Academy Sports and Outdoors Inc (ASO) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Academy Sports + Outdoors Third Quarter 2020 Earnings Conference Call. Today is Thursday, December 10, 2020, and this call is being recorded. (Operator Instructions)

I'd now like to introduce your host, Heather Davis, Senior Vice President of Accounting, Treasury and Tax. Heather, please go ahead.

Good morning, everyone. Thank you for joining our call today. On the call with me are Ken Hicks, Chairman, President and CEO; Michael Mullican, Executive Vice President and Chief Financial Officer; and Steven Lawrence, Executive Vice President and Chief Merchandising Officer.

Before we get started, I want to go over some standard administrative matters. Our earnings release issued this morning is available in the Investor Relations section of our website at investors.academy.com. A replay of the audio webcast of this call will be archived on the Investor Relations section of our website for approximately 30 days.

As a reminder, statements in today's earnings release and some of the prospects 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 could differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's earnings release and in our filings with the Securities and Exchange Commission, including our final prospectus dated October 1, 2020, and our most recent quarterly report on Form 10-Q.

Any such forward-looking statements are based upon currently available information and our expectations, estimates, assumptions and projections as of today and are intended to be covered by the safe harbor provisions under the federal securities laws. The company assumes no obligation to update forward-looking statements to reflect events or circumstances that occur after the statement is made or the occurrence of unanticipated events.

Today's earnings release and this call also include certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP financial measures are included in today's earnings release and provided in the Investor Relations section of our website.

Now I'd like to turn the call over to Ken.

Thank you, Heather. Good morning, everyone, and thank you for joining us today. This is an exciting day as it is our first time hosting our quarterly earnings call as a public company. On October 2, 2020, Academy Sports and Outdoors started a new chapter as a result of the entire team's efforts from our 259 stores to the 3 distribution centers and our home office that support them. Over the years, we've given our customers not just great products but also great experiences. And we look forward to helping our customers have even more fun out there. We hope that you and your family are safe and healthy.

I continue to be proud of our team members and their commitment to serve our customers and our communities during the COVID-19 pandemic. All Academy stores, distribution centers and the corporate office are currently open and have continued to operate within government safety recommendations and requirements, providing a safe environment for our customers and teammates.

We've worked hard over the past several years to improve our competitive position as we move forward to our vision of being the best sports and outdoors retailer in the country. Our business has performed strongly during the past several quarters, beginning well before the COVID-19 pandemic. We've strategically invested in our key initiatives, including power merchandising, omnichannel and our focus on the customer. We saw these efforts continue to pay off in the third quarter of 2020.

Now moving to our financial results. As we announced earlier this morning, we had a remarkable third quarter with our fifth consecutive quarter of positive comparable sales increases. We achieved a record $1.35 billion of total net sales for the third quarter, with a comparable sales increase of 16.5%. Our comp sales were driven by increases in transactions, units and average unit retail.

From a divisional perspective, sports and recreation and outdoors were our best performing businesses. The sports and recreation division had a strong double digit comp increase. Bicycles, outdoor games, outdoor cooking and fitness equipment purchases drove our sports and recreation division.

Our outdoor division also experienced a strong double-digit comp increase, which was propelled by increases in our fishing, camping and hunting categories as our customers continue to participate in more outdoor activities. Comp sales for the footwear division decreased mid-single digits as a result of good sales in both athletic and work footwear. We saw low single-digit decrease in the apparel division due to the decline in licensed apparel as we anniversaried the strong sales from the Astros 2019 World Series appearance, as well as the impact from a changed back-to-school environment.

Our e-commerce experience continues to drive significant revenue and profit growth as well as deeper customer relationships. We've made our website easier to navigate, improved our content and added new services, all of which have improved the customer experience. E-commerce net sales increased 95.9% during the third quarter compared to the same period last year and achieved a 7.5% penetration to total merchandise sales compared to a 4.5% penetration for the same period last year.

