Q1 2022 Academy Sports and Outdoors Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Academy Sports and outdoors first quarter fiscal 2022 results conference call.
At this time this call is being recorded and all participants are in a listen only mode.
Following the prepared remarks, there will be a brief question and answer session.
<unk> will be limited to analysts and investors. Please limit yourself to one question and one follow up question to.
Ask your question during the call. Please press star one if you require any operator assistance during the call. Please press Star Zero I will now turn the call over to Matt Hodges Vice President of Investor Relations for Academy Sports and outdoors, Matt. Please go ahead good.
Good morning, everyone and thank you for joining the Academy sports and outdoors first quarter 2022 results call participating on the call are Ken Hicks, Chairman, President and CEO , Mark <unk> Executive Vice President and CFO , and Steve Lawrence Executive Vice President and Chief Merchandising Officer.
As a reminder, statements in today's earnings release, and the comments made by management. During this call maybe 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.
These risks and uncertainties include but are not limited to the factors identified in the earnings release and in our filings with the SEC.
The company undertakes no obligation to revise any forward looking statements. Today's remarks are 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 thought Academy Dot com.
I'll now turn the call over to Ken Hicks CEO Ken.
Thank you, Matt and good morning, and thank you all for joining us today.
Let me start the call by thanking all of the Academy sports and outdoors team members for their continued hard work and dedication to our vision.
<unk>, the best sports and outdoors retailer in the country.
Before I provide a high level overview of academies first quarter results I would like to spend a few minutes discussing the opening of our first new stores since 2019.
On April 24th we opened our 11th Metro Atlanta store in Conyers, Georgia.
It was great job my.
All of the team members, who helped execute this highly successful store opening.
This location was built with our new store format, making it an even more exciting place to shop with added visuals featuring brand in key item callouts.
Key category shops.
Enhanced category sidelines, and improve more efficient checkout and more localized inventory.
We now have 260 stores in 16 states.
We're excited about the growth opportunities, we have across the rest of the country.
Our current plan is to open at least eight new stores. This fiscal year and 80 to 100 stores over the next five years, we view this growth in three distinct areas.
<unk> is filling out existing markets to build scale like in Atlanta, where we just opened and plan to open another store later this summer.
Second expanding into adjacent markets like our planned opening in Lexington, Kentucky later this year.
Third opening of new markets. Our current store base is located in only 16 states and all states deserve Academy stores.
We will be opening our first stores in Virginia, and West, Virginia, and as we enter these two new states later this year.
Our unique concept has been well received because we self fund and customers are drawn to our broad assortment of top national brands and high quality private labels at an everyday great value. We have an exceptional model with the higher store productivity in our peer group, making new stores, our best invest.
For a high return on invested capital.
Now turning to our first quarter results.
The foundation of our business, which is built on the operational improvements made over the past few years is very solid as we transition out of the pandemic environment.
While some broader market headwinds, there's names such as inflation and supply chain constraints.
We are a fundamentally different company than we were four years ago with the improvements across all elements of the company, including merchandise marketing store operations supply chain systems and Omnichannel.
With a strong team that has demonstrated their ability to execute and different market and challenging environments.
We also see a consumer trend to have a healthier happier and more fun lifestyle, which supports more of the sports and recreation merchandise we sell we.
We saw the benefits of these improvements.
And trend in the first quarter as we weather the headwinds and lapped last year's stimulus payments.
Our comparable sales decreased seven 5% in the first quarter in line with our expectations. As a reminder, the company was lapping 38, 9% comparable sales in the first quarter of 2021, partially driven by the government stimulus payments.
When comparing the quarter sales to the first quarter of 2019, which we believe more closely aligns with a normalized sales trends total sales have increased 36%.
Our expectations is to maintain a similar growth rate to 2019 for the remainder of the year.
During the quarter, we were very pleased with our positive E Commerce performance, which grew 19%.
We continue to invest in technology to accelerate our omnichannel growth.
To create a seamless and <unk>.
<unk> experience for our customers.
All four geographic regions and in each of our four major merchandise divisions sports and recreation apparel outdoors and footwear saw a decrease in their year over year sales.
However, when compared to the first quarter of 2019 each.
Each merchandize division grew by at least 20% with outdoors, increasing by more than 50%.
We believe this division is a real differentiator for us long term as fewer retailers are focused on it and we continue to expand our assortment through relationships with vendors such as colon yeti, the north face and more.
Steve will discuss our merchandise results in more detail later in the call.
Looking at the second quarter, with our very productive and profitable stores, our growing ecommerce business healthy inventory with broad and deep product assortments and upcoming major traffic driving events like father's day in the fourth of July we are focused on winning the summer season.
For the full year, we have confidence in the positive sports and outdoors market trends that have been driving our business and we have a strong strategic plan to continue to drive sales and profits over the long term.
However, we are cognizant of rising macroeconomic challenges and as a result, we believe it is prudent to revise our full year guidance to account for these increasing risk.
Regardless of the dynamics of the economy, though.
Our team has learned to successfully navigate our business over the past few years, and we will continue to win and service our customers at the highest level.
I'll now turn the call over to Michael to review, our first quarter financial results discuss our capital allocation efforts and.
And provide more details on our revised guidance to 2022.
Michael.
Thanks, Ken and good morning, everyone in the first quarter Academy delivered solid earnings on a planned sales decline there are a lot of actions taken in operational discipline from our strong team across the company to deliver this performance.
Let me walk you through the details of the first quarter.
Net sales were $1 47 billion a decline of seven 1% with comparable sales of negative seven 5%.
