Academy Sports and Outdoors Inc (ASO) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors Second Quarter Fiscal 2022 Results Conference Call. At this time, this call is being recorded. (Operator Instructions) I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors' Second Quarter 2022 Financial Results Call. Participating on the call are Ken Hicks, Chairman, President and CEO; Michael Mullican, Executive Vice President and CFO; and Steve Lawrence, Executive Vice President and Chief Merchandising Officer.

As a reminder, statements in today's earnings release and the comments made by management during this call may be 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 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.academy.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. Our performance this quarter was in line with our expectations. We remain confident that the durability of our strong assortments and everyday value model positions us well to deliver consistent sales and profitability growth going forward. This growth is supported by operational excellence, healthy inventory levels, a strong balance sheet, new store expansion and omni-channel advancement. The Academy team remains focused on executing our priorities to achieve our vision of becoming the best sports and outdoors retailer in the country while delivering a great experience for our customers and creating value for our stakeholders.

Part of our plan to achieve this vision is by expanding our footprint and bringing more fun to the rest of the country. I'm excited to announce we opened our second store of 2022 in Panama City, Florida during the second quarter. It is our first location in this market and our 13th store in Florida. So far, in the third quarter, we've opened 2 additional stores, 1 in Richmond, Virginia, a new market for us, and another 1 in Atlanta, Georgia, an existing market we continue to build out. These stores bring our total opened so far this year to 4 stores with 5 more expected to come in 2022. While it is early, the new stores opened in 2022 are overall exceeding our initial sales expectations, which is a good indication that customers are drawn to our broad assortment of top national and high-quality private brands at an everyday value. Thanks to all of the team members who helped execute these highly successful store openings.

We're excited to be in a growth mode and expect to open 9 new stores this fiscal year and 80 to 100 stores over the next 5 years. Academy stores have the highest store productivity in our peer group, making our new stores a compelling use of our capital with a high return on investment. As I mentioned on the last call, our expansion plans consist of 3 distinct opportunities. First is building scale in existing fast-growing markets like Atlanta, Georgia, where we've opened 2 new stores in the past 4 months and now have 12 locations. Second is expanding into adjacent markets like Panama City, Florida, where we just opened, and Lexington, Kentucky, where we will open a new store later this fall. And third is opening in a new market such as Richmond, Virginia, where we opened in mid-August, and West Virginia later this year.

As we continue to expand the store base over time, we believe this will increase brand awareness, leading to market share gains as well as omni-channel growth due to our high penetration of buy online pick-up in store sales.

I'll now provide a high-level overview of our second quarter results. The quarter presented similar macroeconomic challenges as the first quarter, and the team demonstrated once again their ability to perform in a tough environment. Our reported sales and negative 6% comp versus last year's were in line with our expectations. These results were a strong 36% sales increase versus 2019 through the second quarter as the business continued to substantially outperform our pre-pandemic levels of sales and profits. Our best customers have remained resilient throughout the challenging economic environment while our value offering continues to resonate. We expect the sales trend compared to 2019 to hold for the remainder of 2022.

While each of our 4 merchandise divisions, Sports and Recreation, Footwear, Apparel, and Outdoors saw a decrease in their year-over-year sales when compared to the second quarter of 2019, each merchandise division grew by at least 20%, with outdoors and sports and recreation each increasing by more than 45% over 2019. This highlights the fact that each of our merchandise divisions remain substantially higher than pre-pandemic levels. Steve will discuss our merchandise results in more detail later in the call.

During the quarter, we were very pleased with our positive e-commerce sales performance, which grew 12% versus last year. We continue to invest in technology to accelerate our omni-channel growth and create a seamless, engaging customer experience. For example, we've added new mobile payment options like Google Pay and Apple Pay in 4 and we will be launching store wayfinding on our app later this year. We will continue to invest in and deploy technology across our stores, omnichannel and supply chain to enhance the customer experience. These investments are yielding strong results as we continue to see our omni-channel business grow, store productivity increase, inventory assortment and in-stocks improve and our customer survey scores at record levels.

Our adjusted earnings per share were $2.30. This was driven by our ability to sustain our gross margin rate above 35% and effectively control costs. Our gross margin rate is expected to remain in line with our full year guidance, leading to strong cash flow generation and profit growth.

Looking ahead to the third quarter and the remainder of the year, we had a good back-to-school season and expect comparable sales to continue to sequentially improve as we go through tailgating, hunting and fall sports and move into the holidays. As I have stated before, Academy Sports and Outdoors is a different company from 4 years ago and is poised to utilize its operational excellence and strong balance sheet to profitably grow through new store expansion and omnichannel growth.

I'll now turn the call over to Michael to provide more details on our second quarter financial results, discuss our capital allocation efforts and provide an update on our 2022 guidance. Michael?

Thanks, Ken. Good morning, everyone. Academy once again delivered solid earnings per share growth on an expected sales decline, demonstrating our earnings potential and our ability to deliver strong results in a challenging environment. In the second quarter, comparable sales declined 6%, an improvement over the first quarter, while earnings per share increased by 12% compared to last year. Net sales were $1.69 billion, a decline of 5.8% compared to the second quarter last year. The sales decline was a result of fewer transactions this quarter compared to the prior year but was partially offset by an increase in average ticket, driven by higher unit prices.

On our last call, we discussed how we are benchmarking performance to 2019, which was our last normalized year prior to the pandemic. In the second quarter, sales increased approximately 36% versus 2019, which was consistent with the 36% growth we reported in the first quarter. In addition, the overall shape of the sales curve mirrored the 2019 trajectory but at elevated volume levels.