Our buy-online-pick-up-in-store and curbside pickup program comprised approximately half of our overall e-commerce sales for both the quarter and the year-to-date. Including our ship-from-store, buy-online-pick-up-in-store and in-store retail sales, our stores were involved in over 95% of our total sales for the quarter.

Our third quarter sales were the result of our broad differentiated product offering, which lends itself well to the ongoing strengths of at-home fitness, staycations, road trips, and outdoor activities like fishing, camping, hunting and outdoor cooking and games. We offer fun for the whole family through a variety of products for many activities. Our everyday value also resonates during times of economic uncertainty.

We offer customers a convenient and safe shopping experience, both in-store and online. We're here for active families that love to make fun memories together, but we also show up for our communities during difficult times when fun is harder to find.

We are continuing to strengthen our balance sheet subsequent to the third quarter. In November, we reduced our debt by approximately $630 million and refinanced, and extended the remaining $800 million in debt through 2027. In addition, we extended our undrawn $1 billion ABL revolving credit facility through 2025. We believe these actions, along with our continued strong performance this year have positioned us for an ongoing financial stability.

Our inventory position for the third quarter have improved in almost all categories. Firearms and ammunition will continue to be challenged for the foreseeable future. However, inventory continued to flow in all of our divisions during the quarter, allowing us to experience strong sales. We've been working collaboratively as a preferred retailer with all of our business partners, including our merchandise vendors and logistics partners to improve our in-stock positions and merchandise growth.

While our third quarter performance was strong, we continue to work on our key opportunities to pave the way for the future. In our e-commerce environment, we've launched ship-to-store in advance of the holiday season and continue to focus on search and checkout optimization opportunities. In stores, we're focused on leveraging our systematic capabilities to further align team member schedules and responsibilities with the customers' traffic patterns.

In the supply chain, we continue to focus on distribution centers and logistics efficiencies by enhancing processes and systems optimization. In marketing, we continue to improve our targeted marketing capabilities to better communicate with our customers in a personalized fashion. In merchandising, our focus remains on continued advancements in our replenishment and allocation systems as well as product placement within our store environments.

With respect to our future outlook due to the high level of uncertainty created by numerous external factors, including the pandemic, we will not be providing guidance at this time.

Before I turn it over to Michael, I would like to thank all of our team members in our stores, distribution centers and home office for all of their hard work and dedication during this challenging year, which helped us to achieve these strong results.

Now I'll turn it over to Michael to review our financial results in more detail. Michael?

Thanks, Ken, and good morning, everyone. Overall, net sales for the third quarter were $1.35 billion, which is an increase of 17.8% compared to the same period a year ago. As Ken mentioned, comparable sales for the third quarter increased 16.5%.

The gross margin rate was 32.7% of net sales, which is 110 basis points higher than the third quarter of 2019. This 110 basis point increase was driven by strategic merchandising actions, such as lower markdown rates and lower clearance volumes, but partially offset by a sales increase in hardline categories, which generally carry lower merchandise margin rates, but do have a higher ticket.

Adjusted EBITDA increased 64.1% to a record third quarter performance of $145.7 million, up from $88.8 million in the third quarter of 2019. For the third quarter, SG&A was $359 million or 26.6% of net sales, which is 40 basis points lower than the third quarter of last year. SG&A included approximately $32 million in noncash and extraordinary items associated with our October IPO. Excluding these charges, SG&A for the third quarter would have been $326.8 million or 24.2% of net sales, a 280 basis point improvement from the prior year.

Now looking at our bottom line, net income increased 109% to $59.6 million or $0.74 per diluted share versus net income of $28.6 million or $0.38 per diluted share in the third quarter of 2019. Pro forma adjusted net income, which excludes the impact of certain extraordinary items, was $73.7 million or $0.91 per diluted share in the third quarter. This was an increase of 188% from $25.6 million or $0.34 per diluted share in the third quarter of 2019.

The increase in free cash flow for the third quarter was driven primarily by net income and the vendor term changes we implemented in the first quarter of 2020. As a result, our adjusted free cash flow was an inflow of $83.7 million compared with an outflow of $30 million for the same period a year ago.