The sales decline was a result of fewer transactions this quarter compared to last year when elevated demand was driven by the stimulus payments.
The decline was partially offset by an increase in average ticket driven by higher average unit prices.
Our ecommerce sales grew 19% and made up nine 5% of merchandise sales in the quarter.
Since Q1 of 2019 e-commerce sales have grown 375%.
We continue to transform our ecommerce site into a robust seamless customer experience that is well integrated into our omnichannel platform.
E Commerce growth should continue as we make further enhancements to academy Dot com. Additionally.
Additionally, both the number of markets, we serve and our overall brand awareness continue to increase as we open new stores, which will ultimately drive more omnichannel business.
Overall, we gained market share during the quarter.
Going forward, we believe we will continue to gain share based on the following factors.
Our position as the market leader in many of the fastest growing markets in the United States.
Increasing customer visits and conversion rates through more targeted and personalized marketing campaigns.
Driving greater adoption and use of our Academy credit card.
Improving customer service through more team member training optimizing schedules and faster checkout times.
Our continued commitment to the outdoors customer while other retailers have to emphasize the category and lastly, our strengthening partnerships with major sports apparel and footwear brands.
Moving to gross margin our gross margin dollars were $521 million with a rate of 35, 5%.
While our gross margin rate was slightly below last year's rate of 35, 7%. We saw several positive developments as a result of the structural changes we have made to our business, including the merchandising and supply chain initiatives, we have been talking about for several years.
For example, our merchandize margins were higher than Q1 last year.
Additionally, due to the incredible efforts of our supply chain team freight expense as a percentage of sales was lower than the same period last year.
Our gross margin rate has expanded by more than 600 basis points since 2019.
We expect that it will continue to be structurally higher than historical levels. As a result of the success of our initiatives.
Our focus on expense management has paid off.
SG&A expenses were 21, 5% of sales during the quarter, including new store opening expenses.
This is a slight deleverage to last year, mainly due to lower sales, but was in line with expectations.
For the full year, we still expect SG&A dollars to be less than in fiscal 2021.
Yes.
Interest expense was $3 6 million less in Q1 of last year as a result of repricing and paying down our term loan by $99 million in May 2021.
In total we achieved first quarter pretax income of $195 million.
First quarter GAAP diluted earnings per share were $1 69 per share compared to $1 84 per share in Q1 2021.
Adjusted diluted earnings per share were $1 73 per share compared to $1 89 per share in Q1 of 2021.
From a store level sales and profitability perspective, trailing 12 month sales per square foot were $363 and trailing 12 months adjusted EBIT per store were up $3 6 million.
Yeah.
As a reminder, however set of our existing stores are profitable and accretive to earnings which gives us great confidence in our future growth potential.
On the subject to store profitability as Ken mentioned, we opened a new store Conyers, Georgia at the end of the quarter, it's off to a strong start in fact, it delivered one of the highest first two week sales of any new store opening in Academy history.
We are excited and grateful that customers came out like a broad assortment at great prices and most importantly went home with something fun.
The success of our first new store opening of several years gives us great confidence as we enter an accelerated phase of store growth.
We plan to open at least eight new stores in 2022, all of which should follow our general new store opening model.
Each store is expected to have an average return on invested capital of at least 20%.
The ramp to maturity is four to five years.
And the model forecast the store to be EBITDA accretive after the first year of being opened.
Yeah.
Now for an update on our strong balance sheet and liquidity position.
We are pleased with the health and composition of our inventory.
Our ending inventory balance was $1 3 billion, a 22% increase compared to Q1 2021.
This growth was expected given the diminished inventory level, resulting from the 39% sales comp last year.
When compared to the first quarter of 2019 total sales increased 36% while inventory dollars were only up eight 8% and inventory units are down 8%.
This demonstrates the effectiveness of our inventory planning and allocation initiatives as we are running higher sales on less inventory compared to 2019.
We have the right inventory in the right stores at the right time.
As we move into the summer and back to school season, having a strong inventory position enables us to be the destination of choice for the best value and assortment for the cost for our customers.
We ended the quarter with $472 million in cash had no outstanding borrowings on our $1 billion credit facility and generated nearly $80 million and adjusted free cash flow.
As at the end of Q1, our trailing 12 month free cash flow yield was 14%.
Our capital priorities remain the same maintain a strong balance sheet invest in the growth of the business and reward and recognize our investors.
During the quarter, we repurchased and retired $2 3 million shares for $88 $5 million and paid a dividend of $7.05 per share returning a total of $95 million to investors.
In addition, our board of Directors recently approved a new three year $600 million share repurchase program, bringing the total amount available under both share repurchase programs to $700 million.
The board also declared a dividend of seven five cents per share payable on July 14th 2020 to stockholders of record as of June 16th 2022.
Finally, while we are confident in our strategic plan to drive long term sales and profit growth through our expansion and other operational initiatives. There are current macroeconomic developments that we believe are prudent to factor into our fiscal 2022 guidance.
Therefore, we are revising our estimates as follows.
Total net sales of $6 43 billion to $6 63 billion and comparable sales of down 6% to down 3%.
Our gross margin rate for the full year is still expected to range from 33% to 33, 5%.
We expect to have higher AUR offset by elevated supply chain cost and increased level of promotions when compared to last year.
GAAP net income of $550 million to $650 million.
GAAP diluted earnings per share are now expected to range from $6 30 per share to $7 per share.
non-GAAP diluted earnings per share, which excludes estimated stock comp expense of approximately $20 million in store Preopening expenses are now expected to range from $6 55 per share to $7.25 per share.
