Q2 2022 Academy Sports and Outdoors Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Academy Sports and outdoors second quarter fiscal 2022 results conference call.
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 and question and answer session.
Questions 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 on your telephone keypad. If you require any operator assistance during the call. Please press star zero on your telephone keypad 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 second quarter 2022 financial results call participating on the call are Ken Hicks, Chairman, President and CEO , Michael Monahan Executive Vice President and CFO , 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.
The 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 SEC filings the.
The company undertakes no obligation to revise any forward looking statements.
Today's remarks also refer to certain non-GAAP financial measures reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors not Academy Dot com.
That's otherwise noted comparisons are to 2021 with 2019 comparisons also provided where appropriate to benchmark performance given the impact of the pandemic in 2020 and 2021.
I will now turn the call over to our CEO Tim Hicks.
Thank you Matt.
Morning, and thank you all for joining us today.
Our performance this quarter was in line with our expectations, we remain confident that the durability of our strong assortments and everyday value model positions us well to deliver consistent sales and profitability growth going forward.
This growth is supported by operational excellence healthy inventory levels, a strong balance sheet, new store expansion and omni channel advancement.
The Academy team remains focused on executing our priorities to achieve our vision of becoming the best sports and outdoors retailer in the country.
Delivering a great experience for our customers and creating value for our stakeholders.
Part of our plan to achieve this vision is by expanding our footprint and bringing more fun to the rest of the country.
I'm excited to announce we opened our second store up 2022 in Panama City, Florida during the second quarter.
Our first location in this market and our 13th store in Florida.
So far in the third quarter, we've opened two additional stores one in Richmond, Virginia, a new market for us and another one in Atlanta, Georgia and existing market, we continue to build out.
These stores, bringing our total opened so far this year to four stores with five more expected to come in 2022.
While it is early the new stores opened in 2022, our overall exceeding our initial sales expectations, which is a good indication that customers are drawn to our broad assortment of top national and high quality private brands at an everyday value.
Thanks to all of the team members, who helped execute these highly successful store openings.
We're excited to be in a growth mode and expect to opened nine new stores. This fiscal year and 80 to 100 stores over the next five years.
Academy stores have the highest store productivity in our peer group.
Our new stores are compelling use of our capital with a high return on investment.
As I mentioned on the last call our expansion plans consist of three distinct opportunities.
First is building scale in existing fast growing markets like Atlanta, Georgia, where we've opened two new stores in the past four months and now have 12 locations.
Second is expanding into adjacent markets like Panama City, Florida, where we just opened in Lexington, Kentucky, where we will open in store later this fall.
And third is opening in new markets, such as Richmond, Virginia, where we opened in mid August and West Virginia later this year.
As we continue to expand the store base over time, we believe this will increase brand awareness leading to market share gains as well as omni channel growth due to our high penetration of buy online pick up in store sales.
I'll now provide a high level overview of our second quarter results.
The quarter presented similar macro economic challenges as the first quarter and the team demonstrated once again their ability to perform in a tough environment.
Our reported sales and negative 6% comp versus last years were in line with our expectations.
These results were a strong 36% sales increase versus 2019 through the second quarter as the business continued to substantially outperform our pre pandemic levels of sales and profits.
Our best customers have remained resilient throughout the challenging economic environment, while our value offering continues to resonate.
We expect the sales trend compared to 2019 to hold for the remainder of 2022.
While each of our four merchandise divisions sports and recreation.
Where apparel and outdoors saw a decrease in there year over year sales when compared to the second quarter of 2019 each.
Each merchandise division grew by at least 20% with outdoor sports and recreation.
Each increasing by more than 45% over 2019.
This highlights the fact that each of our merchandise divisions remains substantially higher than pre pandemic levels.
Steve will discuss our merchandise results in more detail later in the call.
During the quarter, we were very pleased with our positive E Commerce sales performance, which grew 12% versus last year.
We continue to invest in technology to accelerate our omnichannel growth and.
Create a seamless engaging customer experience.
For example, we've added new mobile payment options like Google pay and Apple pay and four and we will be launching store way finding on our App later this year.
We will continue to invest in and deploy technology across our stores omni channel and supply chain to enhance the customer experience.
These investments are yielding strong results as we continue to see our omnichannel business grow.
Store productivity increase inventory assortment and in stocks improve and our customer survey scores at record levels.
Our adjusted earnings per share were $2 30.
This was driven by our ability to sustain our gross margin rate above 35% and effectively control cost.
Gross margin rate is expected to remain in line with our full year guidance, leading to strong cash flow generation and profit growth.
Looking ahead to the third quarter and the remainder of the year, we had a good back to school season, and expect comparable sales to continue to sequentially improve as we go through tailgating hunting and.
Fall sports and.
And move into the holidays.
As I have stated before Academy sports and outdoors is a different company from four years ago and is poised to utilize its operational excellence and a strong balance sheet to profitably grow through new store expansion and omni channel growth.
I'll now turn the call over to Michael to provide more details on our second quarter financial results discuss our capital allocation efforts.
And provide an update on our 2022 guidance Michael.
Thanks, Ken good morning, everyone.
Academy once again delivered solid earnings per share growth unexpected sales decline, demonstrating our earnings potential and our ability to deliver strong results in a challenging environment.
In the second quarter comparable sales declined 6% an improvement over the first quarter, while earnings per share increased by 12% compared to last year.
Net sales were $1 69 billion a decline of five 8% compared to the second quarter last year.
The sales decline was a result of fewer transactions this quarter compared to the prior year, but was partially offset by an increase in average ticket driven by higher unit prices.
On our last call. We discussed how we are benchmarking performance of 2019, which was our last normalized year prior to the pandemic.