On the balance sheet, we ended the third quarter with $869.7 million in cash and cash equivalents and no borrowings under our $1 billion ABL credit facility. Net of $21.1 million in letters of credit, our available liquidity, including cash, was $1.7 billion at quarter end, which is $730 million higher than the end of the third quarter of 2019.

Most of the proceeds received in connection with our IPO in October are reflected in the quarter-end balance sheet. However, subsequent to the third quarter, on November 3, 2020, the company issued and sold an additional 1.8 million shares pursuant to the underwriters over allotment option, resulting in approximately $22.1 million of further net proceeds.

Also, as Ken mentioned, subsequent to the third quarter, on November 6, 2020, we completed a debt refinance transaction, where we issued $400 million of senior secured notes and a new $400 million term loan facility, both of which mature in 2027.

We utilized the net proceeds from the notes and the new term loan as well as cash on hand to repay in full our $1.4 billion term loan facility, reducing our overall net debt -- reducing our overall debt by approximately $630 million. In addition, we extended our $1 billion ABL facility through 2025.

Our merchandise inventory at the end of the third quarter was $1.1 billion, which was $249 million or 19% lower than at the end of the third quarter of 2019. This reduction in inventory represents a significant sell-through of inventory to support our exceptional sales growth of 18.3% year-to-date and move us towards a better ongoing inventory position with pressured inventory.

While our current inventory position reflects the challenges of staying in stock, in certain categories that have been in high demand during the pandemic, we believe that our inventory is positioned well in those categories and that we're in a good position to make improvements into the future as our supply chain continues to improve to support our sales velocity.

Net capital expenditures for property and equipment were $8.1 million in the third quarter of 2020 compared to $20.8 million in the third quarter of last year, with the decline driven by no new stores and fewer store remodels.

Moving on to year-to-date results. Net sales increased $632.4 million or 18.3% to $4.1 billion, which included a 16.1% increase in year-to-date 2020 comparable sales. Year-to-date, net income increased to 112.3% to $217.2 million or $2.82 per diluted share from net income of $102.3 million or $1.37 per diluted share in the prior year. Year-to-date, pro forma adjusted net income was $208.6 million, up 257.6% from year-to-date 2019. This resulted in pro forma adjusted earnings per diluted share of $2.7 compared to $0.78 per diluted share for the year-to-date 2019.

Our 2020 year-to-date adjusted free cash flow increased significantly to $843.4 million compared to $42.2 million last year.

To conclude, we are pleased with our strong performance during the third quarter, excited about our accomplishments and proud of how our team members have been nothing short of inspiring during this challenging condition. I would like to reiterate Ken's thanks to our extraordinary team members for helping us achieve strong sales and earnings results.

This concludes our prepared remarks. We are very optimistic about our future as our key initiatives continue to drive strong results. We look forward to sharing our progress with you again next quarter. Now we'll take your questions.

(Operator Instructions) We'll take our first question from Robby Ohmes at Bank of America Securities.

Ken, congrats on a great first quarter out of the box here. Actually, I have 2 questions. For the question, just on athletic, the sort of footwear and apparel comps, I was hoping you could give maybe a little more color on how the outlook is there. So were there some things that happened this quarter that you think restrained footwear? And also on the apparel side, how much of an impact was there from -- at the Astros' last year? And maybe some color on how apparel looked excluding that? And maybe just some thoughts on the team sports side of that business as well? And how that looked versus what you may think that could be next year?

Yes. The apparel business was not as strong as it had been. And we were up against some big comps, and it was both from the license to Astros but it was also from a strong back-to-school last year. The Astros, we won't go into the details of what -- how much exactly it was, but we would have had a positive comp had we not had the Astros and on just the increase in Astros' event. So it would have been a positive comp without that.

And also, the back-to-school was a factor. It was more spread out. It was later, and it wasn't as big as it had been in the past. Both of those actually present good opportunities for next year because we would anticipate, particularly with the vaccine, and hopefully, things getting back more to normal, that there would be a regular back-to-school and we'd be able to take advantage of that.