Our e-commerce sales increased 12% compared to Q2 2021, making it the fourth consecutive quarter of double-digit sales growth. The penetration rate continues to improve as well, ending at 10% of sales compared to 8.4% in Q2 2021. When compared to Q2 of 2019, our e-commerce business has grown approximately 245% and the penetration rate has increased by 610 basis points.

Omnichannel is an important part of our long-term growth strategy, and we continue to invest in enhancements to academy.com, the mobile app and our store support in omnichannel sales, such as Ship to Store, BOPIS and Ship from Store. These investments will further enhance the customer experience, expand Academy's reach to new customers and drive further operational efficiencies. We also expect academy.com to get a sales lift from an increase in brand awareness as we open more stores in adjacent and new markets.

As Ken mentioned, our new store openings are ramping up. Year-to-date, we have opened 4 of the 9 stores currently planned for 2022. The early success of the new stores demonstrates our confidence that our business model of providing a broad value-based assortment of top national brands and private label products for the whole family resonates with customers. In tough economic times, customers tend to seek out value so we believe we are well positioned to meet that need with our broad selection of good, better, best products at compelling price points.

All of the new stores are expected to meet our general new store operating model, so we anticipate these stores will: first, have a return on invested capital of at least 20%; second, ramp to maturity in 4 to 5 years; and third, be EBITDA accretive after the first full year of being open. During the second quarter, our existing store productivity was once again very strong. Trailing 12-month sales per square foot were $356 and trailing 12-month operating income per store was $3.4 million. As a reminder, 100% of our existing stores are profitable and accretive to earnings, which gives us great confidence in our future growth potential.

Moving to gross margin. Our gross margin dollars were $596 million with a rate of 35.3%, only 60 basis points below last year's 35.9%, which was the highest in the company's history. Through our merchandising efficiencies, we increased our merchandise margins compared to last year. The increase in merchandise margins was offset by an increase in e-commerce shipping and freight costs compared to Q2 2021. This increase was driven by the growth of our e-commerce business and also from higher import costs as private label sales were a higher percentage of our total sales mix.

During the quarter, SG&A expenses were 20.1% of sales, a 160 basis point decrease compared to Q2 2021. The change was primarily a result of lapping the nonrecurring expenses associated with the accelerated share vesting in the second quarter of 2021. Excluding this nonrecurring expense, SG&A expenses increased 70 basis points primarily due to fixed cost deleverage.

Operating income for the quarter was 15.2% of sales or $256.7 million, flat to last year but 43% higher than all of fiscal year 2019. In total, we delivered net income of $189 million for Q2. On an adjusted basis, net income was $195 million, making this quarter the second most profitable quarter in Academy's history. Second quarter GAAP diluted earnings per share were $2.22 per share compared to $1.99 per share in Q2 2021. Adjusted diluted earnings per share were $2.30 compared to $2.34 per share in Q2 of 2021.

Now for an update on our balance sheet and liquidity position. We ended the quarter with $400 million in cash and had no outstanding borrowings on our $1 billion credit facility. During the quarter, we generated $161 million in net cash from operating activities. Given our strong cash generation, we were able to execute on each of our capital priorities by repurchasing 5.6 million shares for approximately $200 million, paying a dividend of $0.075 per share, investing in our strategic growth and performance priorities and maintaining a strong cash balance. In addition, the Board recently declared a dividend of $0.075 per share, payable on October 13, 2022 to stockholders of record as of September 15, 2022.

Regarding inventory, our planning and allocation initiatives have ensured that we are properly stocked with the best value and assortment across all categories for the fall season. Our ending inventory balance was $1.3 billion, a 17% increase compared to the second quarter last year. When compared to Q2 of 2019, inventory dollars were up 8.4% and units declined by 12% on a sales increase of 36%, demonstrating that while sales have increased significantly, we have effectively managed our inventory.

That brings us to guidance. Based on our results and current trends, we are reiterating our full year net and comparable sales guidance while updating our earnings per share forecast to reflect the reduction in our share count. The updated full year guidance is as follows: Net sales are still expected to range from $6.4 billion to $6.6 billion, with comparable sales down 6% to 3%. Our gross margin rate for the full year is still expected to range from 33% to 33.5%. GAAP net income is still expected to range from $550 million to $615 million.

GAAP diluted earnings per share are now expected to range from $6.50 per share to $7.25 per share. Adjusted diluted earnings per share, which excludes certain estimated expenses such as stock compensation and store preopening expenses, are now expected to range from $6.75 per share to $7.50 per share. The earnings per share estimates are calculated based on an updated share count of 85 million diluted weighted average shares outstanding for the full year. The EPS outlook does not include any further repurchasing activity for the year.

With that, I will now turn the call over to Steve for more details around our merchandising and operations performance. Steve?

Thanks, Michael. As you heard earlier, our Q2 sales came in at $1.69 billion, which is a 6% decline versus 2021. Breaking the sales down by category, our best-performing division in the quarter was Sports and Recreation, which was down 2.5% versus '21 but up 47% versus 2019. The team sports business continued to be extremely strong with football, golf, baseball and soccer all being key contributors. We also saw strength in several of the recreation categories such as water sports and outdoor furniture.

Fitness remains the most challenging category in this area of business, but we've seen it stabilize over the past couple of quarters and over a 30% increase versus 2019 pre-pandemic levels. The footwear division was our second best business at down 4% versus last year but up 22% versus 2019. Similar to Sports and Rec, we saw continued strength in our team sports cleated business where demand continues to outpace supply.

