Q2 2023 Academy Sports & Outdoors Inc Earnings Call

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Okay.

Good morning, ladies and gentlemen, and welcome to the Academy Sports plus outdoors second quarter of fiscal 2023 results conference call.

At this time this call is being recorded in all participants are in a listen only mode.

Following the prepared remarks, there'll be a brief question and answer session.

Questions will be limited to analysts and investors.

Please limit yourself to one question and one follow up to ask your question during the call. Please press star one.

Do you require any assistance during the call. Please press star zero.

I will now turn the call over to Matt Hodges, Our 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 outdoor second quarter 2023 financial results call.

Depending on the call are Steve Lawrence Chief Executive Officer, Michael Mulligan President.

Carl Ford Chief Financial 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 the factors.

In the earnings release and in our SEC filings the company undertakes no obligation to revise any forward looking statements.

Today's remarks also refer to certain non-GAAP financial measures reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors Academy Dot com.

I will now turn the call over to Steve Lawrence for his remarks, Steve.

Thank you Matt good morning to all and thank you for joining us for our Q2 earnings call. It's been three months since Michael when I stepped into our new roles over the past 90 days, we've worked hard to improve our sales trend.

Our expenses in the current run rate of the business.

Backfill so key positions on our leadership team I'm excited that we're able to fill all of our key roles with internal promotions, which speaks to the work. The team has done over the past couple of years on building, a strong internal bench and focusing on succession planning.

I like that I'm thrilled to Carl Florida, New CFO was one of these promotions and he will be joining us on today's earnings call.

Karl has been with Academy for four and a half years and during that time. He has played an integral role in helping the company achieved several milestones, including navigating the pandemic achieving all of the objectives in our first long range strategy supporting our IPO and helping shape and create a new long range plan.

Turning to our Q2 results for the quarter, we achieved net sales of $1 58 for a negative seven and a half comp well.

While we are not happy with running a decrease these results were in line with our first quarter trend and are aligned with guidance. We shared during our last call. What was encouraging is that unlike Q1, we saw the business decelerate as we move through the quarter in Q2, we saw a steady improvements in both sales and margin rates with each month getting successively better.

Our belief is that we can continue to build on this momentum as we progress through Q3 and into the holiday selling season in Q4.

Looking at sales by Division of our best performing business during the quarter with sports and recreation, which ran a two 7% decrease.

Morning goods equipment outdoor cooking and outdoor furniture, all performed well during the quarter. However, the fitness equipment and this was continued to be tough.

Apparel was the second best performing division with a negative three 7% decrease.

We continue to see solid performance out of the men's and youth businesses. There's also in licensed apparel area.

Nike also continues to perform well for us all of our private label business.

The women's business has remained more challenging for us.

As we move forward.

Footwear during Q2 around a four 5% decrease we continue to see strength in casual work footwear, driven by national brands, such as Hey, Dude.

Work boots, and apparel brand Brazos clean.

<unk> business was also strong as we continue to be in a much better inventory position versus where we were a year ago.

Our outdoor trends for Q2 was a 12, 2% decrease which was an improvement versus Q1 is down 15%, but it's still well below our expectations.

Better performing categories for the quarter of fishing and camping.

Hunting remains the most challenged business continued softness in both the ammunition and firearms businesses.

Both of these categories continue to perform well above 2019 levels continued to decline from the peaks that we saw during the last couple of years.

As we move forward, we expect to see the declines in these categories moderate as we start to lap softer comparisons from last year.

When you look across the various businesses many of the key themes that we called out in our Q1 call carryforward into the second quarter.

Customers continue to gravitate towards value on one end of our Assortments demonstrated by an increase in the penetration of private brand sales.

At the same time customers are also focusing on new and innovative products such as Bon bags clause recovery slides, which in many cases, we're not value items.

Bigger ticket items with longer replacement cycles continue to be challenged with many of the search categories benefited from increased demand during the pandemic.

We've also seen a consistent pattern of the customer aggregating their purchases and the natural shopping time periods, such as mother's day Memorial day father's day and the fourth of July .

We are continually adjusting our assortment in future buys along with our promotional efforts to align with these trends.

Customers will continue to see us lean into our position.

The leader in our space by expanding our everyday value offerings, while also leveraging strong promotional efforts during the key shopping on until the calendar.

In regards to new brands and ideas I'd like to highlight a couple of new initiatives launching in Q3, it will help us take advantage of the customers' appetite for newness.

This past week, we announced a new partnership with L. L bean become one of their key retail partners.

We believe their focus on outdoor apparel and footwear with the northern sensibility is the perfect complement to our Magellan outdoors, and Colombian businesses, which lean more towards fishing in southern climates.

Another new initiative is our partnership with escalating American cornhole lead to become the exclusive seller of ACL boards bags for this fall with a strong market share we have in all things still getting this partnership is a perfect fit for us.

Later in Q3 will kick off a new partnership with fanatics to help expand our online offering and license team apparel.

This has been a strong suit for several years, but our offering has traditionally been anchored in the leagues and teams that live within our geographic footprint.

Our new relationship will allow us to dramatically grow our assortment into service a greatly expanded number of categories teams and leagues moving forward.

Shifting to profitability, we remain focused on proactively managing our business to deliver the best possible results for our shareholders. This year, while ensuring we remain on track to achieving our long term initiatives and goals.

Our gross margin for the quarter came in at 35, six which was a 30 basis point improvement over last year was 180 basis point increase over our Q1 rate.

Beneath the surface on merchandize margins stabilize it down 21 basis points versus last year, which was a market improvement over our Q1 run rate is down 110 basis points versus 2022.

Carl will give you more color around our financial performance shortly.