We also expect to generate $4 to $50 450 to 500 million of free cash flow and spent approximately $140 million in capital expenditures in 2022.
The EPS outlook is based on 88 million diluted weighted average shares outstanding for the full year, which accounts for the share repurchase activity in the first quarter, but does not assume any further repurchase activity for the full year.
With that I will turn the call over to Steve for more details around our merchandising and operations performance Steve.
Thanks, Michael.
Heading into Q1 that this would be our most challenging quarter of the year as we lap the plus 39 comp from Q1 of last year.
To help us get a good read on our performance have been using comparisons versus 2021 as well as 2019, which was the last normalize here we had prior to the pandemic.
When you look at the quarter to $1 47, and sales represented a negative seven 1% decrease versus 2021 was up 36% versus 2019.
As we look at the results during the quarter, we've seen the overall shape of the business pretty closely mirror 2019 played out but at an elevated level of volume.
This is helping inform how we're protecting the business moving forward.
Breaking it down by category, our best performing division in the quarter was footwear, which was down 2% versus 21 up 20% versus 2019.
Improved inventory levels and content from key partners, such as Nike Adidas Brooks Skechers <unk> Crocs really drove this category.
Our improved inventory position helped driving stocks back to historical levels, which was a key factor in our performance.
One of the categories were still chasing receipts as the <unk> business, which continues to experience shortages.
This product is made in Vietnam and the shutdown that occurred back in Q3 of last year created inventory shortages that we started feeling the impact in Q1 of this year.
The good news is that even with much lower inventory, we've maintained a steady flow of receipts and cleats and those categories continue to run positive 21, and 19, despite running with lower average inventory when we would desire simply put we're selling them as fast as they hit the stores I would expect us to continue into the back half of the year.
And number two division for the quarter was outdoor which was down 6% to 21, but is up 52% versus 2019.
Some other shoes, when a much better inventory position in most categories, which is driving improved in stocks.
Some highlights during the quarter were camping coolers and drink wine hunting businesses.
We believe that our strong relationships with key partners such as Yeti will comment on the north face were instrumental in driving these results.
Our inventory levels in firearms and ammunition are also in the best position to advance. This pandemic began but that being said, there's still constraints in some specific categories, such as hunting rifles, and certain calibers of ammunition.
Similar to <unk>, we continue to see strong business in these constrained areas as goods continue to sell as fast as they hit the store.
Apparel sales for the quarter were down 9% versus 21, nine up 26% versus 2019.
Our strongest performing categories within the division versus last year, where the outdoor and licensed apparel businesses. Our biggest challenge in our apparel business. During the quarter was that spring deliveries were delayed and we were not able to fully execute our spring SaaS until late April versus traditionally being fully sat in early March.
The good news is that we ended the quarter with overall inventory well positioned and summer product and starting to see the business rebound as the assortments became more balanced.
We expect to see this momentum carry forward into Q2.
Once <unk> sales came in at down 12% versus 21.
Up 40% versus 2019.
We're excited to see the team sports business drive a strong increase in the quarter driven by the key spring sports a soccer and baseball.
We've worked hard on building out the better and best levels of our assortment of baseball with brands like Maruti Easton Rawlings and Wilson and this expanded offering has really resonated with customers.
Our recreation business on the other hand is more challenged.
Breaking the business now we have several categories like water sportsman drilling historically done the lion's share of their business in Q2.
During 2000 22021, and we saw these businesses accelerate into Q1 as a scarcity of supply in the market for these categories.
However, this meant that these businesses are very challenged in the second quarter of each of those years as we sell through a lot of our merchandise earlier in the season more sold out during the peak time.
As inventory levels in these categories that normalized cross marketplace. We did not see the same scarcity of supply for the pull forward this year.
We anticipate that the sales curve has moved back to a more normalized cadence in these businesses and that there'll be closer to what we experienced in 2019 in Pryor, which would point to opportunity for Q2 in these areas.
There were a couple of business because you did not hear me mentioned as one of three exploration categories, such as fitness fishing and bikes. So an outsized benefit from the shutdown associated with the Covid pandemic.
As we expected these businesses are not sustaining the same level of demand as they did in 2020 in 2021.
The good news is that even at the reduced volume levels, they're still in aggregate up over 20% versus 2019.
Turning to margin.
The gross margin rate for the quarter came in at 35, 5%, which was a 20 basis point decline versus 21 was up 600 basis points versus our 2019 baseline beneath the surface, our merchandize margins were up slightly versus last year.
This compares to 2019, where the split was 51% hardgoods, 49% soft goods.
The reason I bring this up is that compared to 2019, our sales increased 36%, while our inventory in terms of units is tracking down 8%.
When compared to 2019, you'll find a deeper investment into year round seasonal categories, such as sporting goods camping coolers and other categories that level up over the past couple of years.
Result of all this is that the overall composition of our inventory has improved with better balance when compared with 2019.
As inflation pressures continue to Mount we believe our everyday value proposition will set us apart as active young families and sports and outdoor enthusiasts with the stretch their dollars as they pursue their passions for sports and outdoor activities.
Lastly, our continued shift away from traditional print and broadcast advertising to a more digitally targeted approach.
<unk>, our marketing reach and effectiveness.
In closing, we believe that the strategy, we put in place should allow us to finish the year strong and carry the momentum that we built up over the past couple of years throughout the remainder of the year.
Now I'd like to turn the call back over to Ken for some closing comments Ken.
Thanks, Steve.
In this economic environment, we know the value is especially important and believe our everyday value that we provide to customers.
Resonate going forward.
Our value proposition allows customers to purchase high quality products. So that they can continue doing the fund things they enjoy without breaking the bank.