In the second quarter sales increased approximately 36% versus 2019, which was consistent with the 36% growth we reported in the first quarter.
In addition, the overall shape of the sales curve mirrored the 2019 trajectory, but at elevated volume levels.
Our ecommerce sales increased 12% compared to Q2, 2021, making it the fourth consecutive quarter of double digit sales growth.
The penetration rate continues to improve as well and they get 10% of sales compared to eight 4% in Q2 2021.
When compared to Q2 of 2019, our ecommerce business is growing approximately 245% and the penetration rate has increased by 610 basis points.
Omni channel is an important part of our long term growth strategy and we continue to invest in enhancements to Etame dot com, the mobile app and our store support on Omnichannel sales such as ship to store purpose and ship from store.
These investments will further enhance the customer experience expand academies reached a new customers and drive further operational efficiencies.
We also expect Academy Dot com to get a sales lift from an increase in brand awareness as we open more stores in adjacent and new markets.
As Ken mentioned, our new store openings are wrapping up year to date, we have opened for the nine stores currently planned for 2022.
The early success of the new stores demonstrates our confidence that our business model of providing a broad value based assortment of top national brands and private label products for the whole family resonates with customers.
The top economic times customers tend to seek out value. So we believe we are well positioned to meet that need with a broad selection of good better best products at compelling price points.
All of the new stores are expected to meet our general New store operating model. So we anticipate these stores well first have a return on invested capital of at least 20% second ramp to maturity and four to five years and third the EBITDA accretive after the first full year of being open.
Yeah.
During the second quarter, our existing store productivity was once again very strong trailing 12 month sales per square foot were $356 and trailing 12 month operating income per store was $3 4 million.
As a reminder, 100% of our existing stores are profitable and accretive to earnings which gives us great confidence in our future growth potential.
Moving to gross margin our gross margin dollars were $596 million with a rate of 35, 3% only 60 basis points below last year's 35, 9%, which was the highest in the company's history.
Through our merchandising efficiencies, we increased our merchandise margins compared to last year.
The increase in merchandise margins was offset by an increase in e-commerce shipping and freight costs compared to Q2 2021.
This increase was driven by the growth of our ecommerce business and also from higher input costs as well as private label sales were a higher percentage of our total sales mix.
During the quarter SG&A expenses were 21% of sales.
Hundred and 60 basis point decrease compared to Q2 2021.
The change was primarily a result of lapping the nonrecurring expenses associated with the accelerated share vesting in the second quarter of 2021.
Excluding this nonrecurring expense SG&A expenses increased 70 basis points, primarily due to fixed cost deleverage.
Operating income for the quarter was 15, 2% of sales a $256 7 million flat to last year by 43% higher than all of fiscal year 2019.
In total we delivered net income of $189 million for Q2 on adjusted basis net income was $195 million, making this quarter. The second most profitable quarter in Academy history.
Second quarter GAAP diluted earnings per share were $2 22 per share compared to $1 99 per share in Q2 2021.
Adjusted diluted earnings per share were $2 30.
<unk> to $2 34 per share in Q2, 2021.
Now for an update on our balance sheet and liquidity position.
We ended the quarter with $400 million of cash and had no outstanding borrowings on our $1 billion credit facility.
During the quarter, we generated $161 million and net cash from operating activities.
Given our strong cash generation, we were able to execute on each of our capital priorities by repurchasing five 6 million shares for approximately $200 million paying.
Paying a dividend of <unk>, seven and a half cent per share investing in our strategic growth and performance priorities and maintaining a strong cash balance.
In addition, the board recently declared a dividend of seven five cents per share payable on October 13th 2020 to stockholders of record as of September 15th 2022.
Regarding inventory, our planning and allocation initiatives have ensured that we are properly stocked with the best value and assortment across all categories for the fall season.
Our ending inventory balance was $1 3 billion, a 17% increase compared to the second quarter last year.
When compared to Q2 of 2019 inventory dollars were up eight 4% and units declined by 12% on a sales increase of 36% demonstrating that while sales have increased significantly we have effectively managed our inventory.
That brings us to guidance.
Based on our results and current trends, we are reiterating our full year net and comparable sales guidance, while updating our earnings per share forecast to reflect the reduction in our share count.
The updated full year guidance is as follows.
Net sales are still expected to range.
From $6 4 billion to $6 6 billion with comparable sales down 6% to 3%.
Our gross margin rate for the full year is still expected to range from 33% to 33, 5%.
GAAP net income is still expected to range from $550 million to $615 million.
GAAP diluted earnings per share are now expected to range from $6 50 per share to $7 25 per share.
Adjusted diluted earnings per share, which excludes certain estimated expenses such as stock compensation and store Preopening expenses are now expected to range from $6 75 per share to $7 50 per share.
The earnings per share estimates are calculated based on an updated share count of 85 million diluted weighted average shares outstanding for the full year.
The EPS outlook does not include any further repurchasing activity for the year.
With that I will now turn the call over to Steve for more details around our merchandising and operations performance Steve.
Thanks, Michael.
As you heard earlier, our Q2 sales came in at $1 69, which is a 6% decline versus 2021.
The sales down by category, our best performing division in the quarter with sports and recreation, which was down two 5% versus 21, but up 47% versus 2019.
Team sports business continued to be extremely strong with football golf baseball soccer, all being key contributors.
<unk> saw strength in several of the recreation categories, such as water sports and outdoor furniture.
Fitness remains the most challenging category in this area of business, where we've seen it stabilize over the past couple of quarters at over a 30% increase versus 2019 pre pandemic levels.
The footwear Division was our second best business down, 4% versus last year, but up 22% versus 2019.
Similar to sports in Iraq, We saw continued strength in our team sports cleanup business, where demand continues to outpace supply.
