis.
So all of all of the formats that we've had in time, we have opened.
A 40000 square foot store.
We see that as an opportunity as we look to.
To fill and markets to go into some of the.
Urban areas.
We're back selling.
To take advantage of existing locations that we may take over so we know thats profitable and it is as profitable as our largest store we like the larger format more simply because it delivers more volume.
So our preference is the largest store, where we can but where we see an opportunity to open a store. We will open that we do have that capability didn't have <unk>.
Productive 40000 square foot store.
And there as well as our.
Our standard store that's.
A little over 60000 square feet.
We're pleased with a 40000 square foot format, but I would like to remind everybody that the larger 60.62 63000 square foot format still has best in class productivity on a sales per square foot basis on a profitability per square foot basis.
And you go back to <unk> earlier question about Omnichannel, the best way to grow our Omnichannel as we grow our fleet because 75% of our E. Commerce businesses is fulfilled from the store, we're only in 16 states that leaves.
30, plus states that have a chance to experience the academy magic as we look to grow and bring our winning model outside of our current footprint and many other states by the way that we're in we only have one.
One or two stores so.
We have within our own market some excellent fill in opportunities, but there are.
It's a big country and.
No theres a lot of people that.
Wanton deserve Academy sports and outdoors.
Great. Thanks, Thanks for all that color and then one follow up on the gross margin outlook that was a helpful answer to Michael's question earlier, but when you talk about the drivers of gross margin merchandise is obviously strong today I didn't hear a ton of discussion around the supply chain initiatives distribution initiatives, we talked about Michael are those still on the come and then can you provide.
Any more color on what maybe the lowest hanging fruit is on the supply chain side and what it can mean for earnings or margin.
I'll take this.
I guess the middle part of the question about.
The gross margin.
We do have significant continued opportunity with.
The planning and allocation.
Initiatives that we've put in place markdown optimization. Those are all learning systems that will continue to learn and develop.
More localization.
We're working very hard so that each store has the right assortment for it whether it's.
That's a store that in.
Outdoor grilling, it's a smoking or gas or pellet.
The predominant market, whether it's a store that the work boots are important and are those work boots.
More factory.
And service or more for the oilfield and so we are really working hard through our systems to tailor that assortment for each of our stores, which will improve the margin and reduce markdowns.
So those those initiatives.
Literally just starting but there is some there is some low hanging fruit that we're looking at.
Mike will talk about some of those things.
We're looking to deliver.
It too is a longer term initiative that will continue to deliver over time.
I think of the gross margin builders really three categories. The first is mixed normalization.
Ken probably 50.60 basis points to come there.
All of the inventory stuff that Ken talked about plus clearance.
Better localization getting.
Getting the right product in the right place at the right time, that's the initiatives that Steve and team of blood.
Still probably middle innings, there and then the last one is the supply chain that you mentioned.
We are just beginning to take that on and that is a multiyear project that will frankly deliver benefits throughout that time.
Quantify the them.
Them, yet, but there is some low hanging fruit that will realize some benefit this year base back up to make sure.
So we are touching touching less better DAU cross stocking more multi stop delivery.
Not.
The sexy stuff like rolling out and maybe a new a new private label brand, but its the stuff that's fixed year ribs, and early matters from a profitability, which by the way you mentioned and others. We continue to develop in our private label brands we introduced.
The.
Freely, which which has done very well Magellan pro.
Our outdoor area.
And in apparel has done well and new ideas.
Yeah.
Just.
A side comment in steves.
Presentation about what we did with water Burger, but we had over 1 million hits and the number of people we sold out that merchandise in a week.
Hum.
Those type of ideas to drive traffic improve profitability and support a strong private label business that doesn't take away from the important brands that we have but adds to the things Academy can provide its customers.
So we're walking back from where we're at today that 35 and change.
If you say the environment becomes more promotional than we give up 200 basis points. Maybe 250, we still have I think 50 to gain from a mixed standpoint, I still think Theres, probably 50, 60, who knows what it is on the supply chain. So ultimately I think as we mature will be at a pretty good spot.
Great. That's really helpful color. Thanks, so much and good luck guys.
Thanks Jane.
Yeah.