And also, licensed apparel will -- should be stronger because there will be teams playing sports and more fan interest. So we had a couple of factors. The increased are the good -- we're up against a good year. We're up against the championship. And as I said, it would have been positive without the incremental Astros and the back-to-school. That gives us on top of -- and we still had a good quarter. So that should be a good plus for next year.

That's really helpful. And then just a quick follow up actually, maybe for Michael. The e-commerce penetration, could you just talk about the impact that had on gross margin year-over-year? And maybe just related to that, there's, I guess, about 4% to 5% of sales is e-commerce that is not running through your stores. Can you give us some color on what kind of margin pressure you get from that portion of the e-commerce business?

Yes. I think we've done a lot there, frankly, from a process standpoint, that's helped us manage the margins. I think again, that's the big thing that happened this year was the introduction of BOPIS for Academy. We get a bigger ticket with BOPIS, we get more repeat trips. And of course, we don't bear the shipping costs a bit. So we're happy with it. We think it's -- the introduction of BOPIS growing will be a tailwind from gross margin as customers have adopted that. We're happy with the progress there.

Robby, one other thing I wanted to follow-up on is your question about team sports. Our team sports business was positive for the quarter. I mean the delayed back-to-school moves and stuff, but we're very happy with how that's performed. And most of our categories within team sports were also positive.

We'll take our next question from Seth Sigman at Crédit Suisse.

Congrats on the quarter, Ken.

Thanks, Seth.

Great. Can you talk about some of the incremental merchandising initiatives as you look out into the fourth quarter, but more so into next year? Obviously, we all know that industry demand has been strong during this period. You're going to have to lap that. But there's also a lot of things with newer control. So how are you thinking about some of the key drivers for Academy specifically as you look out over the next 12 months?

Yes. I'll start, and then I'll have Steve comment on some of them. One of the big things, and we've talked about this, was our -- what we've done in planning and allocation and the systems to get the right merchandise in the right store and the right size, and the right quantity. And those systems are learning systems. So they, over time, continue to improve and enhance themselves. And so we get smalls and extra smalls in our border stores. We make sure we get the right type of grill with the gas grills in the Midwest versus wood and pellet in the South. And so those systems are very important.

And then we also continue to work with our vendors and are adding important merchandise to our assortment and broadening the -- particularly in our better and best categories what we're doing there. And then the third thing that I would say is what we're doing with our private labels and continuing to build on the private label programs that we have. We've got some new ideas that will be coming there, but also strengthening the programs we have. Steve, do you want to add?

Yes, I'll just add 2 things to what Ken covered. So in terms of planning and allocation, flow is a big one, which you mentioned. I'll also say markdown optimization there. We've been spending a lot of time getting our markdowns positioned in the right quarters, taking more markdowns in season versus post season, which ultimately is speeding up sell-throughs, improving turn and improving margin long term.

Another thing we've talked about is how we're building out a true good, better, best assortment across a lot of our categories. And we've always been pretty good at the good end of it. But you take the category that somebody asked about earlier in terms of team sports. We've gone in and built out better, best assortments there so that we can take that, that kid from kind of a beginner to an intermediate traveling team to an advanced level. And so from that -- that's relatively new for us, and we had a lot of that work that was supposed to take effect this year. And with all the week shutdown, we probably didn't get all the benefit of that work. So that should provide a tailwind in the future.

Improved store presentation. We're working really hard to make our stores more engaging, easy to shop, better presentations within vendors, et cetera. That also ties into our website as well. So that will be another one. And then Ken touched a little bit on localization, getting a lot better at utilization. So all those things, I'd say we're in early innings on.

Yes. I think the localization is one of the things that probably was one of our shortcomings. And while we have great assortments, people come to historical product and product that's appropriate for them and making sure -- and it's not just size, it's the type of product. But that localization is something that our merchants really are working hard on to fit each of our markets. And one of the things, as a result, we're seeing some of our new markets as we've implemented localization are our fastest-growing markets.