Bright spots included children shoes on our big brands, such as Crocs, Skechers, Adidas, and Puma, which all rent increases for the quarter.
We're also excited to launch <unk> in all stores in July just in time for back to school.
We're seeing strong early results and expect him to be a sales driver for us the remainder of the year.
Apparel sales came at down 6% versus last year, but were up 29% versus 2019.
Receipts and inventory levels steadily improved over the course of the quarter.
The outdoor licensed apparel businesses led the way in this division during Q2.
Our athletic apparel business was a little softer during the quarter, which we primarily attribute to not having the optimal mix of lightweight tops and shorts inventory as we entered the quarter. We did see the trend improve as we turned the corner into back to school selling season, I believe our inventories are better balanced and well positioned to drive sales in the back half of the year.
Our outdoor business was down 9% versus last year, but was up 46% versus 2019.
Camping was the strongest business in this category are you running a positive comp for the quarter.
Both our field and stream businesses were down versus last year, but in aggregate continue to run well above 2019 levels.
The supply chain across most of our businesses has improved and while not totally back to normal working.
Inventory and in stocks maintained at much higher levels than we had been at over the past couple of years.
We believe our improved inventory position in both of these categories positions us to take advantage of the upcoming hunting season, along with the holiday gift shopping opportunity.
Turning to margins.
We continue to hold on to most of the gains we've made over the past couple of years.
Gross margin rate for the quarter came in at a 35, three which was down 60 basis points versus 21 was up 420 basis points versus our 2019 baseline.
Need to surface on merchandise margin was up 20 basis points versus last year, which was the same increase we ran in Q1.
All the hard work the teams have done over the past couple of years around improved buying and planning and allocation disciplines, but a lot of us absorb the uptick in promotions during Q2, while still seeing increases in our merchandise margins.
Looking forward, we expect the second half of the year to be more promotional in the first half and we've accounted for this increased discounting in the guidance Michael discussed earlier.
That being said, we expect to maintain most of the margin gains for the past couple of years are confident that our everyday value pricing coupled with our promotional strategy makes us very competitive and allows us to maintain our position as the value leader in our space.
Moving on to inventory our teams have done an outstanding job in managing through what continues to be a challenging environment.
We ended the second quarter of inventory up 17% versus last year, only up 8% versus 2019 in terms of dollars and down 12% in units.
Similar to last quarter. The primary driver of the Delta between inventory dollars and units versus 2019 is the increased bigger ticket hard goods categories as part of our inventory and sales mix.
Outdoors and supports ground at 53% of the business this year compared to 49% of total sales in 2019.
The remainder of the variance is driven by the expansion over time of the better and best offerings in our Assortments along with some cost inflation.
Heading into the back half of the year, our inventories are much better balanced across various businesses with in stock improvement across every category.
Additionally, the overall quality of our inventory is in a much better position this year and many of the key brands that we ran late in last year, such as Nike Adidas under armour and Yeti.
Of our fall holiday receipts last year landed 30 to 90 days later than we would've liked.
We've moved the initial sets for these businesses back to their traditional Timeframes. When you walk our stores, you'll see that we're ready to take advantage of the natural fall traffic will come in shopping for hunting and tailgating, along with cold weather categories, such as outerwear fleece and fire pits.
Another sales driver for us is continuing to lean into new brands and initiatives that resonate with the sports and help our customers and our markets.
In addition to the aforementioned Haydu launch at back to school to see several new brands and ideas popping up across the store such as subtle style real fire pits there.
We're also fund trans inspired by Tictoc, such as a spider ball craze, which was rolled out to all stores.
Probably the idea. We're most excited about is the second major limited time Cross brand collaboration that we just launched which is our China plus Magellan capsule products.
We partner with China, growing which is headquartered in Texas are widely distributed across our footprint to deliver our most extensive collaboration effort.
We position this initiative at the front of our stores a couple of weeks ago to help kick off the tailgating season.
And this collection included co branded items, such as Ts fishing shirts hats, koozie as chairs canopies grills and even coolers.
It's only been on the floor a couple of weeks, but it has sold extremely well.
We believe building collaborations with brands that resonate with the sports now for consumer and be a traffic driving initiatives that we add to our playbook moving forward.
Teams have worked hard to stabilize the supply chain and get back in stock and we should be able to maintain a much better inventory position across virtually every category throughout the fall and heading into holiday.
Everyday value offering when coupled with a thoughtful promotional cadence on key seasonal categories continues to set us apart from our competition and reinforce our position as the value leader in our categories.
We also believe that more control distribution by key vendor partners will continue to be a tailwind for us by filing shoppers looking for the best National brands and sports and outdoors into our stores.
Finally, we continue to remix our marketing spend and leaned into more digitally targeted advertising, while reducing our reliance on traditional broadcast and print.
This will continue to improve our overall marketing reach and effectiveness.
In closing, we believe that we have the proper strategies in place and are well positioned to drive the business pick up market share during 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 closing, we've demonstrated consistent strong operational and financial performance in any environment, which is the direct result of the many improvements we've put in place long before the COVID-19 pandemic to achieve our vision of becoming the best sports and outdoors retailer in the country.
I am pleased with the sequential improvement in our comp sales and profitability versus Q1, and believe that academy is well positioned to be the everyday value retailer of choice.
We also have tremendous growth opportunities ahead of us whether new stores.
Any channel or existing stores from operational improvements, we have numerous avenues of growth and the cash flows to support it.
I would like to close by thanking all of the Academy sports and outdoors team members for their continued hard work and commitment to our vision of becoming the best sports and outdoors retailer in the country.
We remain excited and confident about academies future and appreciate your support.
Thank you and we'll now open up the call for your questions.