In addition, the improvements made in the business over the past few years have prepared us to manage through this dynamic market.
Our vision remains the same to be the best sports and outdoor retailer in the country. So we will continue to focus on our mission to provide funds for all through strong assortments value and experience by executing our key priorities in order to achieve our vision.
These priorities are key.
Creating a consistent and meaningful omnichannel business that delivers a true omnichannel experience for our customer.
Growing our store base to strengthen existing markets and enter new markets successfully starting with at least eight stores. This year with the goal of opening 80 to 100 stores over the next five years.
Providing a great customer experience across all of our points of contact to drives loyalty and long term growth.
And we will support our continued growth by maintaining and scaling our capabilities.
Strengthening the efficiency and effectiveness of our supply chain.
And developing and maintaining an industry leading retail team.
We believe these strategic priorities will help us continue to drive productivity to increase sales and profits for years to come.
We remain excited and confident about academies future.
Thank you, we'll now open up the call for questions and answers.
Thank you the company, we will now open the call for your questions to ask your question. Please press star one.
We will pause for a minute to wait for the queue to fail.
Okay.
Okay.
Our first questions come from the line of Kate Fitzsimons with Wells Fargo. Please proceed with your questions.
Yes, hi, good morning, Thank you for taking my question.
Michael you reiterated your gross margin expectation for the year. It sounds like you know looking for 30% to 33% to 33 and a half I believe.
You speak to what you're baking in from a promotional perspective as we get further into the year. Some of your bigger box peers that are calling out more aggressive actions on the promotional front here in Q2, and then to the back half so just.
Just curious about how you are thinking about the promotional will be of the category and all in and just whether or not you think keeps imbedded enough conservatism on that line on a line item and then I have one more follow up thank you.
I think we have embedded the view that the back half of the year could potentially be more promotional or.
Our guidance contemplates a range of scenarios, including the scenario, where the consumer doesn't get a lot healthier.
The other thing we've talked about a lot is inventory as a leading indicator and unfortunate element of retail is that the problems of others could become your problems and we need to be mindful of the overall inventory build that we've seen in the sector and retail in general and I think in this environment, it's wise to be cautious which is why we wanted to update our guidance to get ahead.
The potential that the back half of the year it could be more promotional as planned.
That said Kate one of the things we have done a lot of actions that will allow us to maintain that gross margin.
Right at the higher level of $33 33, and a half through our planning and allocation the assortments.
On our pricing models and things like that so we feel we feel confident that.
Even with a more promotional environment.
We can manage that.
Great. That's helpful. And then just really quick on capital allocation. It was really nice to see the new share repurchase authorization I'm just trying to think about how you guys are approaching getting after this new authorization just in light of the more temporarily temporary full year outlook.
What is the appetite to put some of this.
Excess cash to yes. Thank you.
Yes, I don't think there's anything really new to discuss so we havent discussed in the past I mean, our general approach to capital allocation hasn't changed we are generating enough cash to take our portfolio do everything approach and the additional $600 million I think frankly demonstrates great confidence in our business and our ability to deliver strong cash flow regardless.
Of the environment, whether it's at the top or the bottom end of the range our priorities.
First stability, we're not smart enough to know when this economic turbulence will end and that means having a capital structure that can withstand various economic cycles, including the one that we're at now.
We look to maintain an appropriate cash flooring and the ability to be nimble in challenging times I think that served us well, particularly in the supply chain, where we're able to move some things around and actually lever.
From a gross margin standpoint freight as a rate to sales I mean cash was helpful. There.
<unk> fund our growth.
The real value of academies and its growth potential with the relatively limited geographic reach that we have today.
The white space, we have in front of US you know our plan to open 100 stores. The next five years okay.
Academy Dot com, which has grown almost 400% since 2019.
And frankly the runway they still have we want to make sure we preserve capital to fund those initiatives and we've accounted for that and then lastly, what Youre speaking about is returning cash to shareholders via dividends and share repurchases and debt reductions.
Very strong free cash flow yield $14, 15%. So we have the cash flow and as a reminder, we've bought back.
In the past two years almost double of what we raised in the IPO. So we think thats, a very healthy amount of the $600 million. Additional authorization is just a signal that we're very comfortable and confident in our ability going forward.
Great. Thanks best of luck.
Thank you.
Thank you our next questions come from the line of Greg Melick with Evercore. Please proceed with your questions.
Hi, Thanks, guys.
I guess my first question was on gross margin you mentioned that merchandise margins.
Helped year over year, and also that freight as a percentage of sales was down could you quantify that a little bit more and also speak to the sustainability of particularly on the freight side.
The bulk of it was in the merch margin expansion you know freight was a benefit.
Can't say, that's we thought we'd be pretty close I can't say, that's exactly how we drew it up but I'll tell you. We've got a very talented team and our supply chain initiatives are really starting to work.
Freight was a benefit but the majority of its merch margin.
Yeah. This is Steve merch margins were up roughly 20 basis points.
As Ken mentioned in his comment and we attribute that to a lot of new disappoints, we put in place over the past three years.
The better planning and allocation to better upfront buying process.
And just overall better management of inventory. So we're pretty pleased with the with where we're sitting with margins. So far through Q1, yes, the drag so merch margins up 23.
It was also a benefit the drag was related to inventory overhead and the capitalization of that all of the other frankly gross margin items were favorable.
Great and then maybe a follow up right there is an inventory.
Obviously up while sales are down, but I think he did you mentioned the unit inventories.
What are the Brian .