Yes.
And our next question is from Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody.
Can you provide a little bit of color on the cadence of the back back half of that back half of the year, obviously, implying about an eight 5% comp at the midpoint.
Can you talk about how youre thinking about <unk> versus <unk> to the extent that you can on the top line.
And then also on the margin front are implying about an 8% EBIT margin in the back half that seems pretty low and pretty conservative so.
Any cadence color there and when are you assuming perhaps promotion comes.
Comes back into the mix.
I'll, let I'll give a couple of brief comments, then I'll flip it over to Steve.
Look we are looking at it relatively conservatively theres still a lot of the year left to go.
There's just as much uncertainty today as there was three months ago six months ago, we're up against two monster quarters in the back half of last year. The supply chain is challenged the labor pool has been tough and it looks like COVID-19 is going to be with us for a while that being said business is still very strong today.
I'll, let Steve talk about some of the some of the other some of your other questions. There, yes. So from a cadence perspective, you know what we're seeing right now is it's more normalized cadence last year.
Fall back to school move out in our markets at least 30 to 45 days. This year. It's moved back so it's kind of hard of our back to school and Pat late July early August time period, and as Ken already mentioned, we are off to a really strong start there.
We have a more normalized calendar and the rest of the way through.
We do expect a lot of the tailwind that we've seen so far to continue through one of which as you know we brought up the scarcity of supply and the supply chain, that's going to remain a challenge for us and everybody going forward for the foreseeable future one of the things we're pretty excited about it is if you heard us talk about our inventory we started the quarter.
With inventory up about 7% in the last year, we ended the quarter with inventory up about 24% to last year, So and what we've demonstrated as we've been operating in this.
Kind of dysfunctional supply chain World for 12 to 18 months now and I think we're operating pretty well against that we've got good pipeline of inventory strong visibility to what's coming in we're doing a good job of prioritizing that and we think we're gonna be in really good position for holiday and what we think may happen as holiday some of what we saw last holiday where.
I know there is a scarcity of supply out there in the marketplace and hopefully that means people buy earlier at full price, which should hopefully mitigate aid to promote as we get deeper into the holiday a couple of important points. The guidance that we provided contemplates all of these risks.
We have the goods to achieve the sales targets that we provided and we've got a diverse vendor base, which actually helps us offset.
Some of the inventory challenges our vendor base is much more diverse than others. So as assist today, we feel very comfortable with the guidance that we provided you know if we're able to kind of manage through the challenges in the way we have in the past, we certainly think we can exceed it.
As you look at it.
We plan and those of you who know me for a long time, not we plan for all the contingencies that can occur.
We're overcoming.
A hurricane that impacted one of our major markets. We've got all of those stores opened the team has done just a phenomenal job there.
We but.
The areas impacted for a while and there are some cost as we recover we've got the continuation of Covid we have.
Uncertainty of.
The consumer we have the supply chain challenges all of those have been figured in and what we've demonstrated and hopefully that you saw with this past quarter and the quarter before that is through all these challenges we have been able to continue to perform strongly but that said, we're going to make sure that we've got the.
<unk> planned and we're able to to capture the opportunity as we go forward and I feel confident that with the team that we have here, we will be able to.
Continued to deliver good results.
Okay.
Okay.
And then I guess as a follow up point to that as you held your two year CAGR very strongly here in the second quarter versus what you did in the first quarter I mean, that's that's pretty outstanding.
Even in this consumer environment youre, not seeing that from a lot of retailers.
And like Steve mentioned, a good portion of the way through back to school. So is it fair to assume that you're not seeing any impact from delta and and and that's so far to your trends have remained relatively constant.
I got a lot of grief last time.
My comments, where I said.
The quarter started off.
At the same level.
We've been performing at and people, what does that mean and but it's true again, but we've got challenges and.
I think that we will continue to see.
Strong growth well.
These numbers.
And at some point, we all have to come back to Earth, a little bit.
And everybody is spoiled by.
These these huge.
Growth numbers.
That said.
We continue to see good growth for the company.
We are off to a good start this quarter.
And.
As Steve said, we've got the inventory.
We are positioned well for the back half there are some things that.
Could come up.