The company will now open the call for questions to ask your question. Please press star one on your telephone keypad, we will pause for a minute to wait for the queue to fill up.
Our first questions come from the line of Chris <unk> with J P. Morgan. Please proceed with your questions.
Thanks, and good morning can you talk about a little bit about what you've seen in terms of consumer behavior around trade down you mentioned you had a good back to school season, but how did the consumer behavior when gas prices spiked and then receded did that trend versus 2019 they.
And over the quarter.
Is that also true on a quarter to date basis.
Okay.
Hi, Chris Thank you.
We are seeing.
The consumer continue to be interested in.
Our category sports snap doors, and what we are seeing is interesting and that there is somewhat of a barbell effect.
Those consumers that are interested.
And are these.
Enthusiasm or buying.
Continue to buy at the higher end, but we are seeing some of the consumer shift to our private label.
And so that's why as Steve said, our private label business.
It was better in the quarter and so they are looking for the value that that's offering but that said we can.
Continue to see the consumer.
Shopping for the categories that we sell in one of the things I think that's important as we sometimes talk about whats discretionary and what's not discretionary and I think many of the businesses that we have you know the consumer even in tough times, the kids still going on.
Play baseball and soccer the person who's.
In the outdoors is still going to go camping or fishing and families are still going to a barbecue and so we're seeing a lot of those categories continue to be.
The strong and at a much higher level than they were pre pandemic.
This is Steve I'll, just add a couple of pieces of color. So you know to Ken's point.
On one hand private label being very stronger in the quarter on the flip side you see a brand like Yeti has that really strong business, which is one of the more premium brands in our assortment.
So it is it is kind of a bifurcated result, there I would also say you asked around kind of the shape of the quarter. You know one of the things certainly as we go through quarter by quarter month by month, you see a little bit of variance one month, maybe it's a little better than that 36% average.
Another month, maybe a little bit below that but it keeps returning back to that roughly 36% increase versus 2019, and that's really kind of how we forecast the business.
We look forward.
Yeah, It's Michael just really quick one out of a lot of that strength in private label has been driven by newness and the private label with freely right away Magellan Pro and some others are.
We're certainly happy with the way that we manage that business.
Got it and then my follow up for you Michael as you think about how you're thinking about working capital this year and.
And free cash flow generation.
And how do we should we think about you know a minimum cash balance.
As we think about the potential for additional share repurchases later this year, obviously at this point you're probably full.
Full of inventory to get maybe a seasonally low point from a cash balance perspective, but.
One would expect one would think that you know cash becomes a source of funds into the back half of the year and to just try to think about you know the potential for additional share repurchases.
Yeah, a couple of things that I think others are full of inventory, we have the right amount of inventory in a good level, we'd manage that wells when we compare it to 2019.
I think one of the many positive that this quarter illustrated is our tremendous learning potential in a tough environment.
And against some really tough comparisons you know in addition to having the most profitable quarter. We've ever had from an earnings per share standpoint, we were able to post EBIT and net income rates that lead the sector. In fact, I think in specialty retailer there at the tip top of the heap, we have a double digit free cash flow yield.
You know it makes these discussions on capital allocation possible, we certainly have the cash to invest with that in mind. Our approach hasn't changed we're generating enough cash to do because they could do everything approach to capital allocation. The first thing that we consider is the point that you mentioned around stability, we want to maintain a cash war that allows us to be nimble whenever.
A variety of environments I think we've done that.
Were there and we plan to manage that way.
We've got $1 billion less debt than we had a few years ago. Secondly, we want to make sure. We can fund our growth initiatives and conservatively, we have the ability to add hundreds of more stores, we've announced plans to add 100 within the next five years, we mentioned last quarter that Congress was the best store opening we've had that we could go back and find a Panama city opened in the second quarter.
That top Congress. So we certainly feel like we've got the store opening program figure it out.
I want to make sure that we are hitting our targets there for 100 in the next five years Academy Dot Com has grown 250% since 2019 posted its fourth quarter in a row of double digit growth. We're going to continue to fund Academy Dot Com. We can do all of those things that still have cash left over to return to shareholders, which we did in the second quarter.
The board announced an additional 600 million repurchase authorization and we thought in the past few years bought back three times, what we raised in the IPO, we're going to need to be evaluated be opportunistic. We certainly think the stock is a good good value, which is why we purchased a fair amount last quarter and we'll continue to look at that with the punch line.
As we can do all three.
Thanks, very much best of luck.
Thanks, Chris.
Thank you. Our next question is coming from the line of Simeon Gutman with Morgan Stanley . Please proceed with your questions.
Hey, good morning, everyone hope you're good I wanted to ask about the promotional environment. You mentioned that you still did well despite the uptick came up I mean, when we talk about if there's anything structural that you could point to that's changed pre Covid and then dig in a little bit to it is it because the mix is helping is that the magnitude in each category.
Our initial markups higher some just a way to think about why this this backdrop can continue.
Yeah. This is Steve I'll take first stab at answering the question. So we've talked a lot about in previous calls of structurally we've done a lot of work beneath the surface.
<unk> to be better managers of our business, which I think has given us the lion's share of the increases we've had multiple initiatives across merchandising planning and allocation in terms of better inventory management better flow that our localization efforts.
We've really dramatically improved our markdown process timing and cadence to get much more current with our inventory.
So I would say a lot of those things are structural and or kind of stick to the ribs, and we think we're gonna help to sustain the margins I'd also say that you know another thing that I think helped us within the quarter as we don't have an inventory overhang to deal with you know we've been very I think smart about how we manage the inventory are up 17% certainly versus last year I think it is.
Up 8% versus where we were at $19 or down about 8% in units.
Actually no, 12% well, that's 12% units.