Other bright spots included children's shoes, along with big brands such as Crocs, SKECHERS, Adidas and Puma, which all ran increases for the quarter. We're also excited to launch HEYDUDE in all stores in July just in time for back-to-school. We're seeing strong early results and expect HEYDUDE to be a sales driver versus the remainder of the year. Apparel sales came at down 6% versus last year but were up 29% versus 2019. Receipts and inventory level steadily improved over the course of the quarter.

The outdoor and licensed apparel business has led the way in this division during Q2. Our athletic apparel business was a little softer in the quarter, which we primarily attribute to not having the optimal mix of lightweight tops and shorts inventory as we entered the quarter. We did see the trend improve as we turn the corner into back-to-school selling season where we believe our inventories are better balanced and well positioned to drive sales in the back half of the year.

Our outdoor business was down 9% versus last year but was up 46% versus 2019. Camping was the strongest business in this category, running a positive comp for the quarter. Both our field and stream businesses were down versus last year but, in aggregate, continued to run well above 2019 levels. The supply chain across most of our outdoor businesses has improved. And while not totally back to normal, we're seeing inventory and in-stocks maintain at much higher levels than we have been at over the past couple of years. We believe our improved inventory position in both these categories positions us to take advantage of the upcoming hunting season, along with the holiday gift shopping opportunity.

Turning to margins. We continue to hold on to most of the gains we've made over the past couple of years. Gross margin rate for the quarter came in at 35.3%, which was down 60 basis points versus '21, was up 420 basis points versus our 2019 baseline. Beneath the surface, our merchandise margin was up 20 basis points versus last year, which was the same increase we ran in Q1. All the hard work the teams have done over the past couple of years around improved buying and planning and allocation disciplines had allowed us to absorb the uptick in promotions during Q2 while still seeing increases in our merchandise margins.

Looking forward, we expect the second half of the year to be more promotional than the first half, and we've accounted for this increased discounting in the guidance Michael discussed earlier. That being said, we expect to maintain most of the margin gains from the past couple of years, and we're confident that our everyday value pricing, coupled with our promotional strategy, makes us very competitive and allows us to maintain our position as the value leader in our space.

Moving on to inventory. Our teams have done an outstanding job in managing through what continues to be a challenging environment. We ended the second quarter with inventory up 17% versus last year, only up 8% versus 2019 in terms of dollars and down 12% in units. Similar to the last quarter, the primary driver of the delta between inventory dollars and units versus 2019 is the increased bigger-ticket hard goods categories as part of our inventory and sales mix. Outdoors and Sports and Rec have grown to 53% of the business this year compared to 49% of total sales in 2019. The remainder of the variance is driven by the expansion over time of the better and best offerings in our assortments along with some cost inflation.

Heading into the back half of the year, our inventories are much better balanced across various businesses with in-stock improvements across every category. Additionally, the overall quality of our inventory is in a much better position this year and many of the key brands that we ran light in last year, such as Nike, Adidas, Under Armour and YETI. Many of our fall holiday receipts last year landed 30 to 90 days later than we would have liked. We moved the initial sets for these businesses back to their traditional timeframes. When you walk our stores, you will see that we're ready to take advantage of the natural fall traffic that will come in shopping for hunting and tailgating along with categories such as outerwear fleece and fire fits.

Another sales driver for us is continuing to lean into new brands and initiatives that resonate with the sports and outdoor customers in our markets. In addition to the aforementioned HEYDUDE launch at back-to-school, we see several new brands and ideas popping up across the stores, such as Solo Stove and Rio Fire pits. There are also fun trends inspired by TikTok such as the splatter ball craze, which we've rolled out to all stores.

Probably the idea we're most excited about is the second major limited-time cross-brand collaboration that we just launched, which is our Shiner Plus Magellan capsule products. We partner with Shiner Brewing, which is headquartered in Texas but widely distributed across our footprint, to deliver our most extensive collaboration ever. We positioned this initiative at the front of our stores a couple of weeks ago to help kick off the tailgating season. Categories in this collection included co-branded items such as tees, fishing shirts, hats, cozies, chairs, canopies, grills and even coolers. It's only been on the floor a couple of weeks but it has sold extremely well.

We believe building collaborations with brands that resonate with the sports and outdoor consumer can be a traffic drive initiative that we add to our playbook moving forward. Teams have worked hard to stable our supply chain and get back in stock, and we should be able to maintain a much better inventory position across virtually every category throughout fall and heading into holiday. Our everyday value offering, when coupled with the faster promotional cadence on key seasonal categories, continues to set us apart from our competition and reinforce our position as the value leader in our categories.

We also believe that more controlled distribution by key vendor partners will continue to be a tailwind for us by (inaudible) shoppers looking for the best national brands and sports and outdoors into our stores. Finally, we continue to remix our marketing spend and lean into more digitally-targeted advertising while reducing our reliance on traditional broadcast and print. This will continue to improve our overall marketing reach and effectiveness.

In closing, we believe that we have the proper strategies in place and are well positioned to drive the business, pick up market share during the remainder of the year. Now I'd like to turn the call back over to Ken for some closing comments. Ken?

Thanks, Steve. In closing, we've demonstrated consistent, strong operational and financial performance in any environment, which is the direct result of the many improvements we put in place long before the COVID-19 pandemic, to achieve our vision of becoming the best sports and outdoors retailer in the country. I'm pleased with the sequential improvement in our comp sales and profitability versus Q1 and believe that Academy is well positioned to be the everyday value retailer of choice.

