Q3 2022 Academy Sports and Outdoors Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Academy Sports and outdoors third quarter fiscal 2022 results conference call.
The Sun. 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 questions will be limited to analysts and investors. Please limit yourself to one question and one follow up.
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I will now turn the turn the call over to Matt Hodges Vice President of Investor Relations for Academy Sports and outdoors, Matt. Please go ahead.
Good morning, everyone and thank you for joining the Academy sports and outdoors third quarter 2022 financial results call.
Depending on the call are Ken Hicks, Chairman, President and CEO , Michael Mulligan 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. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections.
These risks and uncertainties include but are not limited to.
Factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward looking statements.
Today's remarks also refer to certain non-GAAP financial measures reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors start Academy Dot com.
Unless 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 Ken Hicks.
Thank you Matt Good morning, and thank you all for joining us today.
As we anniversary our second year as a public company I'm proud of the operational and organizational initiatives. We've undertaken that have transformed the company and helped drive our solid financial performance.
Our talented team of retail leaders have improved every aspect of our company when compared to pre IPO Academy.
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Improving our merchandise planning and allocation processes.
Building, an outstanding assortment of good better best products for our customers, while maintaining our focus on value.
Significantly enhancing our e-commerce capabilities.
Increasing customer loyalty through the launch of the Academy credit card.
Modernizing our marketing along with our store experience.
And meaningfully improving our financial stability.
We are in excellent financial health capable of self funding all of our capital priorities, which include new store expansion Omni channel growth.
Knowledge he enhancements.
<unk> supply chain capacity.
And rewarding shareholders through share repurchase and dividends.
The third quarter was challenging and our reported net sales of $1 49 billion and negative seven 2% comparable sales were below our expectations.
We saw sales increases in footwear and apparel, but experienced sales decline.
And outdoors and sports and recreation.
Steve will discuss our sales results.
More detail later in the call.
Okay.
When comparing third quarter sales to 2019, we maintain the 30% growth trend.
As in line with what we've seen year to date.
We believe this is a strong indicator that our business is baseline at a much higher level post pandemic.
And there is ongoing durable consumer demand for the sports and outdoors category.
Looking at our third quarter profitability adjusted earnings per share were $1 69.
Which is below last year, but in line with our expectations.
We maintain a 35% gross margin rate with an improved mix of products, increasing merchandise margin rates and controlling cost.
We also held a double digit EBIT margin and for the second year in a row, we expect to end the fiscal year with an annualized EBIT margin rate above, 10%, which was one of our long term financial goals.
The freshness and in stock position of our inventory across most of our categories is in very good shape.
We believe we have the right amount of product from key partners like Nike.
Ddos and under armour.
To offer customers what they are looking for this holiday.
There will likely be more promotional activity in the marketplace. This holiday season, but we are prepared to be competitive with our own planned promotions as well as our everyday value positioning.
Which is in our plants.
While we know that our customers have been under inflationary pressure and do not have the stimulus money. They had last year. They are still focused on health and wellness pursuing their hobbies.
And wanting their kids to participate and their sports and activities.
Our good better best assortment of top national brands and strong private brands available at everyday value prices allows them to continue to do that at an affordable price.
As a reminder, the majority of our customers are in the middle three quintiles ranging from $50000 to $150000.
Annual household income.
There is also an ongoing population migration to our base in the south and southeastern United States.
We currently operate in some of the fastest growing markets in the country, such as Austin, Texas, Atlanta, Georgia, and Raleigh, North Carolina.
We are uniquely positioned to benefit from this shift and intend to capitalize on it by executing on our growth plan of opening 80 to 100, new stores between 2022 and the end of 2026.
During Q3, we opened four stores.
In Richmond, Virginia.
Atlanta, Georgia Lexington.
Lexington, Kentucky, and Jeffersonville, Indiana.
We have also opened three stores in Q4, one here in Houston, one in Tampa Bay, Florida.
And a new state for Us Barbara <unk> West Virginia.
These store openings were a mix of locations in existing adjacent and new markets.
We are measuring and analyzing the different market types in all aspects of the opening process.
Marketing merchandising localization seasonality and staffing to gain a better understanding of our approach.
And optimize our processes, we open even more stores in 2023 and beyond.
I want to give a big thanks to all of the team members, who helped execute three successful store openings.
The Academy team remains focused on executing our priorities to achieve our vision to become the best sports and outdoor retailer in the country, while providing fun for all through assortment.
And by delivering a great experience for our customers and creating value for our stakeholders.
I will now turn the call over to Michael to provide more detail on our third quarter financial results, new stores and provide an update on our 2022 guidance.
Nickel.
Thanks, Ken and good morning, everyone.
Academy delivered another profitable quarter for shareholders, despite ongoing macroeconomic headwinds by prudently managing inventory expanding merchandize margins and controlling expenses.
Since going public more than two years ago, we have consistently demonstrated that we have achieved a material step up of our earnings potential and free cash flow generation compared to years past.
In the third quarter net sales were $1 49 billion with comparable sales down seven 2% as we Anniversaried. Our strong Q3 2021 comp of 17, 9%.