Turning to inventory at the end of the quarter, our inventory balance was $1 $3 billion, which was flat to last year in terms of dollars and down 2% in units in total.

On a per store basis declined 5% compared to Q2 of last year.

The team has exhibited a very disciplined inventory management approach through the past couple of years, we plan to continue to lean into this strength as we move forward.

We are confident that our current inventory position is at the right level to support our business as the content is fresh and port pacing, which should position us well for the fall and holiday selling seasons.

As we discussed in June on our Q1 call, we're taking aggressive action and proactively addressing the trends that we've seen in the business. This year in order to help improve sales and profitability.

We move through the remainder of the year I wanted to give a quick reminder of the key actions were taking to drive the business first we'll continue to highlight and focus on our position as the value leader in the space across all customer touch points second, we're introducing new offerings and our assortments such as L. L. Bean Fanatics American Cornhole league to capitalize when the customer's desire for newness.

Cross improving our advertising effectiveness with better targeted marketing that will be facilitated by our new customer data platform.

We're continually enhancing our omni channel functionality and features to improve the customer experience and lastly, we also expect a sales boost from the new stores, we opened up in 2022.

11 to 12, new stores opening this fall.

Now I'd like to turn the call over to our new CFO to walk you through the financials Carl.

Thank you Steve Good morning, everyone. It is an honor to be selected to follow Michael as a chief financial Officer of Academy Sports and outdoors.

Excited about the opportunity to lead our finance organization into what I believe is a very bright future.

And with the company since 2019, and I am proud of the work we've done to strengthen our balance sheet and improve our operating model.

He is not the same company as it was then and I am excited about our long term growth initiatives and capital allocation philosophy.

I will now walk you through the details of our second quarter results.

Net sales were 1.58 billion, a six 2% decline compared to the second quarter of 2022 with comparable sales of negative seven 5%.

Sales were impacted by an eight 3% decline in transactions, partially offset by a 0.8% increase in ticket size during.

During the quarter customers were more active during holiday periods, and we saw an improvement in the comp during each month of the quarter.

Gross margin rate was 35, 6% an increase of 180 basis points sequentially and 30 basis points higher than last year.

The improvement compared to last year was driven by 88 basis points of lower freight costs, partially offset by a 21 basis point decline in merchandise margins.

And 37 basis points of higher shrink our merchandise margins improved sequentially as we benefited from our ongoing efforts to manage inventory through system cases capabilities price optimization and the localization we.

We saw a 42 year basis point sequential improvement in shrink driven by actions taken to detect and detour losses.

We continue to be able to operate at substantially higher gross margin rates, even in a challenging environment.

During the quarter SG&A expenses were $352 $5 million or 22, 3% of net sales an increase of 220 basis points compared to the second quarter of 2022.

This deleverage is primarily driven by investments we are making in our long range.

Omnichannel I T and digital marketing projects that support our growth initiatives approximately 80% of this quarter's SG&A dollar increase is related to growth investments.

When compared to Q1 of this year SG&A expenses were 230 basis points lower as a percentage of sales.

As we discussed during our first quarter call, we focused on aligning our expenses with our revised sales guidance and the sequential improvement of our expenses as a percentage of sales reflects the hard work done across the organization to rightsize our spending.

Examples of areas of the business. We are focused on right sizing include flexing store in distribution labor hours based on revised sales and inventory receipt expectations.

Targeted distribution scheduling during non peak times.

And scaling back on projects that are not aligned with long term growth strategies or hurt your sales growth.

Net income was $157 $1 million or nine 9% of sales a 130 basis point decrease from the second quarter of 2022, resulting in GAAP diluted earnings per share of $2.01.

Adjusted diluted earnings per share were $2.09.

Moving to the balance sheet at the ended the quarter, we had 311 million in cash and no outstanding borrowings on our $1 billion credit facility.

Academy generated 191 million in net cash from operating activities during the second quarter.

This is a 19% increase compared to the second quarter of last year.

We deployed this cash to invest in our growth initiatives and to repurchase approximately 2 million shares for $107 $3 million and pay out $6 9 million in dividends.

The board has approved a dividend of nine cents per share payable on October 11th 2023 to stockholders of record as of September 13th 2023.

Capital expenditures were $69 3 million for the full year, we still expect to spend between 202 hundred 50 million.

With that I will turn the call over to Michael to provide an update on some of our key initiatives and our full year guidance Michael.

Thanks, Carl and good morning, everyone I want to say congratulations to Carl on his promotion to Chief Financial Officer. He has been a core member of academies Finance organization for the last several years during that time Karl has been a key driver of our financial performance.

I know that Karl and his team will continue to be excellent financial stewards of the business as we move forward with our long range plan.

I'd like to take some time to update everyone on the progress of a few key initiatives that will drive the long range growth plan. We described during our Investor day. This past April .

As a reminder, the key components of the growth plan are first to open new stores to expand the store base by 50% in existing and new markets.

Second to build a more powerful omnichannel business.

Third to drive our existing business by improving service and productivity in our stores strengthening our merchandising and attracting and engaging customers through communication content and experiences.

Fourth to leverage and scale of our supply chain.

Yep.

I'll start with our new store initiative, which we expect will be the largest driver of sales and profit growth over the next few years.

As a reminder.

All of our mature stores are profitable and collectively have sector, leading store productivity metrics.

We opened nine stores in 2022, and even though they opened in a challenging economic environment. They are as a group meeting expectations and already positively contributing to EBITDA.

As I have said in the past 2022 was a test and learn year and we're in the very early innings of this initiative.

Our current new store pro forma assumes approximately $18 million of sales in year, one inclusive of omni channel sales, we have learned that new market stores need time to build brand awareness and may have longer sales maturity ramps while stores in existing markets generally come out of the gate faster.