Hi.
We feel confident in.
Probably the biggest thing is the consumer continues.
To say, we like what you have we weren't what you have and we want to shop at Academy and buy from you.
Thanks, very much best of luck.
Okay. Thanks, Chris.
Yes.
Yeah.
And our next question is from <unk> <unk> Credit Suisse. Please proceed with your question.
Hi, Thanks for taking my question and congrats on the strong quarter I just had one question.
So if I look at just the unit growth outlook for 2022, eight to 10 stores confident the business is showing strong growth.
There are structural changes in the consumer lifestyle that you highlighted the strong free cash flow position is the possibility that you could accelerate store growth.
Stronger than the eight to 10 that you called out.
Occidental share gains.
I think let me.
For next year eight to 10.
Probably is a good number because of the capability beyond that we have.
The financial Wherewithal, we've got the.
Market opportunities and we are developing the organizational capability to expand beyond that.
And add more stores, but we wanted to do it right we will grow what is appropriate.
The eight to 10 number.
As I think a good number for next year beyond that it could be higher yeah. The only thing I'd add just to make sure everybody is clear we could add up to 100 stores without having to explain expand our distribution network. So there's plenty of capacity to grow with our existing network.
It costs $3 million to build a store and you can see the EBITDA, we're delivering 100% of our fleet is profitable you should build more stores and so as Ken said, we're going to put the infrastructure in place and evaluate.
After 2022, what that cadence.
And so we won't be <unk>.
Wait and delay to build a distribution center first one and the second thing I think that's important. This is another point that Michael has made in the past as well.
One of our one of our requirements as is the stores in their first year cash flow positive.
So.
We don't want it.
As we expand it will not be a drain on our ability to continue expanding.
Got it thank you for the color.
Thank you. Thank you.
And our next question is from January items with loop capital markets. Please proceed with your question.
Hi, everyone. Thanks for taking the question.
Just one for me on capital allocation.
I'm curious as to what the thought process was behind the buyback.
Versus a dividend.
Just given the balance sheet strength and strong free cash flow generation do you see do you see yourself as a dividend yielding company say.
One year from now.
We will continue to explore what.
We think is best for the company and for our investors right now.
Given where the stock quite frankly is valued a buyback makes the most sense.
And.
We will we will evaluate all the options to make sure that we are giving our shareholders.
The adequate return.
Thanks, Ken.
Jonathan Thank you Daniel.
Yes.
Yeah.
And our next question is from John Heimbach <unk> with Guggenheim. Please proceed with your question.
And maybe when you step back and look at the <unk>.
The strategic capabilities of the business and a lot of different areas.
You know other than supply chain, which we've talked about.
What areas would you still like to work on.
When do you think about use of capital do you think about strategic M&A are there capabilities that you don't have that.
It might be.
Interesting going down that path.
Pretty much have what you need right now.
I think.
Yes.
Can you talk about things that we need to improve on and we've got continued opportunities in our merchandising we have a lot of work to continue in our marketing.
We have.
Opportunities to as you said improve our supply chain.
Omnichannel, we've talked about improving our stores and our the service and what we're doing in our stores. So we've got a lot of things that we can do better. This is this is a company that Fortunately has no shortage of opportunities for improvement with regard to the capability because we have the opportunities for <unk>.
Growth.
I don't think we have to take a risk in looking outside the company for opportunities or trying to think of what's a new idea.
That might work that may or may not work, we've got within our bonus structure the capability to grow to carry that extra weight. If you will and still be just as fast and nimble.
As we were as opposed to having to take the risk.
And cost of spending money outside and that is something that I think is very important.
As you look at our company is are they growing things that you are pretty sure that they know how to do versus is it going to work or isn't it going to work.
Okay, and then maybe as a follow up to that right you talked about building.
Building a national brand.
And it's a long way out, but if you think about adjustments to how your go to market in the south.
Northeast West Coast.
How do you think about maybe this is more for Steve, but how do you think about merchandising adjustments.
As you move to the northern part of the country or is that that's.
Thats pretty easy transition to make it.
It's something that quite frankly.
We've learned we're learning we've got stores in.
In Missouri, and Illinois, Illinois, which is when Theres difference in Texas and Florida.