We also have tremendous growth opportunities ahead of us, whether new stores, omnichannel or existing stores from operational improvements with numerous avenues of growth and the cash flows to support it. I would like to close by thanking all of the Academy Sports and Outdoors team members for their continued hard work and commitment to our vision of becoming the best sports and outdoors retailer in the country. We remain excited and confident about Academy's future and appreciate your support. Thank you, and we'll now open up the call for your questions.

(Operator Instructions) Our first questions come from the line of Chris Horvers with JPMorgan.

Can you talk about a little bit about what you've seen in terms of consumer behavior around trade-down? You mentioned you had a good back-to-school season, but how did the consumer behave when gas prices spiked and then receded? Did that trend versus 2019 stay consistent over the quarter? And is that also true on a quarter-to-date basis?

Chris, thank you. We are seeing the consumer continue to be interested in our category, sports and outdoors. And what we are seeing is interesting in that there's somewhat of a barbell effect that those consumers that are interested and are enthusiasts are buying -- continue to buy at the higher end. But we are seeing some of the consumers shift to our private label.

And so that's why, as Steve said, our private label business was better in the quarter, and so they are looking for the value that, that's offering. But that said, we continue to see the consumer shopping for the categories that we sell. And one of the things I think that's important is we sometimes talk about what's discretionary and what's not discretionary. And I think many of the businesses that we have, the consumer, even in tough times, the kid's still going to play baseball and soccer. The person who's in the outdoors are still going to go camping or fishing, and the families are still going to barbecue. And so we're seeing a lot of those categories continue to be strong and at a much higher level than they were pre-pandemic.

This is Steve. I'll just add a couple of pieces of color. So to Ken's point, you see, on one hand, private label be very stronger in the quarter. On the flip side, you see a brand like YETI, it's a really strong business, which is one of the more premium brands in our assortment. So it is kind of a bifurcated result there. I would also say, you asked around kind of the shape of the quarter. One of the things, certainly as we go through quarter by quarter, month by month, you see a little bit of variance. One month maybe is a little better than that 36% average. Another month, maybe a little bit below that, but it keeps returning back to that roughly 36% increase versus 2019. And that's really kind of how we forecast the business as we look forward.

Yes, it's Michael. Just a really quick one to add. A lot of that strength in private label has been driven by newness in the private label with Freely, Right of Way, Magellan Pro and some others. So we're certainly happy with the way that we're managing that business.

Got it. And then my follow-up is for you, Michael. As you think about -- how are you thinking about working capital this year and free cash flow generation? And how do we -- should we think about a minimum cash balance as we think about the potential for additional share repurchase later this year? Obviously, at this point, you're probably full of inventory so you got maybe a seasonally low point from a cash balance perspective. But one would expect -- one would think that cash becomes a source of funds into the back half of the year. And so just trying to think about the potential for additional share repurchases.

Yes, a couple of things. Look, I think others are full of inventory. We have the right amount of inventory at a good level. We've managed that well when we compare it to 2019. I think one of the many positive that this quarter illustrated is our tremendous earning potential in a tough environment and against some really tough comparisons. In addition to having the most profitable quarter we've ever had from an earnings per share standpoint, we were able to post EBIT and net income rates that led the sector.

In fact, I think, in specialty retailer there, at the tip top of the heap. We have a double-digit free cash flow yield, which makes these discussions on capital allocation possible. We certainly have the cash to invest. With that in mind, our approach hasn't changed. We are generating enough cash to do -- to take a do-everything approach to capital allocation. The first thing that we consider is the point that you mentioned around stability. We want to maintain a cash flow that allows us to be nimble in a variety of environments. I think we've done that. We're there and we plan to manage that way. We've got $1 billion less debt than we had a few years ago.

Secondly, we want to make sure we can fund our growth initiatives. And conservatively, we have the ability to add hundreds of more stores. We've announced plans to add 100 within the next 5 years. We mentioned last quarter that Conyers was the best store that we've had that we could go back and find. Panama City opened in the second quarter, that topped Conyers. So we certainly feel like we've got the store opening program figured out and want to make sure that we're hitting our targets there for 100 the next 5 years.

Academy.com has grown 250% since 2019, posted its fourth quarter in a row of double-digit growth. We're going to continue to fund academy.com. We can do all of those things and still have cash left over to return to shareholders, which we did in the second quarter. The Board announced an additional $600 million repurchase authorization. And we've, in the past few years, bought back 3x what we raised in the IPO. We're going to evaluate it, be opportunistic. We certainly think the stock is a good value, which is why we purchased a fair amount last quarter and we'll continue to look at that. The punchline is we can do all 3.

Best of luck.

Our next questions come from the line of Simeon Gutman with Morgan Stanley.

I wanted to ask about the promotional environment. You mentioned that you still did well despite the uptick. Can maybe we talk about if there's anything structural that you could point to that's changed pre-COVID and then dig in a little bit to it? Is it because the mix is helping? Is it the magnitude in each category? Are initial markups higher? So just a way to think about why this backdrop can continue.

Yes, this is Steve. I'll take the first stab and answer the question. So we've talked a lot about in previous calls. Structurally, we've done a lot of work beneath the surface to be better managers of our business, which I think has given us the lion's share of the increases. We've had multiple initiatives across merchandising, planning and allocation in terms of better inventory management, better flow, better localization efforts.