Our sample size is limited and the current economic environment is challenging, but we continue to learn and refine our expectations and processes with the goal of making each new store opening better than the last one.

So far we are pleased with the learnings that we've implemented.

Given the positive preliminary results of the stores. We opened in 2022, we are confident that we can take our unique academy brand concept and business model to many new markets with great success.

In the second quarter, we opened one store in Peoria, Illinois, which was our second store opening this year.

We have six scheduled openings in Q3, including our first store in the Indianapolis, Indiana area, which opened last Friday.

We are on track to open another five to six stores in Q4.

Steven Carl mentioned, the challenging economic environment, but I want to emphasize that in spite of these challenges we were able to fund store growth with our existing strong cash flow.

As of today we.

We are only in 18 states. So we have a large runway for growth in front of us.

In addition, with other retailers scaling back their outdoor product offerings. There are many markets that are favorable for market share gains.

Our past experience has confirmed that our market research and due diligence identified locations where stores will be successful for the long term.

We launched our new customer data platform in July to drive further sales growth.

This valuable tool will allow us to aggregate customer data from multiple sources within our organization, creating a comprehensive view of our customers.

With this new perspective, we will have the ability to create and develop a robust customer portfolio segmented by cohorts shopping behaviors outdoor interests sports fandom and many other filters.

We can use this refined customer data to proactively designed highly targeted marketing campaigns tailored to specific customer behaviors and interests.

We anticipate that connecting with our customers on this deeper level will drive an increase in traffic conversion rates and loyalty.

We look forward to updating you about this exciting new capability as we develop and refine it further.

Finally, a brief update on our supply chain initiatives.

As we discussed at our Investor Day in April part of our long range plan is to generate 100 basis points of adjusted EBIT margin improvement from our supply chain.

We intend to do this by increasing our unit productivity.

<unk> existing distribution capacity lowering our ecommerce fulfillment costs decreasing lead times and leveraging transportation costs.

A major component of achieving this goal is the implementation of a new warehouse management system and partnership with Manhattan.

We are on track to convert one of our distribution centers to the new system in 2024.

We are also taking other steps to improve supply chain logistics and productivity by implementing consistent processes and procedures.

Kris and cross docking and multi store deliveries and investing in technology to improve visibility of product flow.

I expect us to achieve our EBIT margin contribution goal by the end of the long range plan.

To sum it all up based on our results current trends in back half expectations. We are reiterating our full year sales and net income guidance, while updating our earnings per share forecast reflect the share repurchase activity in the second quarter.

Net sales are still expected to range from $6, one 7% to $6 36 billion with comparable sales ranging from negative seven 5% to negative four 5%.

Gross margin rate between 34% and 34, 4%.

GAAP income before taxes is still expected to range from $675 million to $750 million and GAAP net income between 520 and $575 million.

GAAP diluted earnings per share are now expected to range from $6 65 per share to $7 35 per share.

Adjusted diluted earnings per share are expected to range from $6.95 per share to $7.65 per share.

The earnings per share estimates are calculated on a share count of $78 1 million diluted weighted average shares outstanding for the full year and do not include any potential future repurchase activity.

Finally.

We still expect to generate.

$400 million to $450 million of adjusted free cash flow with that I will now turn the call back over to Steve for his closing remarks.

Thanks, Michael.

As we move forward I think it is important to note that despite some short term headwinds Academy is a much stronger company than we were before the pandemic our sales and gross margin rate remained significantly above 2019 levels driven by the operational improvements made over the past few years that is structurally enhance our earnings power.

We had a strong and flexible balance sheet, a very productive four wall operating model that is scalable and transportable a solid team with a track record of executing and delivering results in high customer affinity within our core markets.

Longer term, we believe we have a compelling growth strategy with multiple ways to capture market share and drive growth through new store expansion into adjacent new and existing markets.

Of an improving dot com business with significant upside and we have the ability to continue to refine and drive more productivity out of our existing store base.

Most importantly, all this growth can be funded from the free cash flow generated by the business. While also returning value to our shareholders through dividends and strategic share repurchases in closing I'd like to thank all of the Academy team members for their dedication and hard work in helping deliver an outstanding experience to our customers now let's go have fun out there.

We will now open the call up for your questions.

Thank you the company will now open the call up for your questions to ask your question. Please press star one.

For a moment to wait till the Q T cell.

Okay.

Thank you. Our first question comes from the line of Daniel <unk> with Stephens. Please proceed with your question.

Yeah, Hey, good morning, guys. Thanks for taking our questions.

Good morning, Dan I wanted to start just broadly on the consumer trends and you're seeing you know we've talked in the past about academy and benefiting from a more discerning customer may be looking for value.

Any signs of that this quarter, whether it was new customers shopping the store any trade down within the store and then also on that within the quarters kind of improvement with any of that attributable the new marketing plan or is that really going to be on the come for the back half of the year. When you think about the sales cadence.

Yes. This is Steve I'll start with the first part I'm sure Michael will jump in.

We definitely see the customer under stress and under pressure, we see that reflected a couple of different ways, we talked about customer gravitating towards value. We see that in terms of growth in private label, which represents kind of value out of our assortment. We see them also taking a bigger advantage of deals or clearance when we sell that so there definitely is a move towards <unk>.

We are seeking out value on the flip side, we also see them seeking out newness right. We see them going after things that are new and innovative go to market like we talked about bog bags of slides.

Why were excited about some of the new brands that we're launching this fall between L L Bean and fanatics and ACL. So.

That's definitely a trend we've seen we've also seen the customer shop.

Shopping during kind of the key appointment shopping time periods.