Units units were down versus 19 about 8%, so we're actually pretty happy with where our inventory position that's right about where we planned. It we said, it's up 22% versus where we ended a year ago for Q1.
Up about eight 8% versus 19 in dollars, but down 8% and units.
Yes.
I guess.
I'm sorry, Greg there are certainly a couple of areas where we.
We have inventory over plan that being said those areas are areas that are frankly, the inventories evergreen I mean, theres little markdown risk associated with those would be some of the the bulk items, where we saw a little bit of a slowdown but overall, we're extremely happy with where we're at from an inventory perspective again dollars up 8% over.
19 of 36% sales increase units down. This is this is pretty much in line with how we planned it.
And as credit.
More consumers taking up your credit offer.
And is that helping gross margin or not.
Well the credit program has grown consistently since we rolled it out so yes more consumers are applying more consumers are using their credit card and we're seeing that customer come back more and more frequently.
Not say there has been a dramatic trend shift to what we've seen in prior quarters. It just continues to grow because it is a relatively you know frankly immature program that scaling and ramping.
Great Thanks, and good luck.
Thank you.
Yeah.
Thank you. Our next question does come from the line of Ravi owns with Bank of America. Please proceed with your questions.
Hey, good morning, guys great quarter.
My first question is just Uninflated <unk> can you give us a sense of.
What the assumption of inflation is in your sales guidance for the rest of the year is it is it contributing more to sales than it than it did in the first quarter and then also related to inflation. It sounds like you did a great job with freight costs in the first quarter.
Whats the assumption for the freight the <unk>.
Port cost outlook in transportation.
Cost outlook, and then I have a follow up.
I would say so far from an inflation perspective, it's been manageable for us.
It's been a relatively low.
Contributor in terms of our AUR increase when we look at that.
The delta between being up 8% in dollars and down 8% units versus <unk> 19, and we started breaking that down really what a lot of the contributing factors that are first a higher mix of bigger ticket items.
If you think about it we've really moved to more of a hard goods business like in the past three years, it's about 56% of the business versus about 51% a couple years ago at the same time, we've also improved our better best end of our assortment.
Those come with slightly higher costs and higher AUR and then the third one would be where there has been some inflation, but it's candidly up to three factors the smallest amount.
And I would say the team has done an excellent job in managing that we've not seen some of the significant inflation that people are talking about.
Things like food and fuel and we have been very very surgical about where we have had to take the price up we want to maintain that value effort. We are working with our vendors to put more make in some of the items so that the.
The customer feels are still getting a strong value, where we've had to take the price up.
It is.
We do see inflation continuing.
We have managed so far and we feel that we've got the capability to manage it.
Going forward with.
With regard to freight are as Michael mentioned, our supply chain team has done.
Outstanding job working with our vendors.
Taking actions such as.
Making sure that we.
Yeah.
By contracts upfront and negotiating to maintain.
<unk>.
That.
That inflation under control.
Alright, great.
I think the thing that we did really well.
<unk> is frankly not over bought we didn't have to pay more.
For more than we needed.
Maximizing cube space at all of the things that we've talked about that also really came into play as we manage freight we're not expecting freight to get to get a whole lot better and thats accounted for in our guidance Tim.
Helpful and just a quick follow up by a very large retailer came out and implied that they've seen some changes in what their customers are doing just over the last three weeks any recent changes in behavior.
Thank you guys are seeing in the customer base the last three weeks.
Yes, I mean, obviously, we don't provide inter quarter commentary on these calls but that being said you know I think.
And then any comments prepared comments, we talked about the trend line versus 19 being very consistent.
At up around 36% that we've seen that continue through.
And we have seen actually the customer.
Improve over since the early part of the year.
They continually continues to improve.
Still has a lot more room to improve but it's getting better.
That's great. Thanks, so much.
Thank you. Our next question is coming from the line of Chris <unk> with Jpmorgan. Please proceed with your questions.
Thanks, Good morning, guys. So a bit of a follow up to that last set of questions. So as you just step back all the color on the category performance in <unk> was super helpful.
Other than some of the late inventory receipts did the quarter generally play out at the category level and from a monthly cadence perspective in line with with how you had planned it.
Yes, I would tell you that it actually did you know we.
We knew that May anti March was going to be the biggest challenge because that's where the stimulus checks came out we saw obviously our biggest surge last year in that month. Once we got past that we saw the business start to come back in April and as Ken said, you know, we certainly see that get better as we progress through the month. Some of that was I think getting further away from the stimulus impact last year.
Some of it was improving inventory content, we talked about apparel being I think the number three ranked division out of four so with a little bit softer than the average, but when we started tearing it apart we really attribute a lot of that to just getting later receipts on some of the spring transitional goods and once those goods hit the floor. We saw the business start to come back pretty pretty pretty well.
The other thing that we are seeing as there has been some shifts.
There were some businesses during the pandemic, where the buying patterns shifted up one of the best.
Examples of that was like in pools pools.
And that has more normalized.
We used to do the majority of our pool business in the second quarter.
Last couple of years, we did it in the first quarter.
We see that it's coming back to a more normal trend.
We're in a better stock position.
Got it and then so as you think about the change in the outlook. Maybe can you talk about how you're thinking about where did you change. The top line outlook was that more of a back half call and you talked about it in the context of the gross margin, but it seems like a real change in the outlook was the sales so as.
That just you're expecting less AUR growth in the back half of the year because of promotions.
Well one of the things that happens.
<unk>.
Terrific team here that that is done.
Excellent job managing through all these challenges, making sure that we werent over bought but we also recognize when we started seeing other people come out.
They were over bought so we figure there will be some more promotions.