Okay. That's all very helpful. If I could just follow-up quickly on the gross margin this quarter, very strong, up 110 basis points. And more importantly, though, was stronger than prior quarters. So I'm guessing -- I'm curious, what was different in the third quarter versus prior quarters? You did have a mix factor this quarter, but I think you had that earlier in the year as well. So was mix less of a factor this quarter? Or the positive offsets just greater this quarter? Can you just give us a sense of what's going on within that.

I'm glad you asked that. I think really what's happening is all the stuff that Steve just talked about. I mean we've had nice gross margin expansion over the past quarter-over-quarter for the last few years because of all the stuff we're doing from the merchandising perspective that's allowing us to harvest our margin. So I couldn't agree more. We are very pleased with the mix shift that we've had. It's skewing more part goods, more outdoor, not anniversarying those Astro sales to have that gross margin expansion. We're really happy with it, and it's really attributable to all the merchandising issues that we talked about, which, by the way, are still early-stage to Ken's point.

Yes. And just the Astros sales, that was all full margin stuff. But really, you think about it, there are a couple of things that we've mentioned. What we've done in dot-com has helped, and looking at that, the approach that we've taken with the markdown optimization. And the third thing is what we're doing with our private label, where historically, we were running our private label really as a loss layer and not a margin enhancer. And we've improved the products and what we're doing there so that if the end can be margin accretive as opposed to margin dilutive.

As we look ahead, we do have a couple of businesses that have been challenged. License is one them, cleats, backpacks through back-to-school. Those businesses will be margin accretive next year as we expect them to return to more normal levels. So a lot to look forward to.

I'll just add on that. We are less promotional right now. We've dialed back promotionality certainly in a lot of the really in-demand categories. It just doesn't make sense, and particularly even with the back-to-school. So as we go forward into next year, that probably provides us an opportunity to put back some of those promotions we pulled out. And at the same time, we should have an offset from the mix perspective of apparel and total on bigger percent of the total.

We'll take our next question from John Zolidis with Quo Vadis Capital.

Congratulations.

Thanks, John.

So Ken, this is primarily a question for you, but I'm interested in everyone else's thoughts as well. I think one challenge here is trying to separate out what's happening from a category demand perspective versus internal initiatives at the business. And maybe if you could provide us some perspective about how you were thinking about Academy before you took the role, the initiatives that were working to drive the positive inflection in same-store sales prior to the pandemic?

And then now with the accelerated consumer demand, has that accelerated the realization of the opportunity you saw? Or maybe you could tell us what inning perhaps you think we're in, in terms of what's left to do and what you see going forward in terms of optimizing the business over the long term?

Thanks, John. When I got here, one of the things and I -- when I go to a company, I go to a place where I think there's tremendous opportunity. And I've been fortunate in having very strong teams that have helped capture that opportunity in the past and here. And I saw the opportunity here. We've built a strong team. And the thing that really, quite frankly, we have started the turnaround a year ago before COVID hit seems like ancient history. But we started to see the results. And I believe that we would still be seeing above-average store-for-store growth without the tailwinds that we've got to some degree from the pandemic.

And the reason I believe that is because the strategy that we put in place, we've seen the results. That strategy actually really helped position us well. For example, doing what we did with our dot-com. That was very fortuitous because we had a really crappy dot-com system. Doing what we did with our systems, so we could not just stay in stock but flow the merchandise. Because flow, because of what's happened with inventories, is so critical. We've got reduced inventories, but we're moving them through the system so fast that we're not seeing the impact of that as we probably would have before.

So I think you said it, that what this situation has done, it's accelerated our learnings. But I still believe the strategy that we had were before, it's worked during, and it positions us even well because it's like running in the mud, okay? We're running in the mud right now, but our legs are stronger. So when we get to solid ground will be in even better shape to move forward and take advantage of that. And I think we will continue to have good solid growth, good solid profit growth going into the future after the pandemic. Hopefully, that answers your question.

We'll take our next question from Chris Horvers at JPMorgan.