We've really dramatically improved our markdown, process, timing and cadence to get much more current with our inventory. So I would say a lot of those things are structural and are kind of stick to the ribs, and we think are going to help us sustain the margins. I'd also say that another thing that I think helped us within the quarter is we don't have an inventory overhang to deal with. We've been very, I think, smart about how we've managed the inventory, up 17%, certainly versus last year. I think it's up 8% versus where we were in '19 in dollars but down about 8% in units -- actually, no, 12%. That's 12% in units.

So we've really been thoughtful about as the supply chain is starting to get a little more normal, although not quite back to normal, making sure we control those inventories. So I think that's allowed us to be very thoughtful about putting promotions back in as we've needed to, to be competitive. We certainly think that the back half of the year is going to be more promotional than it was last year, certainly around holiday. We've got that baked into our guidance as we think about it.

And then the offsets we have are the structure improvements I mentioned. You mentioned mix. Mix helps out a little bit as the soft goods side of the business becomes a bigger percentage of the total. But we feel really good about where we're positioned and our ability to deal with the promotional environment that we see ahead of us.

There are a couple of other things, I think, that have helped us. One is our suppliers, in some cases, have cut back from some of the promotional -- people who were more promotional and they're no longer in the business. And therefore, promotions have become more rational. We will continue to utilize our value proposition and have promotions at key times and react to promotions that are out there competitively.

But we have not seen the level that there was and prior to the pandemic and that's been beneficial. But I think the most important thing is what Steve said, that the actions that we've taken to improve our operations and planning allocation, pricing are a bigger factor. And those are stick to your ribs, as Steve said, but also those use AI to continue to improve over time so they will last. We will continue to get improvements from them for some time to come.

And then maybe a follow-up, thinking about the backdrop for demand in the category, either rebasing or digesting. The consensus models in that it's basically rebasing this year and then grows next year. You mentioned fitness as a category that you're starting to see units, I think, flatten out. Can we look at that as an example that you're seeing stabilization in some of the big COVID winners? And then is it fair to say that all clear that as a category, we can start to see that grow again?

Yes, Simeon, I think it's important to realize, it is -- people talk about normalization. It's really not normalization, it's stabilization. You used the exact right word. And so it's stabilizing at a higher level. And we do anticipate those starting to pick up and grow again. People didn't buy a treadmill in 2020 because they thought they were going to buy one in 2023. That has stabilized at a higher level. And we believe that we'll pick up those -- categories like that will pick up as we go forward.

One additional piece of color to that. So to Ken's point, take categories like fishing and firearms and ammo and fitness and bikes and trampolines and all those categories that were COVID winners, they certainly surged during the pandemic. They're dropping versus (inaudible) stabilizing kind of at that level, but the point, I think, to make is, on average, we're up about 36% versus '19. In aggregate, all of those categories are well above that number.

Yes. Ken has used (inaudible) of going from Denver between Galveston and Denver. They've kind of rebaselined somewhere on the Colorado plateau, substantially higher than 2019 and at much higher levels.

Yes, he won't let me use (inaudible) anymore because it says not everybody knows where that is. The Colorado Plateau is, I think, relevant.

Our next questions come from the line of Michael Lasser with UBS.

In light of the gross margin performance this quarter, does that change how you think about the long-term sustainable run rate gross margin for the business? You previously sized that 32% to 33%. Is it higher now?

It certainly can be. But I think right now, we'll stick with what we've said in the past. I mean, that's -- we feel very good about the 32.5% to 33%. And certainly where this year is playing out, we could be stronger than that. But I don't think there's any long-term change in our perspective. It depends, frankly, on the level of promotion that comes into the marketplace. We feel very comfortable with the things that we can control around managing our inventory and our merchandise mix.

And then my follow-up question is, if we trended out the 3-year geometric stacks, it would suggest that Academy is going to have a flat comp by the fourth quarter. Is that the right way for us to be modeling and projecting the business over the next few quarters?

Yes. I mean, we'll stand by the guidance that we provided and you can kind of sort through that. But certainly, we would expect to see some sequential improvement throughout the year.

Good luck.

Our next questions come from the line of Daniel Imbro with Stephens.

I wanted to ask a different one on inventory. You mentioned inventory is up 8% versus '19. I think sales are up 36%. I guess, Michael, how much of that is reflective of strategically, you guys running just more efficient stores? And how much of that is maybe inventory you'd want or maybe sales you left on the table due to a lack of inventory? Just where should or where would you like inventory to be maybe versus that time period?

Look, I'll let Steve take this because his team has been the one that's been -- that's managed it. But I'll just say very quickly, we're very comfortable with the inventory that we have. Yes, it is strategic. I mean, we have the opportunity to be more efficient with our inventory and we've been speaking about that for several years. But I'll let Steve kind of take it from here and talk about some of the stuff they're working on.

Yes. So I think we feel actually very comfortable with where we're sitting today. It's up 8% in dollars. I think it's down 12% in units. If you went back to our stores back in '18, '19, what you would have seen was what we call top stock. There was a lot of inventory brown corrugated boxes stacked on top of the gondola runs. It was -- we were carrying too much inventory. It was very inefficient. The goods would come in, they'd go into the top stock.

We didn't know where all the inventory was because it was hidden in cardboard boxes. So that 12% reduction in units really came out of that top stock. And so what you're seeing now, I think, is a much more efficient flow of goods through the distribution center, to the store. It hits the back stock. It goes out onto the sales floor versus going into some sort of top stock or back stock situation. So we feel really good with the unit inventory that we're carrying. We feel it's appropriate for where we are right now.