So we've really been thoughtful about as the supply chain is starting to get a little more normal although not quite back to normal making sure we control those inventories. So you know.
I think that's allowed us to be very thoughtful about putting promotions back in as we've needed to to be competitive we certainly things that the back half of the year is going to be more promotional than it was last year certainly around holiday, we've got that baked into our guidance as we think about it and then the offsets we have or the structure on fragrance. I mentioned, you mentioned mix mix helped us out a little bit.
Has the soft goods side of the business becomes a bigger percentage of the total, but we feel really good about where we're positioned in our ability to deal with the promotional environment that we see ahead of us there.
There are couple of other things I think that has helped US one is.
Our suppliers in some cases have cut back from some of the promotional.
For people, who were more promotional and Theyre no longer.
In the business and therefore promotions have become more rational we will continue.
To utilize our value proposition and have promotions at key times and react to promotions.
That are out there competitively, but we have not seen the level.
There was.
Prior to the pandemic and.
It's been beneficial, but I think the most important thing is what Steve said.
The actions that we've taken to improve our operations.
Planning allocation pricing.
A bigger factor and those are stick to your ribs as Steve said, but also.
Those use AI.
To continue to improve over time, so they will last we will continue to get improvements from them.
Some time to come.
And then maybe a follow up thinking about the backdrop for demand in the category.
Re basing are digesting it and the consensus models and that it's basically re basing this year and then grows next year you mentioned fitness is a category that you're starting to see units I think flattened out.
Can we look at that as an example that you are seeing stabilization in some of the Big Covid winners and then you know is it is it fair to say the all clear that as a category. We can start to see that grow again.
Yes, I mean, I think it's important to.
Realized it is you know people talk about normalization, it's really not a normalization at stabilization you use the exact right word and so it's stabilizing at a higher level.
And we do anticipate those starting to pick up and grow again people didn't buy a treadmill in 2020, because they thought they were going to buy one and 2023.
You know they're that has is stabilized.
And a higher level and we believe that will pick up those categories like that will pick up.
You know as we go forward.
One additional piece of color to that so to Ken's point.
Take categories like fishing in firearms, and ammo and fitness and bikes and transplants in all those categories that were COVID-19 winters.
You know they certainly surged during the pandemic there, they're dropping versus a wider stabilizing kind of at that level, but the point I think to make is on average were up about 36% versus 19 in aggregate all of those categories are well above that number Ken has used this analogy of going from Denver between Galveston, and Denver, they've kind of.
Baseline to somewhere on the Colorado plateau substantially higher than in 2019 and it much.
Higher levels, Yeah. He won't let me use Taos anymore, because he says not everybody knows where that is.
The Colorado Plateau is I think are relevant.
Thanks, guys. Good luck thank.
Thank you.
Hello.
Thank you our next questions come from the line of Michael Lasser with UBS. Please proceed with your questions.
Good morning, Thanks for taking my question in light of the gross margin performance this quarter.
How do you think about the long term sustainable run rate gross margin for the business. He previously size that 32% to 33% is it higher now.
Well it certainly can be but I think right now you know well.
Stick with what we've said in the past I mean, that's that's.
We feel very good about the 32, 5% to 33 and its certainly way. This year is playing out we could be stronger than that.
But.
I don't think there's any long term.
Change in our perspective, it depends frankly on the level of promotion that comes into the marketplace. So we feel very comfortable that things that we can control around managing our inventory and our merchandise mix.
And then my follow up question is if we trended out the three year geometric stacks. It would suggest the academy is going to have a flat comp by the fourth quarter is that the right way for us to be modeling and predicting the business over the next few quarters.
Yeah.
Ill stand by the guidance that we provided and you can kind of sort through that.
But certainly we would expect to see some sequential improvement throughout the year.
Thank you very much and good luck.
Thanks, Michael.
Thank you. Our next question comes from the line of Daniel <unk> with Stephens. Please proceed with your question.
Yeah, Hey, good morning, guys. Thanks for taking my questions I wanted to ask.
One on inventory you know you mentioned inventories up 8% versus 19, I think sales are up 36, I guess, Michael how much of that is reflective of strategically you guys running more efficient stores and how much of that is.
Maybe inventory you'd want or maybe sales he left on the table due to a lack of inventory, just where should or where would you like inventory to be maybe versus debt hybrid.
I'll, let Steve take those consist payment has been the one that's that's been you know.
That's managed to it but I'll just say very quickly we're very comfortable with the inventory that we have yes. It is strategic I mean, we had the opportunity to be more efficient with our inventory.
And we've been speaking about that for several years, but I'll, let Steve kind of take it from here and talk about some of the stuff they're working on yeah. So I think we feel actually very comfortable with where we're sitting today, it's up 8% in dollars like it's down 12% in units.
We went back to our stores back in 18 19.
What you would have seen was what we call pop stock there was a lot of inventory brown corrugated box and stacked on top of the gondola runs.
It was we were carrying too much inventory. It was very inefficient you now the goods would come in and go into the top stock.
We didn't know where all the inventory was because it was it didn't in cardboard boxes. So at 12% reduction in units really came out of that top stock and so what youre seeing now I think there's a much more efficient flow of goods through the distribution center to the store it hits the backpack. It goes out onto the sales floor versus going into some sort of top soccer backstop situations.
We feel really good with unit inventory that we're carrying we feel its appropriate for where we are right now.
You can always jam the stores and squeezed a couple basis points of comp out of the equation, but that's not how we're going to play the game.
We're comfortable the way, we're managing it we're going to drive a profitable business.
And flow inventory and operate more efficiently and just one last thing, but we're not we're not perfect in terms of where our inventories I mean, there's still a couple of calibers now more in firearms here and there that were a little light on we still probably could use a little more accreted inventory, but in general we're back in stock and most of the <unk>.