Promotions don't always mean more sales because as you take.
Some of the pricing down for promotions.
You will get less sales dollars for the units and so that's part of what we have figured in.
Along with the margin to go with that.
The adjustments were made.
As Michael said are more for the environment we're in.
For the way we were managing the business.
Yes, the business compared to 2019 is following the same general trend line, it's been fairly predictable from that perspective, but as Ken said, there may be a need to be more proactive and respond to what others do to maintain share in the back half and we wanted to get ahead of it and build that in.
At the high end of the updated guidance, we're squarely within our prior guidance.
From a sales and income standpoint, we just felt like this was the right thing to do.
It makes a ton of sense, thanks, very much and good luck.
Thanks, Chris.
Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.
Good morning, nice quarter congratulations.
Thank you Brett.
So look my my first question I think it's really just it's more of a clarification and a follow up but just to be clear so the revision down.
The moderation in guidance for the year.
If that's what you're seeing is that that's <unk>.
Just conservatism, what youre seeing in the overall environment, but not reflective of anything youre actually signature business.
That's correct, yes, I think we're happy with the way that we've managed the business, we're happy with our initiatives.
If you go down the list, we're happy with what.
The way our business is playing out but you.
We're looking at it the environment and all the leading indicators that we've talked about.
We've got to be cautious about what the back half looks like.
Got it.
And then my follow up so in the prepared comments you spent time talking about some of the categories that have performed particularly well during the pandemic and what youre seeing in those categories. Now so I guess the question I have is.
As you look at the trajectory there certainly there were some categories and I think in the concrete answers maybe in one of them do you think we're now at the point where.
We have found the new run rate they have stabilized we're past the pandemic, where do you think there could be incremental weakness in those categories going forward.
Yeah, I would tell you we kind of look at the business in three buckets you've got the.
The first bucket of goods or things that are selling at or better than the average and those are trending better than the 30 at or better than the 36% trend line versus 2019.
The second bucket is what Ken just mentioned a comment or two ago about where we've seen business start to normalize I think pools is a great example of that and I think grills are great example of that where they were softer in Q1 than they were in the past two years, but we're seeing the shape of that business kind of revert back to where it was historically and it's and it's showing theres opportunity probably knows.
As in Q2, the third category I think is the one you're mentioning which would be things like bikes fitting.
Fitness fishing, where they are settling in below last year. When we ran the last two years, but still at an elevated level versus where we were at 19 and those in aggregate at around 20%. So we do feel like those have shown a lot of stability and we've kind of seen with new baseline as tire than where it was in 19, but a little bit lower than where it trended in 2020.
Yes, it's important.
Yes.
Now going back to Galveston.
Sure.
There maybe some of these are hinting to Taos, but.
While some of those businesses have leveled off.
Tom.
Below where they were last year, but well above 19, we also have some businesses that are picking up.
Because they were lower at that time and in particular.
Apparel and footwear.
There are examples of those.
Got it.
Very helpful. I appreciate it thank you thanks.
Thanks, Brian .
Thank you. Our next question is come from the line of Michael Lasser with UBS. Please proceed with your questions.
Good morning. This is atul <unk> on for Michael Lasser. Thanks, a lot for taking our questions granted that seeing some down in the first quarter as planned can you provide more color on the retention rate.
Customers.
Picked up over the last couple of years and are you seeing those customers shop for new categories at Academy Sports.
One thing were doing previously.
Yes.
We've added about the same number of customers.
We're adding about the same number of customers on a continual basis that we did last year.
And.
That trend continues we are seeing our existing customers.
More categories.
And we are also seen.
Returning customers salespeople, who might have lapsed.
Yeah.
<unk> been shopping us for over a year, we're seeing an increase in returning customers.
As Ken just said I mean, whats most exciting is the overall inflow or outflow of customers have been fairly similar but the reactivation rate has really been something we've been focusing it on and I think that's a real testament to the work that the marketing team has done.
Be much more targeted with our messaging and being.
You know a little more personalize our communication there, we're seeing a much higher reactivation rate as we've gotten better and better at targeted marketing.
Okay got it that's helpful and then as my follow up.
Ill.
It sounds like you are assuming modest increasing promotions over the rest of the year in your guidance is that right and then b, what if some mass mass merchants or other players are meaningfully more aggressive with their discounting experience activity later in the year would you have to follow suit or do you believe it.
That overlap with some of this.
Some of those competitors is more limited.
Such that you would not have to go easy on promotions beyond applying.
Those competitors are much more promotional.
I would say that.
We talked about having very thoughtful promotions around key market share must win time periods. We know we're going to have to be competitive there and that's in our guidance to your point, we also know that the.
Competitive environment could get a little more challenging as we get deeper into the year, but that being said we have a different merchandise mix in some of these mass guys and we have access to a lot of vendors that they.
They don't have I mean, there is not an exposure of Nike ready to sign them and a lot of these places and where we do overlap with them online categories candidly, we have a much better deeper offering than they do.
So I don't think there may be occasionally category here there we might have to react if something crazy happens from a pricing perspective, but we feel pretty good about how we forecast it out our promotions and what we're gonna have to do to react to competitors.
Got it that's super helpful and good luck with the rest of the year.
Thank you.
Thank you. Our next question is come from the line of Seth Basham with Wedbush. Please proceed with your questions.
Thanks, a lot good morning.
And my question is a follow up for you on gross margins.
Thinking about like a normalizing environment that you suspect will occur over the balance of the year, but beyond <unk> 2018 can we expect gross margin to come down even further because of the crime on normalization and other factors are do you think we've reached a new baseline and your guidance currently.