The sales decline was a result of lighter traffic and fewer transactions compared to last year, but overall, we have maintained the market share gains over the last two years in each of our merchandise divisions.
We saw share gains this quarter in apparel and footwear, resulting in our sales mix being more balanced between hard and soft goods compared to recent quarters.
Our ecommerce sales increased 10, 5%, marking the fifth consecutive quarter of double digit growth and represented nine 5% of merchandise sales.
When compared to Q3 2019, our ecommerce business has grown 173% and the penetration rate has more than doubled.
As we have stated before we believe the Academy Dot Com is a competitive differentiator for us in a very meaningful part of our future growth that we intend to invest in for the foreseeable future.
Yes.
As Ken said, we have completed all nine of our planned store openings for 2022.
Academy stores have the highest store productivity in our peer group, making our new stores and effective use of our capital with a high return on investment.
During Q3, our existing store productivity was once again best in class.
Trailing 12 month sales per square foot were $351 per foot and trailing 12 month operating income per store were $3 2 million.
Gross margin dollars during the quarter were $522 5 billion with a rate of 35% only 20 basis points below last year's record third quarter of 35, 2%.
As Steve will tell you more about in a minute, we increased our merchandise margins compared to last year. Despite various external pressures as our refined merchandise planning and allocation processes continuing to generate margin opportunities.
We also saw a shift in our sales mix toward soft goods.
These margin gains were partially offset by an increase in e-commerce shipping costs and shrink during the quarter.
That's the pandemic, we've over indexed on the hard goods side of the business, but as our mix shifts back to soft goods, our gross margin rate should benefit.
SG&A expenses were 23% of sales a 140 basis point increase compared to last year.
The change was primarily result of fixed cost deleverage from the decline in sales and additional preopening expenses associated with opening new stores.
Operating income for the quarter was $179 5 million or 12% of sales.
Academy has now delivered double digit operating margins for seven straight quarters.
Through the first three quarters of this year, we have generated over $640 million of operating income, which is more than the company earned in all of fiscal 2019 and 2020 combined.
This is a clear indicator that the operational and organizational improvements made over the past few years have structurally changed and enhance the earnings power of Academy.
Third quarter GAAP diluted earnings per share were $1 62 per share compared to $1 72 per share last year.
Adjusted diluted earnings per share were $1 69 per share compared to a $1 75 per share last year.
Looking at the balance sheet Academy ended the quarter with $318 million in cash and had no outstanding borrowings on our $1 billion credit facility.
Our positive cash flow generation remains strong as we delivered $58 million in net cash from operating activities.
During the third quarter, we executed on our capital allocation plan in part by investing in the following.
Opening four new stores.
Repurchasing $2 2 million shares for approximately $100 million.
Paying out $6 million in dividends.
Best thing in supply chain and technology enhancements.
And lastly, maintaining a healthy cash balance.
In addition, the board recently declared a dividend of $7.05 per share payable on January 13th 2023 to stockholders of record as of December 20th 2022.
Looking at our inventory, our ending inventory balance was $1 5 billion, a 12, 8% increase compared to Q3 2021.
When compared to Q3 of 2019 inventory dollars were up 12, 3% while units declined by 10% on the 30% sales increase.
This demonstrates that we have effectively managed our inventory while experiencing significant sales growth.
To illustrate when comparing revenue versus inventory per square foot. This quarter to Q3 2019 revenue per square foot has increased 28% while inventory per square foot has only increased 10%.
Lastly, based on our year to date results and current trends, we are narrowing our sales and earnings guidance and are raising our full year 2022 earnings per share forecast as follows.
Comparable sales are expected to range from down 6% to down 5%.
GAAP income before taxes is expected to range from $790 million to $810 million with an expected gross margin rate of 34% to 34, 5%.
GAAP net income of between 610 and $620 million.
GAAP diluted earnings per share of $7 25 per share to $7 40 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 $7 50 per share to $7 65 per share.
The earnings per share estimates are calculated on an updated share count of 84 million diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity using our remaining $400 million authorization.
We remain confident that our business model driven by our transformed retail capabilities and the everyday value of our products positions us well to navigate this uncertain environment and to win this holiday season, but also to drive long term sales and profits with that I will now turn the call over to Steve who will give you more details around our merchandising and.
Operations performance Steve.
Thanks, Michael.
As you heard earlier, our Q3 sales came in at $1 $49 billion, which was a seven 2% comp decline versus 2021, but up 30% versus our 2019 baseline.
This was a little lower than the first two quarters, which were up 36% versus 19, but we're pleased that we continue to hold onto the large majority of the gains from the past couple of years, despite a more challenging macroeconomic environment.
Also good to see three of our four divisions showed improvement in the trend versus last year during the third quarter.
Footwear was our best performing division in the quarter with sales coming in at up five 1% versus last year and up 32% versus 19.
We got off to a strong start during back to school in footwear and Saddam momentum carried throughout the quarter as you'd expect a lot of the categories that spike during back to school, such as kids shoes, and cleats, where some of the leading performers during the quarter.