In aggregate the purchases there and then we've also seen that.

Pulled back a little bit and that's really how we planned our marketing or promotions.

Throughout Q2, and all the way through the remainder of the year regards to the targeted marketing from the CDP that was really put in place really late in the quarter. So we really didn't get any benefit out of that we think we'll start seeing some benefit out of that in the back half of the year Yeah. Daniel on the C. D. P. We've been flying a propeller plane in a dogfight holding our own against fighter Jets for the.

The past three or four years and now we have our own fighter jet.

And we're learning to fly it.

Most of that benefit will start to come next year, we should see a little bit this year, but it will not be a meaningful driver of comp this year, the big benefit will come in the out years.

Super Super Helpful. And then maybe a follow up on gross margins. Obviously, there was discussion from peers or maybe higher promotion your margins held in well I'm curious when you look at your competitive pricing analysis are the peers coming down to where academies priced or are they actually trying to undercut you on certain items if any granularity.

That or changing promotional backdrop, and then tied into that you noted shrink improved I think a little bit quarter over quarter. What was the main driver there or anything worth calling out there for the back half. Thanks.

Yeah, I'll start and answer the question on promotions and then we'll have Carl something on shrink.

Definitely it's it's more promotional out there this year than it was a year ago. At this time, we talked about in the past call, where we really started seeing promotions creep into the marketplace in the back half of last year and that carried forward into the first half of this year.

That being said as I, just said earlier, we're definitely seeing those promotions most effective during those key shopping moments, we're certainly leaning into that.

As we move forward.

We did have a 20 basis point erosion in merch margin.

That came from some additional promotions, but probably the best thing that we've done to help manage through that as our inventory management.

Now when you think about all the strong disciplines, we put in place in terms of our planning allocation assortment planning all of those things that really helped us control inventories and control margins not see the same erosion that maybe other people are saying well, maybe I'll I'll I'll take shrink it.

It's a real issue and in spite of the headwinds we face from higher shrank as Steve said, we were able to meaningfully expand our gross margin rate compared to last year.

We sequentially improved our gross margin for the last quarter, we've taken a lot of actions many of which are confidential and frankly co investment in nature, and we can't talk about many of them, but they're working one thing that we do from a process standpoint, as we count our stores regularly throughout the year and we take our high shrink store inventories earlier in the year that gives us some chance to adjust.

Asked them to take some actions and perhaps count them again, and so we have visibility into trends throughout the year. It's a difficult environment I will tell you that good leaders adjust and that's why we've done I do have to take the time to thank all of the Academy team members in our stores with folks in the Blue shirts that had been so attentive and helping us manage this issues. They wanted to do what they do best.

And that has helped customers have fun and the best way to prevent shrank a to provide great customer service in our stores or we can do that.

More labor and more customer service, because our stores are significantly more productive than our peers. So we can have people in the stores helping customers R.

Our L. P Department has worked very hard with law enforcement, we've got great partnerships with law enforcement and we've been able to frankly, a help intervene and take down some organized crime ratings that have helped shrink. So you know last thing I've mentioned here on this issue because it is a big issue. We've heard a lot of people talking about it if you reflect back on many.

She is facing retailers over the past few years, we will start with the Covid pandemic during the peak of the Covid crisis, I believe we manage that better than anybody else. We got our stores open more quickly we were able to help the community to get back on their feet more quickly. If you look at ballooning freight costs over the past few years, we've managed that better than most others.

The folks in the space.

You look at back to a year ago, when many retailers were overbought and didn't manage our inventory well, we did that better than others. We're going to do the same with shrink we have a great team we're nimble.

We're going to manage it we're not going to use as an excuse to not hit our gross margin goals.

I appreciate all the color and best of luck guys. Thanks.

Thanks, Dan.

Our next question comes from the line of Greg Melick with Evercore. Please proceed with your question.

Hi, Thanks first I wanted to just look at the comp.

Where transaction counts.

Getting better sequentially I mean did that drive the the negative seven and a half comp or was it more average ticket.

So for the quarter transactions.

<unk> transactions, which is also a proxy for us traffic was down high single digits AUR up slightly units per transaction down slightly.

We did talk about how the comps successively got better as the quarter progressed.

Can you kind of her traffic improve steadily as we got less negative as we go through the quarter.

And it sounds like given the bad I guess the midpoint of the guide now would have you just sort of a negative.

455 comp in the back half that's does that where we're running now.

So, we obviously don't give inter quarter guidance.

But the performance of the business continues to be within the guidance range that we've shared.

Got it and then I wanted to follow up on this thanks for the answer on shrink that was good.

Holistic.

Freight benefits or supply chain wasn't benefit that.

That helped grow gross margin or our whole stabilize it could you quantify that and maybe sort of give us an idea as to how youre thinking about that into the back half.

Yeah. Greg This is Carl so freight was a tailwind of 88 basis points during the quarter quarter over quarter improvement.

So 30 30 basis points in gross margin the puts and takes on that where freight was a positive 88 March was a negative 21 shrink was a negative 37 and we can we can turn you are within the guidance to see that as a tailwind throughout fall.

Got it thanks and good luck.

Thanks.

Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.

Thanks. Good morning, guys can you talk about what youre seeing in some of the key COVID-19 winning categories, whether it's hunter exercise equipment bike.

And so forth or are you seeing the bottom form in the business such that we can start to look forward to it.

Proven and calm, but then ultimately positive as you think about the out year or are those like basically relative to 2019.

Are things stabilizing and we can start to think about the business more seasonally.

Yeah on a on a T Y O Y basis. When you look at just the comparison of those bigger business big ticket businesses.