So a couple of questions. First, you talked about a shift in timing of back-to-school. And I know there are some big districts in Texas that pushed school back a few weeks or maybe even a month. So can you talk a bit about the cadence of the quarter? And you also have the benefit of having Black Friday and Cyber Money behind you. Curious what you're seeing so far. And how do you think about the sort of risks and opportunity as you get into sort of cooler weather patterns and how that could impact the overall momentum in the business that you're seeing?

Yes. The same was that there were 3 issues with back-to-school or 3 things that happened with the environment. One, it was later, as you said, and so what normally would have happened probably in August, we started to see in September and October.

The second thing was that it was spread out because historically, the school districts will use Texas since that's our largest state, start the third -- normally would start by the third Monday in August. And they actually spread out from the third Monday in August all the way until the mid of October. So we're spread out.

And the third part of it was, there was still a lot of kids who didn't go back to school because in many of the districts that was left to the apparent option. And in some districts, less than half the children went back to school. So they didn't have to buy all the stuff that they would normally buy or -- and go back to school. And there also were team sports that didn't start up. So it was later, more spread out and smaller than what it historically would have been without -- with the normal back-to-school, which we would anticipate seeing next year. What was the second part of your question?

Thoughts on quarter-to-date. You have the big Black Friday in setting...

No. We're not going to give any direction on the current quarter, other than saying that the trends that we've seen in the overall trend that we saw in the third quarter has continued into the fourth quarter.

Understood. And then on the balance sheet, obviously, you generate kind of cash, big deleveraging moment here in early November, which is great. How are you thinking about working capital into year-end? And how much of rebuild do you expect to be in 2021 if you look at inventory per store or per foot?

And then related to that, your accounts payable to inventory ratio is 2x what had been historically. How are you thinking about where that settles out and the ability to maintain such a high AP, the inventory ratio? Because clearly, you're going to be sitting on a lot of cash and generate a lot of cash. And we understand you're committed to continuing to deleverage the balance sheet. Just trying to think about the potential of that next year and timing of that next year.

Yes. From an inventory perspective, I'd say there's probably $150 million of inventory we'd rather have right now that we've been chasing hard to get like everybody else. There's just, as you know, worldwide shortages in some categories that have been -- we're still getting the product and selling it, we're just not getting back to minimum presentation quantities that we'd like to have. So that's how I think about inventory.

From an AP standpoint, I think one of the really good things that came out of the pandemic was the strengthening of our vendor relationships and good results generally help with that. As an essential retailer, we never closed. We were able to place orders. We were able to pay our vendors. We were able to pay our landlords. And we were able to work with them on the strength of that relationship to help extend our terms. Really, we were behind our peers for a while there. We were -- and all goals have fair treatment. I think we're in a fair place, and I wouldn't expect a lot of giveback there going forward. And that's how we think about this.

Yes. One of the other comments, and it relates to your first question, is because we were and we saw what was happening, Steve and his team were able to place a lot of the orders and merchandise that other people weren't. They were actually canceling goods, and we were placing orders. So we feel, starting in the third quarter and going forward, on a number of categories, we're probably in a better position than some of the competition because we did place those orders and are flowing them in now and for next year.

We'll take our next question from Tom Nikic at Wells Fargo.

I wanted to ask, I know you've been trying to drive loyalty with the Academy-branded credit card. Can you talk about what you've been doing there, the performance of the credit card over? And anything sort of interesting from a royalty perspective would be helpful.

Yes. We're really happy with these initiatives and how they progress. We've added over 3 million new customers this year, with specific -- especially with the credit card program, which we've really designed to have a loyalty feature to it. We're happy with it. I think you recall, we were 4% penetrated as of the end of Q2. That number is running around 6%, currently. So we're very happy with the growth. Those customers shop us more often. We get a nice basket uplift with them. And it's a great program that we think has a lot of room to run and the customer gets 5% off their purchase every day, they don't wait for a coupon in the mail, they don't have to accumulate points, and the bank funds that discount. So it's a great program for us. It's growing nicely, and we're happy with it.