Categories, and where we'd like to be.
Okay, Great. That's helpful. And then as my follow up I wanted to ask on the new stores I think you guys mentioned, Panama, even outperforming the one in Atlanta.
Are you seeing outperformance in certain categories and I guess I'm curious to know what are you learning in terms of the marketing spend it would've been more strategic than you thought just trying to think of that as we move forward, how what kind of room for efficiencies on the cost to build marketing can you can you improve upon them in the store opening cadence as we think about accelerating it over the next few years, Yeah, I'll start and then Mike.
Ill pick up but we are learning and one of the reasons why we opened.
<unk>.
The fewer number of stores this year and we started with one two and well open more of this fall was.
We are we are getting a better understanding of what to do on all of the aspects that you had when we open a new store.
The mix.
Quite frankly, usually starts out on the hard lines of the store as people learn about us and then the soft lines.
Catch up.
So we are we are seeing that that trend continue in most of the stores. Although in some of the stores soft lines have been a better portion.
We are getting smarter about the marketing that we do and because of the way we are opening stores, our marketings going to vary and its one of the reasons why we mentioned we opened a store in short bank, which is there.
I mean short pump, which is an area, where we had not been in before.
To understand how we go into a new area versus an area like Atlanta, where we had a presence and people knew what academy was and those are helping us and we're going to evolve.
And improve.
The marketing the good news is that.
As we said overall theyre performing.
Ahead of expectations and.
Another good thing is we are not having issues.
Getting people to work in the stores see we appear to be a place where people look forward to to working and want to work in the stores. So I think that you know.
We are seeing we are seeing a good result, but.
Theres still a lot of.
Things that we can learn from them and one of the things that are Steve and Michael are doing is after each of the openings we've had.
No pretty intensive after action reviews, even though they were good openings to really take the lessons learned so we can improve.
Not a lot to add there other than you know keep in mind, we haven't done this since 2019 and most of the team that's working on it as it is new so everything we do we're going to learn from it. This is very much a test and learn year, we've got new markets. We've got existing markets. We've got adjacent markets, we're going to take over spaces for the first time.
In about a decade to Panama City was a takeover space in a good area of town.
We've got stores in more urban environments, and we've got a team that's got an appetite to learn so we're using this year as a learning year as we ramp and you know all of the things that Ken said, where we're focused on marketing merchandising and across the board. We've got a team that gets together every one of these is it goes to the key learnings we can maximize our success going forward.
I'd say the biggest change between store openings this year versus what we opened in 19.
B two things first.
Localized assortments I think we're better at.
At localizing Assortments than we were three or four years ago, and so you know.
The question you asked is do we see certain categories outperform others. Yeah. I mean, when you go into Panama City fishing is doing a heck of a lot better there than it did it conjures right and that's because we are.
<unk> had a good sister store process really studied the market and help a bigger fishing assortment for that store versus we went for conyers.
I'd say the second piece is if you go back our marketing spend and our focus you know three or four years ago was broadened blasted broadcast news print and we're a heck of a lot more efficient in our targeted marketing and seeding the market.
With look alike customers and so I think both of those things are really different and our playbook currently than what we're doing a couple of years ago.
Great. Thanks, so much guys good luck going forward.
Thanks Danielle.
Thank you. Our next question is coming from the line of Greg Melick with Evercore. Please proceed with your questions.
My first question was about supply chain could you just quantify how much of a headwind that was in the quarter I realize that it drove the gross margin decline, but give a number.
Yeah, I'll call between 10, and 20 basis points. The headwind was really related to the increase in private label penetration, which is a good thing.
So that was that was really the cause of the headwind. It wasn't you know due to the container cost or anything like that it's the penetration of private label, which group.
Got it so theres sort of a net offset there in terms of mix, but.
Exactly yeah.
I understand the margins with that yeah.
I guess supply chain.
That will that could continue as long as the private label mix is improving is there anything else on container costs or diesel.
But plus a lot of areas, it's better than we planned it mhm.
Worse than last year.
Worse than last year, but better than we planned it getting better.
But.
Certainly don't think we're going back to as you know last last year looked a anytime soon again, we contracted some rates. So we feel like we've got pretty good visibility to the costs were not in the spot market at all really anymore. So we feel like we've got better line of sight to it.
Got it and then.
You talked a bit about planning for more promotions I guess I'd love to know a little more color on which categories. You think the market is at most at risk for that increased promotion ality.
I don't know if I could narrow it down to a specific.
Category, what I will tell you is obviously the fourth quarter every year is the most promotional quarter of them all.
We've seen a lot of pullback in promotions over the past two years versus where we were in 2019 and prior our anticipation is as our supply chain.
Starts to get a little better in stocks are in a better place. We saw last year last two years candidly a pull forward of demand in early November and in December when our people saw something he bought it and they didn't have to be incentivized by promotion to buy it because they were afraid it wasn't going to be there closer into holiday I think people are starting to get back into them.
The place where they're used to seeing the shelf full people in stock. So I think that's gonna probably incentivize people to be a little more promotional earlier on.
[noise] accounted for that in our forecast and how we're thinking about it.
It's not isolated to one category, it's where promotions like we have an underlying base of our business. It's everyday value that we don't promote awful.
Our underlying value proposition.
We do have seasonal categories that come in and go out they tend to lend themselves to be a little more promotional than we baked that in.
Got it thanks and good luck.
Thank you.
Thanks, Greg.
Thank you. Our next question is coming from the line of Ravi homes with Bank of America. Please proceed with your questions.
Hey, good morning, guys I wanted to follow up on the commentary about the you know the unit prices are driving the ticket you know could you give any color on you know how.