Search categories, you talked about Theres, some challenge right I mean, our fitness business continues to be pretty fitness equipment. In particular continues to be pretty challenged the hunt business. We've talked about between firearms and ammo continues to be challenged as we get through this year.

Comps get a little less daunting the farther we get through the year and so were counting on some of that improvement as we move through the year.

Going back to the later part of your question. When you look at these businesses versus 2019, there's still all really really healthy when you look at like the hunt business, it's still up in the mid Forty's versus maintaining you could take a category believe beneath the surface. There like ammo is still up in like 96% versus where it was 19 so.

It's certainly I'm falling back a little bit from the activity. We've seen the last couple of years, but still maintain a really healthy spread versus pre pandemic and once we kind of see this business start to stabilize and I think it is going to stabilize at a higher level than where it was 19.

That's when we'll start being able to move more towards growth from a total company perspective.

So I guess just focusing on that so in these categories are broadly yet in the business or do you feel more confident today than a quarter ago that we are getting to that point of okay. What were seeing a bottom form and you have better visibility as you look forward.

They're becoming more predictable for us we certainly can and are getting a lot closer dependent in terms of how forecasting those businesses.

Running negative, though I mean, I don't want to mislead.

Initially during mislead you on that Theyre running negative, but as we get through the year. These headwinds start to diminish a little bit and so that's what really we're counting on as part of our guidance Chris One other thing I think.

Looking out long term and again, we're focused on the long term we're more differentiated in this space than we were a few years ago. I think there are fewer competitors in some of our largest competitors have really backed away from this space. So you know short term it definitely as Steve said, we're still running down at some of those categories. It is stabilizing I think long term.

We've got a great opportunity to pick up meaningful share of new customers as we really support to lean into this category.

Yeah, a lot of the categories that you're talking about a major cross shop across the company and ultimately even though we're fighting through some sort of short term chop on this we believe that diversified assortment.

Lennar nature of the businesses and how they cross shop is the right place for us to be you know, we're a sports and outdoor retailer and candidly there's more people pull back from the outdoor space, we become maybe the only player in this space with a large footprint.

Got it and then my follow up question is any any help here on the back half in terms of.

Cadence from a topline and gross margin perspective as.

As we think about the models thanks very much.

Yeah, I think from a guidance perspective, you know we're comfortable with the annual guidance of down 75 to down four or five.

Flexibility or the variability as you think about that is on consumer health you know, we're going to continue to lean into value, we're going to continue to lean into newness.

It's completely related to consumer health and on the on the margin guide from 34, four down to 34 O. We felt comfortable with that we've delivered that consistently over the past two years.

It's up 500 basis points since pre Covid and all of those business disciplines that Steve kind of a walk through of of what we this leadership team has started doing in 2019 really coming back to Merck.

Merchandise planning and allocation systems and <unk>.

Handsomest planning and by execution open to buy discipline, having that mark walked out of lifecycle management.

We're doing those consist that way that's what we're doing day in and day out is managing a business and so we felt comfortable with the margin guidance and we delivered it for the past two years.

Yeah.

Thank you.

Our next question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.

Hi, This is Emily go Shawn for Kate we wondered how you were thinking about the overall health of the market place currently and into the second half of the year. It sounds like there are some areas, where there's heavier inventory and we wondered how that might impact academy. Thank you.

No.

Yes, I mean certainly.

Talking about we're very comfortable with where our inventory position is.

We also know that competition, sometimes asked some issues out there and those problems can become our problems as they looked at a product.

That being said you know some of the headwinds you're talking about there's definitely increased promotions out there heading towards you mentioned and you know customers under pressure right. There is the credit card that's higher than it's been inflation is real but when you think about some of the other tailwind. We had we got this everyday value positioning that is kind of core and fundamental to who we are.

And I think customers will continue to gravitate towards value.

We got strong offerings of new brands, and a really strong private label business that customers resonate with so we've got some new things coming in combination of all those things we feel like the guidance. We gave is thoughtful and it encompasses both an upside or a downside scenario and you know, we're just kind of the situation in <unk>.

<unk> as we call them much like we've done all year, yeah, and going back to a year ago. There was a I think a number of retailers weren't happy with their inventory positions at that time, and we'd certainly more than what we're able to hold our own based on the strength of our inventory management reiterating what Steve said, we're in an environment, where we we certainly believe that value will be more important in the future than it is today.

It was a year ago, and we think we're the.

Best positioned to benefit from that at the risk of tripling up our units are down 5% on a per store basis, we feel like we've really leaned into this inventory management thing and.

We've been doing it consistently.

Thank you.

Thank you.

Our next question comes from the line of Robbie <unk> with Bank of America. Please proceed with your question.

Hi, This is Alex Perry on for Robbie just first could you give us some more color on how back to school is shaping up has since July momentum that you've seen sort of continued and then I think the high end implies a same sort of acceleration in the back half is that based on the trends you're currently seeing in them what are sort of the buckets that would drive an acceleration.

In the back half and then also I think youre lapping an astros win as well can you just remind us how much of a headwind that could be to same store sales. If if that's not repeated.

A lot wrapped up in that question, we'll do our best attack I.

Yes, He said before we don't give inter quarter guidance that being said our back to school is earlier than a lot of other people. So our back to school really starts kind of the back half of July we already told you in July was the best performing quarter for our best month of the quarter for US a lot of those trends that we saw happen at the end of July into August in terms of strength in key back to school areas like youth apparel.

Footwear backpacks hydration all those things were really strong for back to school for US now that being said, we still have a lot of the quarter ahead of US you know we've talked about how we see the customer shop. During those key point in time periods, but once you get passed back to school right. Now we have kind of a kickoff the tailgating hunting season, and then we go into a little bit of a lull in the later part of the quarter.