We also continue to see strong sales in key brands, such as Brooks Crocs, and Skechers, along with a very successful launch of hey, dude across all of our stores.
Apparel sales also rebounded in Q3 with an increase of about <unk>, 5% versus last year, which was a dramatic improvement versus our spring trend.
Like footwear, we continue to run double digit comps for 2019 baseline about 24%.
Back to school results were also strong in apparel and the momentum that started early on carry forward into the remainder of the quarter.
This momentum coupled with an improved inventory position and top brands, such as Nike Columbia, and carhartt versus last year helped spark selling in fall seasonal categories, such as fleece and outerwear.
While our sports and Rec business in Q3 was down 4% to last year. It was also an improvement versus our spring trend that was up 40% versus 2019.
We continue to see solid gains in our sporting goods business with strength across key categories, such as football baseball and golf.
The softest category in this area remains the home fitness business, which declined double digits versus last year, but has stabilized set up over 25% versus our 2019 baseline.
Our biggest challenge during Q3 was our outdoor business, which posted an 18, 3% decline that was the only category, where Q3 sales softened versus the first half trend.
It's also important to note that we continue to hold on the majority of the gains we picked up over the past couple of years not for this business still running up 30% versus 2019.
Softest category was hunting, where we struggled to anniversary high double digit comps in ammunition from last year.
We're up against the sales site driven by large receipts that were helping us get back in stock during Q3 of 2021.
Probably speaking the overall inventory levels and ammunition have stabilized across the industry over the past year. We've started to see a lot of stock up surge activity by consumers drop off which has resulted in slowing demand.
While running negative comps versus last year at the ammunition business continues to run up triple digits year to date versus 2019, and we saw the decline versus 2021 start to lessen as we got deeper into the quarter.
Sum it up the missing outdoor largely driven by ammunition price over 100% of our drop for the company. So stabilizing this business is a clear priority for us.
Shifting to margins as planned we held on to most of the gains we've made over the past couple of years.
The gross margin rate for Q3 came in at 35%, which is a 20 basis point decline versus 21 was up 340 basis points versus 2019.
Similar to last couple of quarters beneath the surface. Our merchandise margin was up 60 basis points versus last year and continues to run well ahead of 2019 levels.
We attribute the continued strength in gross margin to a combination of the hard work. The teams have done over the past couple of years around improved buying and planning and allocation disciplines, coupled with a favorable mix of sales into higher margin categories of apparel and footwear.
As we finish out the year, we built in a well thought out promotional calendar for this Q4 this.
This cadence is more aggressive than the past two holiday seasons, and his focus on driving traffic to our stores by providing our customers with outstanding deals on giftable items.
These additional promotions are accounted for in the guidance Michael discussed earlier and our expectation is that despite this uptick in discounting we will continue to hold onto most of the margin gains for the past couple of years.
We also believe that our everyday value pricing, coupled with our thoughtful promotional strategy will allow us to maintain our position as devalued leader in our space and gain market share during Q4.
In terms of inventory our teams continued to do an outstanding job in managing through a challenging environment.
We ended the third quarter with inventory up 13% versus last year, which is lower than the 17% increase we entered the quarter with our.
Our inventory levels and content are in the best position that <unk> over the past couple of fourth quarters, putting us in prime position to take advantage of the holiday traffic surge.
Another sales driver for us is continuing to lean into new initiatives and brands that resonate with our core target customers.
A couple of fund new ideas that we put in place for this holiday, including launching Christmas themed Magellan outdoors apparel.
Expanding into gas powered write offs with Coleman, along with adding UK in Biolife fire pits into our outdoor eating all.
All of these ideas should help reinforce academy as the gift destination for all things sports and outdoors.
The team has worked hard to get back in stock and ensure that our inventory is much better balanced with physician and a key brands and categories will drive customers into our stores for this holiday.
Our everyday value pricing, coupled with a strong well thought out promotional cadence will allow us to deliver a strong value proposition this holiday.
When you combine that with our broad assortment of the most desirable brands and our strong in store experience. We believe that we have a winning formula to continue to pick up market share.
Finally, we also continue to lean into more digitally targeted advertising, while reducing our reliance on traditional broadcast and print.
This shift helps improve our overall marketing reach and effectiveness, while also allowing us to be much more nimble and reacting to pricing promotions.
In closing, we believe that we have the proper strategies in place and are well positioned to drive the business and continue to gain market share during the very important Q4 timeframe and beyond.
Now I'd like to turn the call back over to Ken for some closing comments Ken.
Thank you Steve.
Despite the challenging macro environment, we've delivered a solid operational and financial performance this year.
We've made significant improvements over the past several years, resulting in our profitability being materially higher than just a few years ago.
This is the result of our dedicated team working diligently toward our vision of becoming the best sports and outdoor retailer in the country.
Academy is well positioned to have a successful holiday season.
This past Black Friday was the largest sales day in the history of the company and we are maintaining the 30% plus sales trend compared to 2019.
That being said, we still have the biggest three weeks of the year ahead of us, but we are confident in our plan.
Academy has enormous future potential growth opportunities from opening new stores, expanding omnichannel, improving existing stores and from operational improvements.