Yeah again, I don't think much has changed there from what we've discussed prior we feel pretty good that we're in.
Where we're going to be with maybe some you know again this one promotion in the back half of the year. The bulk of the gross margin builders to 2019, our revolve around the merchandise planning and allocation work that Steve and his team have taken on and we think that that is $475 to 500 basis points of of sticky gross margin benefit.
Still have a lot of benefit coming our way with our work in the supply chain that we've taken on.
We have done a better job.
Managing freight as we've shown so we feel like that's the that's the right level and were comfortable with their going forward, yes. The other thing to keep in mind. These systems that we put in place.
We used to use the word learning systems now that <unk>.
They continue to improve over time, so we have not received the full benefit from all of the change.
Changes that we put in place and we continue to add new capabilities that will allow us to improve our.
Our merchandise planning and allocation.
Pricing.
And markdowns as we go forward.
Seth the only other thing I'd just add on there I mean, we've been able to expand our margins frankly with the relatively unfavorable mix shifts so as the mix normalizes over time and that may not happen. This year that'll also be a benefit to margins going forward.
That's helpful color and then secondly, as you think.
Backing out the outdoor seasonal category and just trying to understand what gives you confidence that you'll be strong by 2019.
Especially at some of the macro pressures.
If you could provide some more color on that that'd be great.
Yeah, I would tell you that within the outdoor business I mean, there's a lot of categories underneath there we've seen a lot of strength.
Continued strength and growth in categories like camping, our casting business is actually running up to last year and it's been really strong the hunting business has been pretty strong the softness we've seen is primarily in fishing.
Once again, thats running up better than it was versus 19 that a little bit lower than it has in past years and then when you take categories like a field all those categories are continuing to comp well above where they were in 19, maybe a little bit lower than we were last year, where we were more hand to mouth on some inventory because of the long term trend from the customers I think has continued.
Well continue.
As people looking for more.
<unk>.
Looking for health and wellness.
Sports is another category is performing well for us and so we think.
Right now, we all could use more fun and theyre looking for it and we sell it.
Yes.
Awesome. Thank you very much thank you Sir.
Thank you. Our next question is coming from the line of.
Daniel <unk> with Stephens. Please proceed with your questions.
Yeah, Hey, good morning, guys. Thanks for taking our questions.
Steve I think on <unk> and some of the outdoor categories, you talked about the ability to run stronger sales with leaner inventories and I'm curious to know how does that change your long term thinking about how much inventory in store needs and then Ken to your point around royalty of new store builds.
How does this updated thought around inventory impact your thoughts around how much investment of new store needs to support it could you run these tours leaner and therefore drive stronger cash on cash returns with less inventory.
I think we are I mean, I think that's one of the things. We're demonstrating is that inventory levels at least from a unit perspective, and we used to run two or three years ago, we don't need to run.
To drive increases and we can be much more productive.
Been in our stores three years ago, we had a lot of inventory that was on top of gondola wasn't called top stock that's virtually out of our stores that being said I mean, there are categories like cleats, where I mentioned, we're selling them as fast as they're coming in I mean, that's that's not healthy candidly I mean.
We are our shelves are empty customers can't find their sizes.
We need to get in a better inventory position in that category. So that we can service a customer on a day in day out basis that being said it will turn a lot faster than it did back in 19 and prior yeah, we our new store format is designed to.
To do more flowing of inventory less store stocking of inventory.
<unk>.
We got up last year over four times turn which was a significant improvement from 19, where we were under three times turn we believe operating in the mid threes, probably is where are we where we will be operating and as we continue to improve and enhance both the supply chain.
And the planning and allocation, we can continue to move that turn up and be more.
Much more productive with the inventory.
[noise] Daniels to there.
Oh, sorry about that.
Yes, if I could tie in our store growth maybe the balance sheet. You know 80 to 100 stores can over the five years, that's a pretty nice ramp should we assume that's going to be linear at about 20, a year and then tying up the balance sheet. Michael you know sub one times Levered I think around the IPO you target with two times plus.
Would you guys put leverage on the balance sheet to accelerate new store growth investments or accelerate the buyback, but how are you thinking about using that at this point given the strength and consistency of cash flows. Thanks, Yeah. I don't think there is a need to add anything any leverage to the balance sheet.
Particularly in this environment I don't think that would go.
Long term, that's probably a good thing and honestly because our cash flow is so strong we don't need to do that to hit our growth targets.
From a ramping perspective, I would stare step at the later years, we'll do more than we will next year, but it'll accelerate over the next three.
Excuse me two to two to five years from here till we get the target of 100, and we're building the capability of opening new stores, Yes, we haven't done it in a couple of years and by the way first one out of the gate, we touched on it on the call.
We said it was one of the strongest we've had the lawyers made me say that because I couldnt actually go back and prove that the first store didn't open higher than this one but it is the best one in recent history by a long shot.
It was nice to do it in a market that was outside of our legacy market here in Texas and it gives us a lot of confidence that frankly, we're going to have a great success with this program.
Got it really helpful color and best of luck guys. Thanks.
Thank you.
Thank you. Our next question is come from the line of John <unk> with Guggenheim. Please proceed with your questions.
Hey, guys wanted to start with.
Ken If you think your business technically right is all discretionary but when you really think about your core customer what percent of the business do you think is really discretionary right.
Maybe in a normal downturn, they would actually defer purchase.
Curious how you think about that and then if you did think that we were headed for a recession next year other than inventory management, what would you do tactically right from a merchandising standpoint would you lean into good a little more.
What would you do.