Until we get to the holiday shopping time periods. So we certainly got that modeled into our forecast in terms of the Astros.

We're up against in Astra's win.

I hope youre, not counting astra's out yet.

We're tied for first place I think at this point in time and we also by the way have the range are still in this as well as the race I think are still in the hunt. So we've got a lot of teams stone and that's one of the kind of the fun things about the licensed businesses that theres always something that happens right and while we certainly try to take those out of our forecast we know that if we do get.

One of those teams to get into a world series and win the World series and that would be upside to what we're forecasting right now it's one more thing on the license business and what we're not oddsmakers and we don't take the field to play the game are we like when the when the local teams win but we don't really plan for that no matter how.

Strong we think theyre the seasons that they may have can be so any anything there that that's beneficial to us is beneficial to the forecast and then back to the kind of the remainder of your question you know.

The things we've talked about on the call that we think gives us a belief that there is in our forecast is achievable.

Focus on value that we have leading into the newness that we have the new store initiatives, where we've got.

Somewhere between 14 and 15 stores. This year, we should have another 11 12 open up in the back half here, that's going to be a tailwind for us we start to anniversary some of the new store openings from last year.

Falling into the comps so theres a lot of different things to give us a belief that our forecast is pretty solid for the back half of the year.

I just want to say the forecast that we put out there although non comp. It includes 13 to 14 total new stores.

And in this year.

Perfect. That's all really helpful. And then just on margins to follow up there I think the high end of the guidance implies year over year increases in the back half what would sort of be the buckets of drivers there for two H gross margin improvement, maybe just give us some color in terms of.

How are you thinking about shrink versus freight versus the promo environment. Thanks.

Yeah, I mean that the the 34 to 34.4 annual actually represents a little bit of a give back from what we've had last year. It's still in that same general range, it's up 500 basis points to to pre pandemic. The so I think the three buckets that you saw.

That you saw this quarter merch margins shrink and freight are going to be the main players that were not going to throw anything new ACH in the third quarter or the fourth quarter.

We started to shrink we started seeing shrink start to turn last year beginning in the third quarter, we were up 40 basis points in the third quarter of FY 'twenty two to the previous year, So Michael talking about taken those year round physical inventories.

Kind of got ahead of this a little bit I'm, not saying, it's the environment's going to change, but we had already baked some of that into our accrual rate with that being said you know the.

The second quarter was up 37, approximately 40 basis points from a merch margin standpoint, I think it begins and ends with inventory management.

And just providing the customer with value options on stuff that they really want and freight as I as I previously stated you know.

I think that's gonna be a tailwind for for fall.

So that's what's embedded within the guidance Yeah, just I would reiterate that point you know we get this question every quarter around margin and when you look back and you think about where we are as a company I think a couple of times. We said, we're a different company than we were pre pandemic, we were sustaining right now at about 27% had a weird and nine.

From a sales perspective March is about 500 basis points higher and that's really built on the back of a lot of really strong meaningful operational changes that we've made to the business in terms of how we buy and allocate our regular price and markdown optimization work, we do the better sized profiling, we do in getting the right goods to the right stores.

We also think that mix should benefit us.

Socket does it start to kind of normalize and become a bigger percentage of the business.

Our gross margin tailwind private brand, becoming a bigger percentage of the business provides margin tailwind. So we feel like we've made the right moves long term to structurally improve the margin promotions are going to be what they're going to be and we certainly participate in promotions during those.

Time periods, but you know at our core we're an everyday value retailer, we talked about on previous call that roughly 75% of our sales come from regular price, which is driven by our value pricing right. So promotions are out there, there's certainly going to be what they're going to be we feel like we've got some planned appropriately that we feel like the strength of the margin is structural and foundation that we're going to hold onto it.

Perfect. That's really helpful best of luck going forward. Thanks.

Thanks.

Yes.

Our next question comes from the line of Anthony to combo with loop capital. Please proceed with your question.

Good morning, and thanks, so much for taking my question to be respectful to my peers, who may also want to ask questions. On this call I will just ask one question. So you talked about the SG&A expense and leverage drivers.

You know the new store investments Omnichannel technology, and digital marketing, obviously, the new store investments will continue given the fact that you have a very aggressive new store opening plan, but I guess my question is when do we start to anniversary.

The I guess, the bulk of the Omnichannel technology and digital marketing investments. Thank you.

You say, you're anniversarying the bulk of the of the I'm sorry, you have to do one more time.

When do we start to.

Anniversary, the bulk of the Omnichannel technology and digital marketing investments.

Hey, Anthony it's Carl.

When we launched our long range plan back in April we actually baked in about 100 basis points of <unk>.

Hence deleverage intuitive and it was really around the things that we viewed as strategic priority is to invest in new stores, we think there's a ton of white space there.

<unk>.

<unk> capabilities, we think we have a lot of upside there and we're just starting to get into the cockpit of the fighter jet associated with a customer data platform. So so I really think you can expect us to continue to lean into that we're gonna be responsive from an expense standpoint, as we look at our.

<unk> macroeconomic environment and it kind of always optimize our expense structure, but youre going to see us consistently leaning into investing in those areas throughout the long range plan that was going to say I think I think particularly in the realm of dot com.

You may never stops right, you're continually reinventing your site, adding new capabilities that we're adding some new paying for capabilities. Currently we're gonna have says along line in the next couple of weeks, which is a big win for us. So I don't think youre going to see us.

Necessarily discontinue those investments or if theyre going to start they're going to be continual.

All of the business, but we're going to be very thoughtful about where and how we invest those dollars and make sure that they really pay for themselves.