Theres a lot to be excited about and we are prepared to execute to achieve our near and long term goals.
I'd like to close by thanking all of the Academy sports and outdoors team members and wishing everyone a joyful holiday season.
We will now open up the call for your questions. Thank you.
Yeah.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.
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Please limit yourself to one question and one follow up so we may get to everyone's questions.
Our first question comes from the line of John <unk> with Guggenheim. Please proceed with your question.
Hey, guys wanted to start with as.
As you think about the fourth quarter right.
The implied comp right at the midpoint down to now that's sort of the same trend line, so not a multiyear improvement, but how do you. When you think about the four categories of the four divisions.
Think about the the prospect for improvement right.
Sequentially in each of those four where do you where do you see the biggest opportunities right based on merchandise content and the behavior of your customer.
Hi, John Thanks for the question.
We obviously.
<unk> seen a.
Good strength in our.
Soft lines apparel, and footwear categories and they continue to provide an opportunity as well as team sports, which has been a very good business with us. So those are three of the businesses that I think.
We have you know.
We have good opportunities with that said there are still challenges out there and some of the outdoor areas, but I'll, let Steve provide a little more color. Yeah. If you go back to a year ago.
Fly chain was still pretty much in disarray, but when you look at where we're sitting today in terms of our ownership in seasonal categories cold weather goods.
Giftable items for Christmas, where in a way better shape than we were a year ago. So we feel pretty confident about our inventory composition. There we feel like our inventories under control and that it's well balanced across all the areas.
Category called out as being challenging for us as the outdoor category and beneath that it's ammo is really the biggest challenge there.
Good news is we're starting to see the trend line versus all why.
Get a little better it's still negative, but less negative than it was early in the quarter and we're starting to see that business stabilized. So that's going to probably be a challenge for us throughout the remainder of this this year.
But we do feel like we're seeing strength in the other category, which is helping offset some of that John .
John a couple more points. In addition to the categories that we expect to have a good finish to December .
The guidance that we provided implies that we're going to be up 30% for 2019, which is consistent with recent trends. That's in line with our quarterly or monthly builds which are usually a pretty reliable indicator of performance. In addition to being better in stock in key holiday programs as Steve mentioned Youre looking at the consumer and how they're behaving we have some planned <unk>.
<unk> dropping promotions and we were not in position to do that last year, because we didn't have the inventory and if you recall last year. There was a scarcity of goods in the market, which led to a lot of early purchasing this year. There is an abundance of goods and so we think that coupled with a favorable calendar or theres, an extra Saturday this year before Christmas, we will probably see some like shopping.
The weather Hasnt been terribly helpful. Because sales so that's been a pretty warm start to the holiday season. So we think the last couple of weeks, we will see a lot of sales coming and as a reminder, we've invested a lot in our buy online pickup in store business. Our customers are leaning into that and we're going to be in a good spot to deliver for them down the stretch.
And then maybe as a follow up right on supply chain.
<unk> had this distribution initiative for a little bit where do we sit on that and then when you think about capacity I know you have got capacity for the time being but as you look out.
Capacity in the three Dcs and then at some point I guess youll need a fourth DC I guess further north.
How do you think about the network over the next three or four years.
Youre correct at some point and we had a fourth DC and then we'll need a fifth and as we grow to reach the potential of the company, we will probably need a six at some point for the next several years. We're in good shape, we've got plenty of capacity as we think about the next five years of the business, we will start to incur costs in.
Frankly think about adding a fourth distribution facility will be in existence speak more about that later, but for the next several years, probably until 2025 2026 were in a good position.
Okay. Thank you.
Thanks, Sean.
Our next question comes from the line of Daniel <unk> with Stephens. Please proceed with your question.
Yeah, Hey, thanks for taking the questions guys. Good morning Congrats.
I wanted to start on the topline may following up on the last line of questioning so you kind of implied continuation of 30% growth versus pre COVID-19 in the fourth quarter. I know, it's early do you think about 2023, but I guess, maybe could you qualitatively talk about how youre thinking about next year I mean, if you execute on your merchandising initiatives that Steve you laid out with the new brands I mean can you grow.
So on this new base have we rebase to a point where growth is possible as you look out to next year.
I think one of the things that we're pretty confident that is that we have re baseline at a higher level.
You go back each quarter. This year, it's been in that low to mid thirties in terms of the performance versus 2019. So we do feel like we're going to be building off of a higher base. So that being said, it's still too early for us to give guidance for 2023 at this point in time, Yes, Steve said not prepared to provide guidance for 2023 at this time I will say.
But we have a few categories that in this quarter comprised of 100% of drop, namely hunting categories outdoor categories. Those categories are considerably stronger through 2019, and frankly, we expect most of it to maintain most of that gain to 2019 this year and beyond we've got some categories that were really strong.
During COVID-19.
People call them Covid categories Covid winters, many of those actually Havent reverted to 2019, a great example would be outdoor cooking and outdoor furniture, which collectively in the quarter were higher than they were last year. The rest of the business and the business as a whole is exceptionally healthy we took share in soft goods this quarter, despite being up against a lot of <unk>.