We're going to maintain that balance.
Good better best.
We offer a value even at the better and best level, we offer a value.
And so I think that the customer sees that with regard to discretionary I think discretionary is an interesting term most people think.
That their morning coffee is not discretionary.
And the children are still going to play.
Softball, but people are still going to participate in their activities. They may not buy as much or they may not buy the best.
Fishing, rod or baseball bat, and Thats, where we come in because we trade broadly across good better best and I can come in and I can make a decision.
Which fan I want to buy or which treadmill I want to buy I can buy a 399 treadmill, where I can buy.
<unk> thousand $700 treadmill, and so I think that gives us an advantage over the competition.
<unk> allows people to still do what it is they want to do we trade and those mill three quintiles of customers and we have shown in our past that we performed well during economic downturns.
I just wanted to reemphasize one thing that can Ken said, and we know where the value provider in our space, we know our everyday value pricing proposition.
This is an advantage and we think in an environment, where people, maybe you're looking to trade down or looking for ways to stretch their dollars we win in those environments and so strategically it's leaning into that making sure we're getting credit for that whether it's in our marketing and our stores and just really making sure the customer understands the value proposition that we offer day in and day out.
And I think just maybe as a follow up to that your philosophy on <unk>.
Seasonal product right is too.
And then more recently right Mark it down and get it out as opposed to <unk>.
Pack it up and sell it the following year.
Correct.
That's the philosophy on seasonal.
Seasonal as sort of a percent of.
Of your business the way you would characterize it.
Take the fourth quarter right that would probably be what.
What percent of your business do you think.
It's relatively small it's probably in the teens and.
And just to be clear seasonal I think has theres. A couple of you have been kind of subcategories of seasonal so you're right. We don't traditionally pulled goods out of the store send them back to the D. C pack them up and ship them out the next season.
Being said, we do have Dcs it can hold capacity. So a great example would be if we were a little long on a category like pools that we're going to get out of for a couple of months and then reset the following spring.
In the past that we've been long on pools might hold on to that and use that exited extra inventory not send it out to stores and you deserve the setup for the next season.
So we do that occasionally from an inventory management perspective in terms of apparel and fashion and seasonal that that doesn't usually age very well right. So the idea of packing it up and then bringing it out next season.
Generally it's not one we've really we've really done.
Okay. Thank you. Thank you guys.
Thank you.
Yes.
Thank you. Our final question is come from the line of John <unk> with <unk>. Please proceed with your questions.
Hi can you hear me all right.
John .
Okay, Great I wanted to zero in a little bit more on a comment that was neat earlier about the store growth being where the value.
He is located and in particular for the 100 stores just looking at the current EBIT per store of $3 6 million can we just if we're going to do some rough math multiply that by the 100 stores to see the potential that you anticipate.
For those stores, which I estimate is a little bit more than $4 per share in earnings depending on what the share count might be or is there. Some reason that those incremental stores youre going to be higher or lower contribution.
From a modeling perspective, Thats, probably fair I know theres, some ramp time that it takes them to get there you know.
Typically it takes four to five years for a store to ramp but look I mean, we're planning to open stores that are that are accretive.
And that's the plan.
Ken I don't know if you have anything there if you think about it there are four.
Big growth levers that we have one is new stores. That's the largest because the 100 is the starting point, we have the opportunity to add significantly more than that over time, but I think.
Five years is a long time.
But over time, we will add even more stores. The second is our dot com business, which now at the end of the first quarter was running just under 10%.
Penetration penetration I'm, sorry penetration is running 18%.
Sales growth.
We see that.
<unk> going to grow, particularly as we grow our territory.
And somebody outside of our current market wouldn't even know to go online for us Although we are finding.
Cleats and things like that that are insured supply people in Ohio, and Pennsylvania are some of our.
<unk> Dot com markets.
We are.
We see that as growth and that can continue to.
The increase the third is our existing store base with the things that we're doing in terms of customer service in terms of our presentation.
We have an opportunity to to continue to have real comp store growth in the future and the fourth is the improvement in our operations with things like we're doing with.
Our supply chain and even within the store or new queuing checkout allows us to be more efficient in the store to give more hours.
On the customer and our sales associate productivity has continued to grow up.
So the stores when you do the math that's by far the or that's the biggest but the others are significant growth opportunities that we have.
And.
Not not all retailers have all four of those that they can take advantage of it and lastly, just to be clear, we certainly don't plan to stop at a 100, that's our plan for the next five years, but there is a lot of white space beyond that.
Look we've been very disciplined in our process to make sure that we are opening stores that allow us to achieve the profitability levels that you've discussed John .
No me, a long time and you know that.
Some people call me <unk>.
I think some people call me methodical, but we are going to be controlled and managed and provide the continued direction. It's one of the reasons why our inventory was under control and a lot of other retailers inventory wasn't it's we're able to go out now and buy merchandise that we're hearing other retailers are canceling veteran.
Very good categories that are performing for us.
And so managing that we are the systems that we're putting in place making.
Making sure we're rolling those out and we don't overstate over.
Get over our skis same thing with store growth, we're managing that but we're going to continue to move forward and drive the business forward.
In a strong way, but not get too far ahead of ourselves.
Well, thanks for all those answers and I want to wish you all a wonderful summer.
You too thank you bohn here.
Yeah.
Thank you pleased that concludes the question so I want to thank everybody. Thank our team for having helping us achieve.
To achieve the results that we've had and olive.
You all for following us and our investors for supporting US as we continue to move Academy to achieve our mission to be the best sports and outdoor retailer in the country.
Okay.
Yeah.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.