This new marketing platform I think we're really early innings as a matter of fact I'd say, we're at the start of the game on this one.

And theres going to be more investment against that but I guarantee you that everything we do we run an ROIC seat against and we're going to get paid back in spades for those investments and funding those initiatives with existing cash flow, but that's the one of the more important parts.

That's helpful. Thank you.

Okay.

Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Hi, good morning.

So all of these lead and only ask one question as well, but with multiple parts first of all congratulations Carl we look forward to working with you.

I appreciate it.

So the question I have.

You've done a fantastic job of managing the business through some cross currents out there comps are still negative.

The guidance you provided a balance you would suggest they stayed negative through the year. So I guess the question I have is how do we think about these negative comps.

Is it what portion of those is lapping some of the east coast.

Categories versus an underlying.

<unk> challenged consumer when they really what are the if.

If you look at the business beyond the core and you know what are the building blocks to get back to that.

Steady positive comp for the company, where it should be.

Yeah. So when we thought about coming out of the pandemic last year and 22 I mean.

Nearly during 2020, one the business groups, who have an outsized kind of state of a proposed tried it it was it was in.

Inflated by one time customers coming to our stores one of the only store open et cetera, if somebody surge categories, there's extra stimulus in the economy.

Last year's kind of that reset year, and really intended to move back to growth. This year I think the thing we weren't counting on coming into this year was how much pressure to customers under so I'd attribute a lot of what we're seeing this year is negotiating through that short term kind of jobs. That's been created by the state of the economy that you know the.

Inflation, we talked about high credit card debt et cetera. So.

As we move forward you know the thing that's going to that we have to keep navigating through that short term shock when we see the customers start to get them healthier and stabilize I think that's when we start moving back to growth and that's when a lot of these initiatives that we're still investing it right I mean, that's one of the things we talk a lot about is.

These investments were making a new stores. These investments, we're making to our CDP or to our dotcom site, they're all long term investments and that's when they're really going to start paying off is once we come out of this kind of short term dislocation of having in the market youre going to see those really kick in.

Yeah, that's really helpful. I appreciate it.

Good luck for the balance of the year here. Thank you.

Thanks, Brian .

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning, Thanks, a lot for taking my question, how much lower can academy tickets operating expenses without having a negative impact on the customer experience.

Actually if comps remain negative into 2024.

Yeah.

Yeah, well I think we've got our expense structure and are in a pretty good place.

We're happy with it you know I would reiterate we are more productive.

On a sales per square foot basis, we're more productive at a profit per square foot basis, we're more productive than the competition. When you look at productivity per employee and that's important and I know that others have had some actions with our employees, but we're more productive than our competition in most of the sector are when it comes to productivity per employee per employee. So I think we've got our expense structure and a pretty good place.

From a from a store standpoint, we are looking very diligently as you know to improve our expense structure and our supply chain and we've got a very long lived initiative that were undertaking there that really won't start benefiting us in the next year. So what we are working hard on the initiatives that Steve talked about to turn the comp trajectory, we do anticipate.

But that will happen.

Based on the initiatives again, not not this year, but hopefully shortly thereafter and as the other initiatives that we have on the expense side, particularly in the supply chain to take hold we should have some good offsets there but your question is a great question I mean, that's something we spend a lot of time talking about is making sure that as we're managing through this we're not.

You know doing anything to hurt the customer experience.

You know, we're more productive in our stores because we've taken non customer facing tasks off the plate.

And that's allowed us to flex our labor down there and we will continue to flex as we need to but there is a certain tier point base level of service, we want to provide to the customer.

Business comes down receipts come down a little bit and that gives us a little bit of room in terms of how we manage our supply chain. So I think we've got some natural flex is still in the business based off of how receipts come in how customers are shopping that we can flex up or down, but we also always want to make sure to your point, we don't want to erode that customer experience.

Got it. Thank you so much my follow up question is some of your key vendors are going to soon expand the distribution of their products and the perception is that <unk>.

There is more expanded distribution he's going to put pressure on the profit pool that academy plays in which in term is is lowering the operating profit margins for some of your key competitors.

So how have you factored in this expanded distribution into your outlook and be over the next few years. If we see your competitors have their margin drift lower what is it about academy model that would enable you to maintain the margins that academy.

<unk> right now.

Yes, I'd start with the distribution question, we got this last quarter because it was right around that time. It was announced that I think Nike is going back into a couple of retailers apparel and Macy's.

And I believe footwear and DSW and.

Our response to it is the same as it is now.

A lot of where Macy's are picking up apparel their mall base for non non mall based.

We don't anticipate that impacting us too much.

<unk> tends to be a little more off mall based on certainly.

That you can worry about maybe a little bit of traffic from there, but when we look at their assortment and what they traditionally carried a it's not the same level of assortment that we carry so.

Adding more people, having access to brands isn't a positive thing for us, but we think we've got it accounted for.

And appropriately projected in our margin forecast.

Longer term I keep coming back to the margin improvement that we've seen over the past four or five years is foundational and it's how we manage the business and I think Carl said it a couple of times in this call. It starts with inventory management that is a key foundational thing as a company we used to carry way too much inventory that creative way to any marked.

Towns and inefficiencies in the system managing inventory managing the receipt flow has so many positive benefits in terms of not creating markdowns on the backend in terms of not creating trapped inventory of the stores have to move around needlessly.

So inventory management is a big one and then just how we manage through our pricing and make sure that we present a value price on a day in day out basis.

And offer great value I think the combination of those disappoints, we put in place in our everyday value model. I think are two things that help us believe that our margin is going to be sustainable in the long term and then again back to the other initiatives. We believe very strongly that we've got 100 basis points of benefit coming from the supply chain.