Clearance in the market our inventory position is very healthy, we havent had to take drastic and dramatic measures to clear inventory.
Like others retailers in the space have we've got best in sector of free cash flow generation, we continue to deliver best in sector store productivity and our EBIT net income rates are higher than many in the sector. So I think we're in a good position to finish this year strong into next year strong as we think about the plan for next year and beyond.
That's really helpful color and then I guess just to fall.
Blow up on that maybe I know you guys were private during the great recession, but could you provide any color just a case study of the kind of benefit you saw from the trade down. It sounds like you guys are bullish that you'd see your everyday value offering maybe help take share can you help quantify what you've seen during past downturns of the data you have on that.
No doubt none of these economic cycles look exactly like the other but you try to draw some parallels from at 2008 2009 to 2010 were collectively very strong comp years for the company and those were some tough years. This is a little bit different cycle in that consumer balance sheets are still relatively healthy that will last for.
Heck of a lot longer.
Inflation rates continue to rise in and obviously go into recession if that occurs.
We are in a great position to pick up market share because we are the value player I think what we've shown is our team our customers and our business are incredibly resilient through a variety of economic cycles.
Great I appreciate all the color and best of luck.
Thanks, Dan.
Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.
Hi, Mike Alexander on for Chris. Thanks for taking my question, maybe just wanted to follow up on an earlier question that three year trend of 30% versus 2019 has that at all improved throughout the quarter and November and into December you mentioned, whether or not being helpful. It's gotten a little bit.
And then it does seem like there's a more normal cadence of holiday shopping that Sharon. So just trying to understand did that clear you don't get any better assertion.
Black Friday, what you mentioned with John .
Yes, 30% trend has been.
Pretty consistent.
The low to mid thirties.
For the past.
Actually all of this year.
So we have not seen a big shift to one one thing I will say is this holiday calendar having lived through it.
A couple times.
One that you need to have somewhat of a lead stomach for because where.
We are shifting some as Michael said.
People last year shopped early because of the scarcity and they're moving back to <unk>.
Later purchase pattern so.
And were in line with that purchase pattern right now with our trends so far this quarter.
I think.
That trend for this year, probably should continue the first part of next year.
As Michael said the economy still in a.
A lot of turmoil.
Continue to be a challenging.
<unk> will be a challenging time, but we should be able to perform well.
At the higher basis, Steve talked about.
No.
And continue to develop the business so that we can start growth.
At some point in the near future.
Got it that's really helpful. And then maybe a follow up for Michael how are you thinking about working capital and free cash flow generation during the fourth quarter. One would think based on the seasonality of that cash should be comments are sometimes in the fourth quarter. So how should we think about the minimum cash balance as we think more about the potential for additional.
Share repo and fourth quarter.
Yes, no great Great question, I think I will have.
One little nitpick before I get going here, we've got a business that's been performing so well, we should generate cash in every quarter and that hasnt been the case.
I think for a lot of other retailers and certainly us historically, but in the third quarter, which is typically not a source of cash it was for US why we were able to invest in the business correct fourth quarter, we should improve on that and grow the cash balance and then we will have to make some decisions like we've been saying there is no change to our approach we generated enough.
Cash we can fund our initiatives and we could take a portfolio approach to capital allocation either through repurchases or potentially been retiring some debt. If we felt that was the right thing to do given where interest rates are headed.
Great really helpful Best of luck.
Thank you.
Our next question comes from the line of Kate Fitzsimons with Wells Fargo. Please proceed with your question.
Yes, hi, Thank you for taking my question I wanted to switch gears to margins you raised the full year gross margin outlook.
And just as we're thinking about puts and takes on the gross margin into next year, how should we think about chemical drivers between mix supply chain promotion and then Michael just any updated view on the longer term gross margin opportunity versus that 30 to enhance a 33% range you've spoken to you previously.
Given how low the business.
And I think margin gains thank you.
I'll take the first part and then I'm sure Michael will jump in on some later parts, but so far we're pretty pleased with our gross margin performance our ability to hold on to the higher margins. We've generated over the past couple of years, we attributed a lot of that to just.
Being better planners and managers of the business that being said, we do expect the margin will decline a little bit versus last year.
Q4, which is accounted for in our guidance that's based off what we think it's going to be a more promotional holiday, we're already seeing it being more promotional holiday. So we baked that in but just to be clear we are still going to hold onto the vast majority of those gains and we think those gains are coming from a couple of different places and already mentioned.
The planning and allocation disciplines that we've put in place in terms of better management of how we flow goods and allocate goods. We don't have the inventory overhang that I think a lot of other people out there have so that certainly is not going to be a pressure for us or headwind for us.
One of the things Thats happened to us during the pandemic was the hard goods business, which has a lower margin profile had become a bigger percentage of total and as that mix starts to normalize back to a 50 50 sockets the hard goods thats definitely a tailwind for us as well.
So those are all probably the tailwind certainly the supply chain is getting better, but there's still some disruption in that and I think thats something that could be a headwind for us I think as business seems to be moving back to more kind of the cadence or trend pre pandemic I think we're going to see more promotions creep into the marketplace. So those would certainly be a little bit of a.