Look, you can always jam the stores and squeeze a couple of basis points of comp out of the equation, but that's not how we're going to play the game. We're comfortable with the way we're managing it. We're going to drive a profitable business and flow inventory and operate more efficiently.

And just one last thing. We're not perfect in terms of where our inventory is. I mean, there's still a couple of calibers and ammo and firearms here and there that we're a little light on. We still probably could use a little more cleated inventory. But in general, we're back in stock in most of the categories where we'd like to be.

Okay, great. That's helpful. And then as my follow-up, I wanted to ask on the new stores. I think you guys mentioned Panama City is even outperforming the one in Atlanta. Are you seeing outperformance in certain categories? And I guess, curious on, what are you learning in terms of marketing spend? Are you able to be more strategic than you thought? Just trying to think of as we move forward, how -- what kind of room for efficiencies on the cost to build, marketing can you improve upon on the store opening cadence as we think about accelerating it over the next few years.

Yes. I'll start and then let Michael pick up. But we are learning. One of the reasons why we opened the fewer number of stores this year, and we started with 1, 2 and we'll open more this fall, was -- we are getting a better understanding of what to do on all of the aspects that you had. When we open a new store, the mix, quite frankly, usually starts out on the hard lines of the store as people learn about us, and then the soft lines catch up. So we are seeing that trend continue in most of the stores. Although in some of the stores, soft lines have been the better portion.

We are getting smarter about the marketing that we do. And because of the way we're opening stores, our marketing is going to vary, and it's one of the reasons why we mentioned we opened a store in Short Bank, which is -- I mean, Short Pump, which is an area where we had not been in before to understand how we go into a new area versus an area like Atlanta where we had a presence and people knew what Academy was. And those are helping us, and we're going to evolve and improve the marketing.

The good news is that, as we said, overall, they're performing ahead of expectations. And another good thing is we are not having issues getting people to work in the stores. We appear to be a place where people look forward to working and want to work in the stores. So I think that we are seeing a good result, but there's still a lot of things that we can learn from them. And one of the things that Steve and Michael are doing is after each of the openings, we've had pretty intensive after-action reviews even though they were good openings to really take the lessons learned so we can improve.

Not a lot to add there other than, keep in mind, we haven't done this since 2019, and most of the team that's working on it is new. So everything we knew, we're going to learn from it. This is very much a test-and-learn year. We've got new markets, we've got existing markets, we've got adjacent markets. We're going into takeover spaces for the first time really in about a decade. Panama City was a takeover space in a good area of town.

We've got stores in more urban environments. And we've got a team that's got an appetite to learn. So we're using this year as a learning year as we ramp. And all the things that Ken said, we're focused on marketing, merchandising and across the board. We've got a team that gets together after every one of these and goes to the key learnings so we can maximize our success going forward.

I'd say the biggest change between store openings this year versus what we opened in '19 would be 2 things: first, localized assortments. I think we're better at localizing assortments than we were 3 or 4 years ago. And so the question you asked is, do we see certain categories outperform others? Yes, I mean, when you go into Panama City, fishing is doing a heck of a lot better there than it did at Conyers, right? And that's because we went in, had a good sister store process, really studied the market and built a bigger fishing assortment for that store versus we would for Conyers.

I'd say the second piece is if you go back, our marketing spend and our focus 3 or 4 years ago was broad blasted broadcast, newsprint. And we're a heck of a lot more efficient in our targeted marketing and seeding the market with look alike customers. And so I think both of those things are really different in our playbook currently than what we were doing a couple of years ago.

Our next questions come from the line of Greg Melich with Evercore.

My first question was about supply chain. Could you just quantify how much of a headwind that was in the quarter? I realized it drove the gross margin decline, but give a number?

Yes, I'll call it between 10 and 20 basis points. The headwind was really related to the increase in private label penetration, which is a good thing. So that was really the cause of the headwind. It wasn't due to the container cost or anything like that. It's the penetration of private label, which grew.

Got it. So there's sort of a net offset there in terms of mix, but...

Exactly, yes.

You take ownership of it.

Helping margins with that.

Yes.

And I guess, supply chain, that will -- that could continue as long as the private label mix is improving. Is there anything else on container costs or diesel costs...

No. The punchline there is it's better than we planned it. It's worse than last year, worse than last year but better than we planned it, getting better. But certainly, I don't think we're going back to last -- the way last year looked anytime soon. Again, we contracted some rates so we feel like we've got pretty good visibility to the cost. We're not in the spot market at all really anymore so we feel like we've got better line of sight to it.

Got it. And then you talked a bit about planning for more promotions. I guess I'd love to know a little more color on which categories you think the market is most at risk for that increased promotionality.

I don't know if I could narrow it down to a specific category. What I will tell you is, obviously, the fourth quarter every year is the most promotional quarter of them all. We've seen a lot of pullback in promotions over the past 2 years versus where we were in 2019 and prior. Our anticipation as supply chain starts to get a little better in stocks or in a better place. We saw last year -- last 2 years, candidly, a pull forward of demand in early November and in December when people saw something, they bought it and they didn't have to be incentivized by promotion to buy it because they were afraid it wasn't going to be there closer in the holiday.

I think people are starting to get back into the place where they're used to seeing the shelves full, people in stock. So I think that's going to probably incentivize people to be a little more promotional earlier on. We've accounted for that in our forecast and how we're thinking about it. It's not isolated to one category. It's where promotions lie. We have an underlying base of our business with everyday value that we don't promote off of. That's kind of our underlying value proposition. But we do have seasonal categories that come in and go out that tend to lend themselves to be a little more promotional and we bake that in.