And we.
That's gets to the point I made earlier about the localization.
La Crosse in North Carolina, they have different sports they have different cookie they have different seasons for apparel and.
Those are things that when I talk about learning and merchandising, we're learning and that localization I think will really help us as we go into new markets and understand what's important in a new market and it's not something that jeez. This is foreign to us it's a way that we operate.
Yes, I'd say that that was a mistake we made in the past when we went into new markets and why they underperformed waters and we've talked about this I think with a lot of a lot of different conversations where we can try to take what worked in taxes and apply it there we're not doing that anymore. So that's a muscle from a localization.
From our perspective that we've learned exercise back to Michael's point earlier, the 100 stores.
We are in the future most of those would fit within our existing DC structure. So that keeps us still somewhat in the southern part of the geography of the United States I think if we start pushing into the north yes, we're going to have to add in some of the winter sports.
Like hockey skiing at some point, but that's well into the future I think it's more important is understanding all the local nuances, whether it's in cooking whether theyre gorilla.
Using smokers, whether it's propane.
Defying turkeys, it's all those other nuances one of the back to school timing is but I think we've gotten a lot better at in terms of how to executing one of the most localized things that we do is fishing.
And all of the e-mails demos localized because of abate.
One market is very different and that's something we've got a great team there and it's helping us apply that that thought process to other parts of the store.
Thank you.
Thanks.
Okay.
And ladies and gentlemen, you do have time for only one more question.
That last question will go to John's latest latest capital. Please proceed with your question.
Hi, Good morning, I have many questions have been answered, but I do have one question about.
The reasons you've cited for.
Confidence that trends on the topline and gross margin will continue.
I think a lot of us understand the demand side of the equation, but a little bit more difficult to quantify and drill down on.
Are some of the things that you mentioned for example distribution strategies of key vendors. So what have you.
Could talk about that specifically and then secondly.
In the post Covid environment, what's happened from a brick and mortar competitive standpoint. Thanks.
I think we'll probably I'll take a chance at answering parts of that question, but now back to growth drivers I mean, we already mentioned you brought up strong consumer demand so.
That's clearly a tailwind for us and we brought up dotcom, our dotcom business.
Is accelerating traditionally been underpenetrated there.
We obviously as we're coming through the first half of the year and anniversary Ing. Some of the Covid surges that business. It was flattening out a little bit, but it's back to growth force, that's going to be a traffic and sales driver for us in the future.
Inventory levels and content, we already talked about we touched on marketing we are shifting our marketing spend from a more traditional print broadcast and much more digital targeted and talking to the customer on a one on one basis that is going to make us much more efficient and a better retailer you talked about the underlying strategies that we have from from <unk>.
<unk> perspective, it really put in place pre COVID-19 that we're fueling the business now to better allocation of better localization as a better assortments regular price markdown optimization and then you brought up the controlled distribution that is definitely something that is happening in the market where vendors are controlling the distribution better thats, helping us a couple of different ways. It's it's following.
More customers into our stores is protecting and making those brands more important.
And it's allowing us and a lot of retail to pullback on income some of the promotion allergy that undifferentiated retailers, we're leaning into as a way to drive those brands going forward. So all those things. We think in addition to the consumer demand behind our category our drivers of growth.
John.
Literally the thousands of outlets that have been cut by <unk>.
Several of the larger vendors.
Those customers then.
All of a sudden dislike that brand and they're looking to find it and we're one of the key places where they are markets, where they can find it and they know they can get a real good selection of it and our partnerships are they're just getting stronger I mean, a lot of there's been a lot of noise around is vendors moving to more of a digital space, but when you think about.
How much volume is still done in brick and mortar stores and they really value to customers that we reached that they can't reach we see that continuing to strengthen our relationship with our key partners going forward.
Thanks, Thanks, guys and good luck.
Thank you very much John.
Thank you everybody we appreciate.
Your interest and participation.
Hope that you have a better understanding of the opportunities and you heard on the call. We're all excited about what we're doing and where we're going and we've got a great team working on it and.
Thank you for your support have a great day.
Okay.
Yeah.
And this concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
[music].
Yes.