Headwind, but we feel really good about our ability to navigate through those and then we're going to hold onto the vast majority of the margin gains we picked up over the past couple of years.
Okay first of all welcome back good to have you on the call again I will tell you that let Steve answer that one pretty well I don't have a lot to add merchandise margins have been the hero as we continue to harvest the fruit from the initiatives and the groundwork we laid many many years ago and continue to do that one thing.
I'd say shrink has been a little higher than plan. There has been a lot of organized crime and retail.
We're experiencing that along with everybody else, we're working with our law enforcement partners, who are great partners in part because they really like the stuff that we sell and then they love shopping our stores. So we think that we have an opportunity to improve that going forward as far as the long term algorithm.
Sticking with what you have and largely because we want to preserve flexibility if we need to become more promotional would want to preserve that flexibility to two adds Kate one one as well.
We want we want to continue.
Our value proposition and so we do not want to.
For for growth for.
For margins, so we will work to maintain that value proposition.
We've worked very hard to get and the customer views us.
Within the market. The other thing I think that is different than when we talk about promotions I think one.
We talk about seeing more but it is more rational and thoughtful.
So a couple of reasons one.
<unk>.
People are in a better position and can afford.
To be more thoughtful about the promotions that hadn't had the ones back in that would make the most sense to drive traffic and to the vendors what the vendors have done some of the key vendors have done over the past several years and it's not just an apparel, but it's in other places.
And how they've cut back.
On their distribution.
And our positioning as a favored.
Retailer for them has helped to maintain.
Some of the sensibility in the market and also support some of the margin.
Improvements that we've seen in addition to the operational and process improvements that we put in place.
But one more thing to add just as a reminder, we are just embarking on a multi year initiative to improve the efficiency and the effectiveness of our supply chain and that work is really getting underway and so I think from a market perspective, hopefully the environment normalizes from a logistics and a supply chain perspective, but we have things to work on it already into.
That should provide a margin benefit in the out years, but I think for now <unk> got a good number to work with and we've provided in the past and I think thats a good one to runway.
Great I'll, let others go back in the queue, but happy holidays guys. Okay. Thanks suitcase.
Okay.
Our next question comes from the line of Ravi homes with Bank of America. Please proceed with your question.
Hey, good morning.
A couple of quick follow ups just on the guidance how are you thinking about transaction expectations in the fourth quarter kind of similar to the third quarter and is the.
Some of the confidence as you just with with hunting.
Not being less of a drag in the third quarter helps the visibility in the fourth quarter and the kind of follow up question, which you've somewhat answered but just the.
You guys see promotions potentially coming back on and transactions have been down.
Sure.
That's usually is a hard environment yet gross margins.
Offer flat versus all time highs whats the.
What's the risk of promotions come back on and you're not able to maintain that sort of gross margin expectations you guys have put out there.
Yes, I'll start and then let <unk>.
Steve pick up on the second part of our transactions.
I have been off.
And.
Part of it is.
What's happening in the consumer environment, but part of it is also.
A significant part of actions that we took last year as we said there were.
Limitations on on ammunition, and while we sold a lot we had.
Limits on how many people could buy.
And we had a lot of customers coming in multiple times in a day and.
Literally lining up.
And every day and we arent seeing that now because we've taken those limits off and that makes the transaction number a little bit more difficult to read a year to year, because we had created some artificial.
Hi transaction levels because of because of those limits that we put on and we no longer have those and to the point on promotions I think Ken was alluding to it when you go back and you look at some of the promotions that we used to run.
The current management team doing here I mean, they were in some cases irrational promotions and I think you've heard us talk about those over time, where.
We'd be selling something like a big bulky items like a trampoline close to cost then on top of that providing free shipping and they just they didn't make a ton of sense and so.
I think one of the things that's happened over the past couple of years is not only for us but for the whole industry is the promotional landscape has kind of been benign it's allowed us to kind of clear the decks and it's really allowed us to be thoughtful about where and when and how we're layering in those promotions you also have.
A lot of vendors out there having much better control over their maps. So I think that that kind of keeps them in check. So I think it's the combination of us having rational promotions that were not up against that we don't feel compelled to anniversary.
That drove topline, but maybe not bottom line coupled with.
A better controlled distribution out there I think those two things allow us to know that we're going to see more promotions certainly this year than we did last year, but that we're still gonna be able a whole lot of majority of the margin gains.
Just a quick follow up in the average transaction size are you seeing.
More items per basket or are you seeing.
Bigger ticket purchases and is there any.
We have the vendors raised price on somewhat like items. So you are seeing inflation in certain categories like fleece or things like that that are supporting same store sales.
Ravi I would just say, we generally don't give the basket detail I'll give you a little bit of color last year. If you remember we were up against a tremendous surge in demand for ammunition.
And that drove a lot of units.
And so theres, a little bit of noise kind of internally, but that will provide you a little color about about about our basket and we are seeing some AUR increases just pay that off with cost increases that we've seen out there.
Got it terrific. Thanks, so much.
Thanks Ravi.