How much price increases are supporting ticketing is that is that sort of price increases on on a lot of categories like items or is it reflecting significant mix changes versus last year and also like how do we think about.
Sustaining.
The unit price increases as we start to anniversary them. Thanks.
I'd say a couple of things to that if you look at the we said at our inventory in dollars is up 8% versus 19 down 12% in units, which obviously implies a higher average unit cost when we break that down with the biggest chunk of that is mix change having more inventory in the higher ticket things outdoor.
Sports in Iraq. The second one we called out is also an investment in building a better in paas layer to some of our Assortments. He take a category like baseball or in the past, we didnt really sell bathroom clubs north of a $100 that now makes up a bigger chunk of our business and that's by the way a very productive piece of our business and I'd say probably the smallest.
Contributed to that Delta would be cost price increases that had been reflected in retail changes on our side. So are we.
We certainly have taken those cost increases just like everybody else in the marketplace has been very thoughtful about how we price goods and so far we really haven't seen resistance to two that our AUR or up in the mid single digits and we feel like we kind of put those price increases I'll point out also being evaluate in our space is really important to us and we spent a.
A lot of time, making sure that our prices are as good if not better than our competition and to stay out there day in day out basis, we have a price scraping tools. We monitor this all the time constantly looking at this and we're committed to make sure that the cost increases we're seeing we'll pass along thoughtfully, but we're not going to let ourselves lose that value.
Our proposition our leadership that we have in our space.
That's that's really helpful.
Just a quick follow up a lot of other retailers have kind of called out that there was a shifting back to school into the that's benefiting the third quarter are you guys seeing the same thing.
I would say that we certainly have seen the back to school categories do very well at the tail end of July heading into the back to school timeframe, we try not to give inter quarter guidance, but you know one of the things that keep anchoring back on is that trend versus 19 being in kind of that that $30 range. We've seen that continue through this one of the.
Ravi is that you have to keep in mind.
In most of our markets our back to school is earlier than what it is on the East Coast, We had kids going back to school literally the end of July .
And almost all of them were back to school by the Middle of August .
And I don't think any of them or like you may have in the east to West coast, where they are after labor day.
Thanks, that's really helpful.
Thank you. Our next question is coming from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.
Hi, good morning.
Congratulations on another nice quarter, thanks for taking my questions.
Right.
The question I have.
Getting back and I know, we have a lot of us focusing on just the demand environment. If you step back and look at your business.
How what's in there.
Basically this you know this stabilization now at a higher level higher than pre pandemic level. You think is it is it more a function of just changes in consumer behavior.
Or is it more of a function of substantial alterations that you've made in your company and the merchandising.
And then the follow up question I had and some other initiatives other people's questions, but with regard to private label as Youre seeing stronger demand for private label.
Is that should we think about Keystone Academy is that the consumer trading down or is that just to get cheaper reacting to now a bunch of better built out.
Private label offering from your company.
And I think with regard to the consumer and I'll, let Steve talk about that.
What we've done with private label.
It's actually both of the situations that you put forward are there there is definitely a shift in the consumer behavior and I don't. This is this is a long term trend and it has to do with Uh huh.
Health.
And you know the People's desire Fluor.
Experience and we are in both of those areas and the consumer is more interested in their health and wellness. So there'd be more active and they're interested in experience and that is what we sell.
And that's important that said at the same time that trend was going on we made fundamental changes to the business and became a much better business.
Many times, we're a different company than we were four years ago and that's how we operate the business all of the systems and things that we've done to improve that the merchandise we offer as is.
You said earlier about good better best.
And making sure that we keep that consumer with us and with regard to the categories that we sell we got out of peripheral categories to be able to focus on that sports and outdoors.
People are interested in that go with the trends. So you put those two things together.
I guess the term people use is the perfect storm.
We were benefiting from that.
I would add a third one you know the competitive environment is different when you look at some.
Some of the brands, we carry there's there's more controlled distribution than it was two or three years ago.
You look at some of the categories we carry.
<unk> pulled out of some of those categories are really downplayed those categories and so I think it's probably the combination of those three things there.
It allows us to believe that we're going to hold onto this.
<unk> and long term in terms of the health of the customer and trade down I mean, you know we spent a lot of time talking about that I mean, certainly the strength in the private label could.
Indicate there was some some trade the value in our assortment.
But we also saw strength in a lot of our a better national brands and what we do believe is that our position as a value provider in the space and having a good range of good better best.
Well positions us to capture trade down customers as well as hold onto our existing customers because they can trade up trade down.
Two.
Two questions to ask what we've done with the private label, we have continued to offer terrific value in things like our <unk> brand.
And the Academy chair in wagon, which are terrific values for our customers, but the addition of freely and grow and Magellan pro.
Uh Huh have added to the strength of our private brand and continue to fill niches.
Really we didn't have in our assortment and that is that has also been a big supportive what we've done in our private brands and things.
Things like what we did with water Burger and what we're doing with Schreiner.
That's that's not chopped liver.
That's a nice volume with some of the exciting ideas that we've added.
Okay well. Thank you very much appreciate all the color congrats again.
Okay. Thanks, Brian .
Okay.
Thank you. Our next question is coming from the line of giant John Heimbach <unk> with Guggenheim. Please proceed with your question.
So let me start with <unk>.
Have you done with regard to the wallet share.
By different cohort, maybe looking at enthusiasm casual customer.
I'm curious you know.
Even with.
Some of your better customers, how big do you think.
The opportunity is with their wallet is that still pretty significant.
I think we know that within our existing customer base relative to our competitors, we capture a higher share of wallet.