More cross dock.

More multi stop deliveries.

Their use of variable labor I mean, our workforce our D C.

It's frankly highly fixed.

So we've got opportunities there and then with more effective and efficient market.

Being a blunt instrument and using a scalpel will help our margins as well.

Yes.

Thank you.

Thank you.

Yeah.

Our next question comes from the line of Seth Basham with Wedbush. Please proceed with your question.

Thanks, a lot on good morning, My question is around new store productivity.

Operational again.

This quarter I'm wondering if there's anything associated with starting up in terms of the pacing of timing.

That's my first question. Thanks.

Sure. We're pleased with the progress of the new stores. We've opened three stores. This year, all three had been out of footprint.

All three much more successful than the out of footprint openings. We had back in 2018 2019. The last store. We opened was in the Westfield caramel, Indianapolis, and even though you're going to be quite honest not an ideal time to open a new store. It's one of the better openings, we've had out of market in the past five years. So we are seeing the 2022 stores a little slower.

<unk> than we had planned but again the chain is down it's they're opening stronger than they did in 2019.

The economy is challenging and it takes time to build some brand awareness awareness and as I've said many times over its a test and learn year. Our 2022 stores were still learning from those we've got 13 to 14 that will open this year.

Allergy that I've used internally around this initiative as Milton Friedman school. The shower you turned the water hot and it doesn't get Hot and then you turn a cold and when you turn a cold. It finally gets hot and that's meant to illustrate that many times people fail to account for the lag time, when they are studying cause and effect and so this initiative, we're going slowly here. The punch line is when you have these large initial.

When you can implement them slowly and not all at once you can study the impact of those decisions and that's what we're doing we're still studying the 2022 vintage we feel like we've got some good learnings and we're applying them, but very very happy so far.

Again, the key things to keep in mind is that all of our mature stores are profitable, we've got more white space than almost any retailer that I can think of is certainly in our sector only being in 18 States and we're funding all of this growth through existing cash flow. The stores that we opened in 2022 are already creating cash flow they are accretive to cash.

Hello, So now we're reinvesting that to open more stores and the only thing I would add to that is.

As we continue to open stores out of our traditional footprint, it's all market share opportunity for us.

To pick up market share in those markets and it helps the dot com business as those customers now have awareness for two academy.

That's helpful and just a follow up so the 2022 class and stuff. That's on average 18 million on sponsor that although stores and then to the 2023 class with wireless opening outside your footprint.

<unk> volume.

Or could it be lower than that.

Yeah on average that's how we underwrite the stores and that's what we expect on average they may be different depending again, we've tried some different things. We've got some smaller format stores I would say that are you know below the 62000 prototypes those will be smaller.

Again, 20% ROIC hurdle for for really every store in there they will achieve that both vintages based on what we've seen and tracking tracking ahead of that.

That's a pretty attractive.

Thank you ladies and gentlemen, we have time for one more question, which will come from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.

Hey, Thank you so much for taking our question. This is Jackie on for Simeon.

What is the right kind of comp level.

<unk> leverage in that business.

There can be some degree of deleveraging the model over time as you open new stores and ramp up your growth investments or how should we think about that thanks. So much.

Yeah from a from a long range plan standpoint, we modeled in low single digit.

Comps and 100 basis points of expense deleverage, we do have some some things that offset that in the supply chain space.

And we've seen nothing that that says that that's not what we're expecting you know if you look at SG&A for example, in the near term and in the current quarter up $13 million year over year that investment is really in those long range.

Our strategic priorities and our free cash flow Michael spoke to it but under $90 million in cash flow from operations during the quarter, that's actually up $30 million year over year compared to last year, I think 19% increase in AR in a tough environment when you've got a down 75 comp.

We're creating the cash flow that makes us feel like we have permission to continue to invest in these strategic priorities and that's what we're doing.

Great.

Oh go ahead.

Oh No you go ahead Scott.

If I can squeeze in a quick follow up.

I know you guys don't guide Q3, Q4 gross margin given that Q2 gross margin kind of came in line with normal seasonality versus Q1 should we think about whether she trained so far from a margin can should follow the seasonality as well. Thank you.

I'll take it I am just going to reiterate the 34 to 34 for the three things that are going to move that are the three things that you saw this quarter merch margin shrink in freight.

From a merch margin standpoint, what you know units down five we felt pretty good from a sales to inventory spread standpoint, we feel like from a promotional standpoint.

We're going to we're going to do that but we're going to do it during those key time periods and that really worked for us in the second quarter from a shrink perspective, we're beginning to lap some stuff from last year that we saw.

But I'm not expecting the environment to change magically work, we're doing the things that we think help prevent and deter.

And in some cases follow up on.

The losses that is having a beneficial sequential impact in freight.

It's still going to be a tailwind into fall. So those are the three things, we're not going to give guidance on Q3 and Q4, specifically, but those are the three things that are going to impact that and we feel like we're managing what we can manage in those spaces.

Great. Thanks, so much.

Thank you so just want to close and kind of reiterate we believe that academy represents.

A compelling growth opportunity.

The retail space for investors, we have one of the most compelling growth opportunities out there.

And wanted to make sure you guys realize the team is simultaneously focus on two things, we're going to continue to navigate through the short term headwinds.

Customers under pressure, but at the same time, we're going to be working against our long range plan to make sure we're setting ourselves up for success in the long term.

To achieve our long range planning objective, so with that I want to thank everybody for joining the call out there and thanks, Oliver Academy Associates and everybody should have a good labor day weekend. Thanks.

Thank you.

Ladies and gentlemen, the call has now concluded. Thank you for your participation you may now disconnect.

Okay.

Okay.

Okay.

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