Our next question comes from the line of Anthony <unk> with loop capital markets. Please proceed with your question.
Good morning. Thank you so much for taking my question I'm glad to hear my Equipment's working I tried to get into it on earlier calls I've been taking my questions. So I thought maybe it was a problem on my end anyway, neither here nor there.
So I had a question actually about your new store openings I know, it's fairly fairly early but these are the first new stores you opened in quite some time and so just wanted to see if you any early reads on how those stores are performing relative to your expectations. Thanks.
First off Anthony if you Couldnt ask a question on last call. We'll let you ask is too. So you can ask us to wherever it is.
Thank you yeah, new stores I would say this year is really about capability building, it and test and learn and so we have all nine stores opened this year, we tried different formats different markets. We did urban stores. We did takeover spaces, we did traditional build to suits and we tested a lot and we learned a lot and we build the capability all nine store.
Ours are open we're happy with the performance as a whole overall theres always things. When you are testing and learning that you want to do different and do better and we will apply those learnings next year.
So we opened four new stores in Q3, two more in Q4, we haven't announced our targets next year, but it'll be more than we did this year.
One thing Anthony I think thats it.
Important.
As Michael said, we are pleased with the overall performance and we have we have some really good winters we have.
Our store that we would like for it to be better and it's a good learning store.
One of the things that's actually.
Really pleasing for US is some of the new markets that we've entered both.
That were adjacent or completely new markets. We've seen some very good results. There. So we're getting some.
We're pleased with our ability to enter places where people might not be as familiar with us.
Yes.
We're one of the last two weeks of surface and Barbara Hill, West, Virginia, not only a new market, it's a new state.
I got to tell you a line around the block in the snow I'm sure.
If you followed us a little bit on social media of seeing some of that that is exciting and shows the potential of.
Not only you know being able and ability to grow in that market, but it's in that region, where there is a lot of white space in the mid Atlantic.
Got it very helpful. And then once again, thanks for allowing me to ask the second question can you make up for the fact that wasn't able to ask any question that earlier call.
So yeah, just a real quick one.
You mentioned supply chain and some improvements you've been making there Michael.
Michael if I recall correctly, you know when we last spoke and you said that you thought that the warehouse management system would be.
Would be installed in 2023, I just want to confirm if that was still the case or what you thought was there.
That's going to be a multi year, but.
Yes, I think towards the end of 2023, we will start to bring that online.
Okay very helpful. Thanks.
Thanks.
Anthony will go ahead.
We will phase that and across all of our D. D. C. So we're not doing anything all at once.
So, but we'll we'll start at the end of 'twenty three.
Then roll it out to other distribution facilities.
Got it thanks, so much and keep up the good work guys.
Thank you Anthony.
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, This is Andrew Chazanoff on for Brian Nagel.
Two quick questions. One is shorter term in nature and the other ones longer.
The near term can you.
Any specific trends in the Black Friday, cyber Monday, Mondays specifically how.
How you describe the brick and mortar traffic trends versus pre COVID-19 and longer term in nature.
As the pandemic dynamics decided and your thinking towards the longer term growth outlook of ASO changed at all.
Thank you.
I'll take the first part I'll give the second part to Michael.
One of the things we've seen this this Christmas candidly that started in early November in and blood into Black Friday week is kind of a return to pre pandemic.
Shopping patterns. So what is what we mean by that is if you go back.
Pre pandemic.
Customers really waited until black Friday week to kick off the last two years, we've seen pull forward of demand early in the month, particularly in some of the bigger ticket categories, where there was scarcity of supply and so we've seen that kind of revert back this year.
Old softening softer demand for big ticket early in the month.
Then when we got into Black Friday week. Another thing we've seen is people over the past couple of years, we're really trying to avoid large crowds on black Friday itself. They tended to shop earlier in the week and then we saw a little bit softer trend over the weekend and that's reverted back to where the weekend was much more important this year and as Ken mentioned already was the largest Dan our companies here.
From a sales perspective, so I would say the biggest thing we've seen is kind of a version early on back to more of the soft goods business we've seen it.
Shifting back to their shopping on the big days more pre pandemic, there where they have been but we also believe that that's going to drive the big ticket sales closer in which we've seen pre pandemic as well.
The other things we did see though was.
The customer was willing for the right item.
You know to buy the big ticket.
So this is not it was not black Friday was not just driven by.
Apparel, we did very well in that but we also saw a number of our big ticket items some of the categories that Michael called out like our outdoor cooking.
Sports and the like also.
<unk> performed very well.
During the during the during the event, where we had great value, where we had good value.
With respect to the long term growth algorithm no changes there we were still planning low single digit comp growth overall throughout the long range plan total sales growth of high single digits EBITDA growth high single digits and net income growth in the high teens, we will do that through the addition of 182.
80 to 100 new stores.
Investing in our Dot com business, which is on a real growth run here continuing to grow at double digits quarter over quarter and improving our existing operations.
Great. Thank you so much thanks Andrew.
Our last question comes from the line of John <unk> with <unk>. Please proceed with your question.
Yes.
Hi, guys. Thanks for taking my question.
That's two questions, but I'll just stick with one here since it's the last one.