Our next questions come from the line of Robby Ohmes with Bank of America.

I wanted to follow up on the commentary about the unit prices are driving the ticket. Could you give any color on how much price increases are supporting ticket? And is that sort of price increases on a lot of categories and like items or is it reflecting significant mix changes versus last year? And also, like how do we think about sustaining the unit price increases as we start to anniversary them?

I'd say a couple of things to that. If you look at the -- we cited our inventory in dollars is up 8% versus '19, down 12% units, which obviously implies a higher average unit cost. When we break that down, the biggest chunk of that is mix change, having more inventory in the higher-ticket things, outdoor Sports and Rec. The second one we called out is also an investment in building a better and best layer to some of our assortments. You take a category like baseball, where in the past, we didn't really sell bats and gloves north of $100. That now makes up a bigger chunk of our business, and it's, by the way, a very productive piece of our business.

And I'd say probably the smallest contributor to that delta would be cost price increases that have been reflected in retail changes on our side. So we certainly have taken those cost increases just like everybody else in the marketplace has. We've been very thoughtful about how we price the goods. And so far, we really haven't seen resistance to that. Our AURs are up in the mid-single digits and we feel like we counted for those price increases.

I'll point out also, being the value leader in our space is really important to us, and we spend a lot of time making sure that our prices are as good, if not better, than our competition in a day in, day out basis. We have price scraping tools. We monitor this all the time, constantly looking at this. And we're committed to make sure that the cost increases we're seeing, we'll pass along thoughtfully, but we're not going to let ourselves lose that value proposition or leadership that we have in our space.

That's really helpful. And just a quick follow-up. A lot of other retailers have kind of called out that there was a shift in back-to-school in -- that's benefiting the third quarter. Are you guys seeing the same thing?

I would say that we certainly have seen the back-to-school categories do very well at the tail end of July, heading into the back-to-school time period. We try not to give inter-quarter guidance. But one of the things we keep anchoring back on is that trend versus '19 being in kind of that 30s range. We've seen that continue through.

One of the things, Robby, that you have to keep in mind, in most of our markets, our back-to-school is earlier than what it is on the East Coast. We had kids going back to school literally the end of July, and almost all of them were back-to-school by the middle of August. And I don't think any of them are like you may have in the East and West Coast, where they're after Labor Day.

Our next questions come from the line of Brian Nagel with Oppenheimer.

Congratulations on a nice quarter. The question I have, just stepping back, and I know a lot of us has been focused on this demand environment. But as you step back and look at your business and how -- and what -- basically, there's stabilization now at a higher level -- higher than pre-pandemic level. Do you think is it more a function of just changes in consumer behavior? Or is it more a function of the substantial alterations that you've made in your company and the merchandising?

And then the follow-up question I have, some other -- and this is a follow-up to other people's questions. But with regard to private label, as you're seeing stronger demand for private label, is that -- should we think about in the case of Academy, is that the consumer trading down? Or is that just the consumer reacting to now a much better built-out private label offering from your company?

Well, I think with regard to the consumer, and I'll let Steve talk about the -- what we've done with private label. It's actually both of the situations that you put forward are there. There is definitely a shift in the consumer behavior. And I don't -- this is a long-term trend and it has to do with health and the people's desire for experience. And we are in both of those areas and the consumer is more interested in their health and wellness. So they're being more active and they are interested in experience, and that is what we sell. And that's important.

That said, at the same time that trend was going on, we made fundamental changes to the business and became a much better business. I've said many times, we're a different company than we were 4 years ago in that how we operate the business, all of the systems and things that we've done to improve that, the merchandise we offer, as Steve said earlier, about good, better, best and making sure that we keep that consumer with us. And with regard to the categories that we sell, we got out of (inaudible) categories to be able to focus on that sports and outdoors that the people are interested in that go with the trends. So you put those 2 things together, I guess, the term people use is the perfect storm, we're benefiting from that.

I would add a third one. The competitive environment is different. You look at some of the brands we carry, there's more controlled distribution than there was 2 or 3 years ago. You look at some of the categories we carry, competitors have pulled out of some of those categories or really downplayed those categories. And so I think it's probably the combination of those 3 things that allows us to believe that we're going to hold on to this and that it's structural and long term.

In terms of the health of the customer and trade down, I mean, we spend a lot of time talking about that. I mean, certainly, the strength in the private label could indicate there was some trade to value in our assortment. But we also saw strength in a lot of our international brands. And what we do believe is that our position as the value provider in the space and having a good range of good, better, best, well positions us to capture trade-down customers as we'll hold under existing customers because they can trade up and trade down.

But to the questions you asked, what we've done with the private label, we have continued to offer terrific value in things like our BCG brand and the Academy Chair and Wagon, which are terrific values for our customers. But the addition of Freely and R.O.W. and Magellan Pro have added to the strength of our private brand and continue to fill niches that really we didn't have in our assortment. And that has also been a big support of what we've done in the private brand. And things like what we did with Whataburger and what we're doing with Shiner, that's not chopped liver. That's some nice volume with some of the exciting ideas that we've added.

Our next questions come from the line of John Heinbockel with Guggenheim.

So guys, let me start with what work have you done with regard to wallet share by different cohort, maybe looking at enthusiast, casual customer? I'm curious, even with some of your better customers, how big do you think the opportunity is with their wallet? Is that still pretty significant?