And we think that goes back to our value. So I think there's always opportunity one of the things that we tried to do is to have a broad and complete assortment offer a one stop convenient shopping experience and we think as we continue to deliver on that that that opens up the opportunity for more cross shopping across the store not to get a higher share of the customer's wallet.
At the same time pick up other customers, who are trading into our in our stores. We are we are seeing both new customers. We continue to have about the same number of new customers. This year as we did last year.
But with our existing customers, our core customers spending more with us and continues to spend more with us shops more frequently shops more frequently and we were able to retain them.
Because in the past is okay. The kids starts out in T ball, but as they move up.
It used to be we didn't have a product for them, but now is as Steve said, we're selling you know.
Much better gloves Mariucci batch same thing in campaign I was in a store the other day and a couple was looking.
Looking at the North face tense and I said you know.
You can proceed when we bought the Magellan.
And now we want something.
Better so we're able to.
Offer more to that customer with our with our assortment what one other key thing I'll I'll pile on here, it's I don't want to lose it we are more popular with families than our peers and so not only can we trade individuals' into different categories across the store because of our diverse assortment, we can trade the whole family.
Into different categories across the store. So we think that's a big advantage for us.
And then maybe secondly, right I know.
It's up over 30% since 19 I'm curious.
Whats happening to the four wall store model.
I.
Imagine right.
New stores are opening up at higher levels than you might have imagined two or three years ago is.
Is that changing the economics significantly right.
Directionally, yes.
And then I was going to add.
When you think about gating factors on growth right because if that's true.
But you've got the capital.
You know what is the gating factor just.
People at this point.
Whether you can do 20 or 25 year.
Yeah, we certainly have the most productive and profitable model on the business before we've had the run of success and it's now it's just you know of course amplified.
Sales per square foot and the category are most four wall profit.
In the category, we want to accelerate our growth we've got the capital to your point, we have the appetite to do it we want to do it well and that's why we're taking a very measured approach and again I'll go back to an earlier question. This is a test and learn year.
And we're taking the time to do that before we step on the gas.
Certainly you know all of the studies that we've put together and the ability to add up to 800 stores in the country at some point and.
We're certainly going to do it in a responsible it's possible manner. You. If you do the math on the 85 to 104 as we progress through the five year period, we're going to continue to increase the number of stores that will open each year. It would be able to grow like we're growing and still deliver the free cash flow yield that we have.
Now I'll tell you that we could certainly do more.
We just wanted to make sure we're doing well with you that's the key do alone.
Thank you.
Thanks, Ken.
Thank you. Our next question is coming from the line of Anthony to come out with loop capital markets. Please proceed with your questions.
Good morning, Congrats on the strong quarter and thanks for for fitting me in I guess I was just I just had a question in terms of how are you thinking about your holiday marketing strategy, particularly given the fact that like you said you do expect it to be more promotional I mean are you going to continue to shift your mark.
Cutting spend more to digital or you're going to lean more into your academy credit card like how are you how are you thinking about that.
I'd say, yes to all of the above I mean, our marketing.
Tenant approaches has been evolving a lot over the past three to four years Oh, we were we were as I mentioned earlier very very print centric very broadcast centric.
Going back to 2018 2019.
And when you look at where we are today I think at the time, we looked at it and maybe like 2% to 3% of our marketing at that time was targeted and when you look at where we are today. It's the preponderance of the marketing is targeted it's digital so that that shift in spend has been ongoing and continues as we move forward and I think you'll see us really lean into that as we go into the Holly.
One of the things that that does that does actually good is.
When you used to do print you had to have your pricing and everything done literally a couple of months in advance.
Can now respond and react to what's going on in the market.
It's down to a category.
You know the specific items and make sure that we arent, giving things away, we don't have to and at the same time, maintaining that value proposition that we have it makes us more nimble on just more efficient overall.
Got it very helpful keep up the good work guys.
Thanks Anthony.
Okay.
Thank you. Our next question is coming from the line of Seth Basham with Wedbush Securities. Please proceed with your questions.
Thanks, a lot and good morning, when you guys think about merchandize margin gains versus 2019.
Clearing schemes Oh, yeah. Thank you Alex.
Strong margin gains in our components of improvement because of lower promotions industry and less clean senior business, which of those bigger driver of improving.
I would say, it's the structural improvement in terms of better management of inventory that our management of clearance that is that is the biggest share of it.
A smaller piece of it would be lower promotions in the marketplace.
That being said, it's kind of hard sometimes to disentangle the two but when we do do the work and try to go through it. It is definitely structural improvements are the lion share of the gains.
Got it okay and when you think about the go forward then in terms of the negative potential impact to your merchandize margins going forward do you think it would be essentially figure from normalization of inventory levels impacting clearance or what is the promotional normalization in the marketplace. Yeah I think the way.
We look at it with we have the.
Structural improvements that we've quantified we believe there could potentially have the 500 basis points roughly gain that we've had we think depending on what the environment looks like what our competition does and how we have to respond there could be.
100, 200 basis points of give back from greater promotion.
That's how we look at it internally.
Yeah as it relates to give back some amortization of clearance levels.
Yeah.
Exactly yeah competitive competitive again, you know where you.
Counterpunch to maintain share to keep up with others. The other thing that I would add Seth is we still haven't gotten the full impact from a normalized merchandise mix as hard goods are still.
Outperforming to wear has performed historically and in 18 and 19. So it's apparel becomes a greater piece of the mix, we should get some margin benefit from that and probably lower private label exactly.
Understood, Thanks, a lot and basketball.
Got it thank you very much Seth.
And I think that that'll be our last question. We went ran a little bit over appreciate everybody's time and appreciate the interest we feel we have a very strong story.
And excited about the future and hopefully you all are too.
You know as we head into the fall season.
Working hard and moving forward.
You'll have some fun out there.
Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.