You mentioned that you had okay alright, so here's my two questions. First question is on average unit sales. So for the full year. We're looking at just under I believe $25 million per average store and that's that's down about some 26, a little over 26 million in the previous.
Tier and so the first question is for the new units that are coming on.
Do you expect those to annualize in their first year.
Okay.
I'm, sorry, I missed the last piece of your question.
So the newer stores that you're opening up we've got nine open year to date as you've mentioned they have been open a full year, yet, but as we think about the sales.
Contribution from the new stores.
What should they be annualizing at in their first year.
Oh, yeah, we underwrite than on average of around $16 million.
At year, one sales into your own sales, we do expect them to be EBITDA accretive after year one against some of these just open but.
The first four collectively as a whole were accretive to earnings even just a few months ended the year is another opening then obviously they ramp up on the ultimate rent basis significantly higher than than a typical store.
Okay. Thanks, we will monitor that and then the second question.
Relates to something you talked about with pandemic winter categories, and you mentioned that a number of these even though they might be down a little bit are still dramatically higher than pre COVID-19 levels and in particular for example, ammunition stopped triple digits. So I think.
A more cautious view might suggest hey, these are still.
Performing okay, but what we really just haven't seen the reversion or.
The demand for these category, yet and as we go into next year and potentially a lot favorable consumer environment, that's where you're going to see that.
Kind of continued downward pressure and so obviously, we can't predict what's going to happen, but my question is.
How are you positioned how are you able to manage inventory.
If that were to occur.
Well I think we've demonstrated that over the past several years to be honest with you we.
Certainly build contingency plans into our buying process, we have trigger dates that we activate depending upon where we see demand happening we.
We have great partnerships with our vendor partners.
And I think on both sides of it is inventory that was scarce and we had to chase. It I think we definitely.
<unk> outperformed a lot of our competitors in terms of getting supply of goods, which I think was reflected in sales trend that we drove in 2021 and I think this year as the supply chain has gotten a lot better.
And actually one of the vendors caught up so people have been call. It the other way with inventory.
Morning for them and I don't think we've seen that happen. So I think we've got a very nimble team who's got good partnerships and relationships are strong planning and allocation basis strong open to buy management and that's really allowed us to manage on both sides of it. So I don't see that changing if we see slowdown next year, but what I would say is.
One of the things that gives us confidence and I think Michael hit on this is <unk>.
These search categories, we track them and you know you mentioned several of them when we talked about animal being one or fitness being another.
Or cooking or things like that.
They're all stabilizing at these higher levels and a lot of cases higher than the 30% trend in the company formed that and we're seeing the volumes stabilize at those levels. So that's another thing we're looking at not just the trend versus last year, but the average weekly volume the average monthly volume and so that is giving us.
Confidence that this is kind of the new baseline that we're building off of because they've been maintaining at those consistent levels for multiple quarters in a row. Two other things that I think are very important about this category and the inventory.
First as Steve mentioned I think we have absolutely demonstrated we can manage inventory as well if not better than most anybody in the space, but the categories were.
If you take a bearish view and you predict a demand drop off the inventory doesn't go bad.
It's not seasonal in nature, it doesn't become toxic seasonal apparel with inventory does secondly in these categories. While if you believe theyre going to be demand challenged they shouldnt be share challenge because a lot of folks in this space have walked away for it and they don't support it like they used to and so we should continue to take share.
<unk>, even if the category becomes demand challenge and again the inventory.
Kim will remain healthy because it doesn't it's not subject to two.
Fashion or seasonality of those types of things My line is theyre not bananas.
But the one of the key things here John are two key things one is what Steve mentioned.
These.
The team has demonstrated the ability.
And multiple scenarios to manage the inventory not put us in a position that we havent announced as other retailers have that we've got an inventory problem and we're having to take excess markdowns.
We are managing carefully where we are both on the up and downside.
And the second thing is we've also demonstrated.
We are able to maintain at those higher levels and one of the comments that that.
Michael just made was about the.
Even some of those categories that are declining our share continues to improve.
And many of those categories. So we're able to.
While in a declining market.
Assigning situations pick up share.
And hold at that higher level.
Either because competition has pulled back or the value and assortment that we've offered our team has done an excellent job over the past couple of years, putting us in a good place with our good better best strong brand Assortments.
In multiple categories and so that is one of the things that gives us confidence as we go forward.
Yes, we're in tough times, yes.
The first part of next year is going to be.
A challenging time for not just retail, but the entire economy.
But we will be positioned for growth both with our existing.
Stores and online, but also as we enter new markets. So we feel we feel very confident about our position.
Going forward and we're excited.
About the future for Academy.
Thanks, very much and happy holidays to everyone and your families.
Thank you John Thank you. Thank you.
That was our last question, where ending right right on time and I appreciate everybody's participation on the call. Thank you very much appreciate everybody's support of the company want to.
Thank all of our team members, but.
So our investors and the people who are interested in academy, we feel as I said, we've got a great future when I wish everybody the happiest of holidays and a terrific terrific.
New year, so happy holidays and thank you.
Goodbye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.