I think we know that within our existing customer base, relative to our competitors, we capture a higher share of wallet and we think that goes back to our value. So I think there's always opportunity. One of the things that we strive to do is that broad and complete assortment, offer a one-stop convenient shopping experience. And we think as we continue to deliver on that, that opens up the opportunity for more cross-shops across the store, to get a higher share of the customer's wallet and at the same time, pick up other customers who are trading into our stores.

Yes, we are seeing both new customers. We continue to have about the same number of new customers this year as we did last year. But with our existing customers, our core customer's spending more with us and continues to spend more with us...

And shops more frequently.

And shops more frequently. And we are able to retain them because in the past, okay, the kid starts out in T-ball, but as they move up, it used to be, we didn't have a product for them. But now, as Steve said, we're selling much better gloves, Marucci bats. Same thing in camping. I was in a store the other day and a couple was looking at the North Face tents. And I said, "Are you campers?" Well, we bought the Magellan tent and now we want something that's better. So we're able to offer more to that customer with our assortment.

One other key thing I'll pile on here because I don't want to lose it, we are more popular with families than our peers. And so not only can we trade individuals into different categories across the floor because of our diverse assortment, we can trade the whole family into different categories across the store. So we think that's a big advantage for us.

And then maybe secondly, right, I know AUV is up over 30% since '19. I'm curious what's happening to the 4-wall store model, right? Imagine right, the new stores are opening up at higher levels than you might have imagined 2 or 3 years ago. Is that changing the economics significantly, right, in a favorable direction? Well, what I was going to add, when you think about gating factors on growth, right, because if that's true, right, you've got the capital. What is the gating factor, just people at this point that would limit whether you can do 20 or 25 a year?

Yes. We certainly had the most productive and profitable model in the business before we've had the run of success. And it's -- now it's just, of course, amplified, best sales per square foot in the category, most 4-wall profit in the category. We want to accelerate our growth. We've got the capital, to your point, we have the appetite to do it.

We want to do it well and that's how we're taking a very measured approach. Again, I'll go back to an earlier question. This is a test and learn year, and we're taking the time to do that before we step on the gas. But certainly, all the studies that we've put together, there is the ability to add up to 800 stores in the country at some point. And we're certainly going to do it in a responsible manner.

If you do the math on the 80 to 100 stores, as we progress through the 5-year period, we're going to continue to increase the number of stores that we'll open each year.

To be able to grow like we're growing and still deliver the free cash flow yield that we have, that will tell you that we can certainly do more. We just want to make sure we're doing it well.

That's the key, do it well.

Our next questions come from the line of Anthony Chukumba with Loop Capital Markets.

Congrats on the strong quarter. I guess I was just -- I just had a question in terms of, how are you thinking about your holiday marketing strategy, particularly given the fact that, like you said you do expect it to be more promotional? I mean, are you going to continue to shift your marketing spend more to digital? Are you going to lean more into your Academy credit card? Like how are you thinking about that?

I'd say yes, all of the above. I mean, our marketing spend and approach has been evolving a lot over the past 3 to 4 years. We were, as I mentioned earlier, very print-centric, very broadcast-centric going back to 2018, 2019. And when you look at where we are today, I think at the time we looked at it, maybe like 2% to 3% of our marketing at that time was targeted. And when you look at where we are today, it's the preponderance of the marketing is targeted. It's digital. So that shift in spend has been ongoing and continues as we move forward. And I think you'll see us really lean into that as we go into holiday.

One of the things that, that does that's actually good is when you used to do print, you had to have your pricing and everything done literally a couple of months in advance. But we can now respond and react to what's going on in the market down to a category to specific items and make sure that we aren't giving things away we don't have to, and at the same time, maintain that value proposition that we have.

It makes us more nimble and just more efficient overall.

Got it. Very helpful. Keep up the good work, guys.

Our next questions come from the line of Seth Basham with Wedbush Securities.

When you guys think about merchandise margin gains versus 2019 and clearance gains, well, think about merchandising margin gains and the components of improvement because of lower promotions in the industry and less clearance in your business. Which of those has been a bigger driver of improvement?

I would say it's the structural improvement in terms of the better management of inventory, better management of clearance. That is the biggest share of it. I'd say a smaller piece of it would be lower promotions in the marketplace. That being said, it's kind of hard sometimes to disentangle the 2. But when we do the work and try to go through it, it is definitely structural improvements are the lion's share of the gains.

Got it, okay. And when you think about the go forward then in terms of the negative potential impact to your merchandise margins going forward, do you think it would be potentially bigger from normalization of inventory levels impacting clearance? Or would it be promotional normalization in the marketplace?

Yes. I think the way that we look at it, we have the structural improvements that we've quantified. We believe there could potentially, of the 500 basis points roughly gain that we've had, we think depending on what the environment looks like, what our competition does and how we have to respond, there could be 100 to 200 basis points of give-back for greater promotion. That's how we look at it internally.

Got it. As it relates to a give-back from normalization of clearance levels?

Yes. Exactly, yes. competitive. Again, where you've got a counterpunch to maintain share to keep up with others. The other thing that I'd add, Seth, is we still haven't gotten the full impact from a normalized merchandise mix as hard goods is still outperforming to where it has performed historically in '18 and '19. So if apparel becomes a greater piece of the mix, we should get some margin benefit from that.

And private label.

And private label, exactly.

And I think that, that will be our last question. We ran a little bit over. I appreciate everybody's time and appreciate the interest. We feel we have a very strong story and excited about the future and hopefully, you all are, too. And as we head into the fall season, we're working hard and moving forward. And you all have some fun out there.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.