Great. Glad to hear that. A quick follow-up, more of a sort of housekeeping item. With the $630 million reduction in debt early in Q4, Michael, can you let us know, I guess, what the interest expense savings will be from that debt paydown?

Yes. Let me get -- it's about -- yes, about 30. So the (inaudible), yes.

We'll take our next question from Greg Melich at Evercore ISI.

Congrats on a nice opening quarter, guys.

Thanks, Greg.

On the comp breakdown, you listed transactions. Does that mean that, that was a majority of the comp in the quarter? And if you could give us a little insight on how the trend on transactions was through the quarter.

No. We have all elements of the purchase, the transactions, the unit per transaction and the average ticket were all up for the quarter. And then we don't have counters in all our stores, but we have counters in some. And the traffic that we saw was up and it was well over the rest of the industry.

Got it. So I think of it as the plurality. Traffic and transactions was a key part of it, but it wasn't a majority of the comp.

Yes, it was all the elements. When you're up 16%, you need everything quick.

Absolutely. We're working. So then on that front and being able to do that, I mean, how long can you keep growing like that with inventory still missing that would be down 18% year-over-year? Or I think, Michael, you mentioned you wish you had $150 million more. If we think about that, how long can you keep this up if you can't get that inventory?

We're like [in special race], we're running as fast as we can. And really, we've kept it up now for a number of months. And the reason is, first of all, we're catching up with a number of businesses. So it's not as extreme as it was. But what's happening is we are learning how to flow the merchandise much better. Michael used the term properly. The presentation standards aren't necessarily what we would like. But the sales have continued because it literally, we'll get a lot of bikes on delivery to a store, and in a day or 2, they're all sold. And then 2 days later, they get another load. And the customer has learned using online to find out what the inventory is. And we think we're going to catch-up that the customer is coming just as rapidly as we're getting it in. So we're not able to present it the way we like, but we're able to sell it the way we like.

And it's betterly improving. And we've improved week over week for the last several months here. So we are improving. But there's just the sales velocity in some of these categories...

Yes, the velocity, but it's really flow. It's what Steve mentioned earlier. Flow is really critical. And to be quite frank, there's only about 2 or 3 businesses now that are really an issue, guns, ammo; and bicycles; and some parts of exercise, dumbbells, would be one. But other than that, most of the others, we feel that we might not be exactly where we want, but we're at an acceptable level.

I'd just add that what's really interesting is when you have how long can we keep this up. I mean certainly, as we went through this, we looked at certain categories and said, well, is this pull forward, is this not. And we have to put our best thinking cap on as we did that. As we've gotten back in stock, we've actually seen a lot of trends accelerate because we actually inventories in some of these categories where other people haven't. And so it's not that we're not procuring a lot of inventory and have been chasing them, but even bringing it in, it's very hand to mouth, so we can accelerate some of these categories.

And if I could cheat and sneak in one more. With the new customers, I know that's been a focus as you get new customers or reengage customers. Could you give us an update on the things you're doing to make those customers sticky and maybe having come back next month or next year?

Sure. We have a really good grip on who they are. We know how to reach them. We've been marketing to them. Digital, some print delivered via mail and have been talking regularly. And our goal is obviously to keep all of them, if ultimately possible.

So -- but longer term, what really is going to keep these customers and other customers shopping with us is moving away from traditional kind of blast media, traditional media that's broad broadcast, whether it's newsprint, broadcast and more digital personalized messaging. So we've been evolving our marketing spend and how we communicate with the customer across those channels. We're doing a lot more of that today than we were doing a year or 2 years ago, and we're going to get more personalized going forward and talk about the things that they're purchasing and make sure that we're speaking with what things we're interested in.

So Greg, it's 3 million new customers, the growth of Academy credit are very exciting. I think the most exciting thing that we have going on from a customer perspective is we had a number of customers who have shopped us for a long time. The new to category existing customers is growing greater than it has in the past. And what we're seeing is those customers shopping that new category, a second and third time, more than we have in years past. So that, I think, bodes very well for kind of some of these trends moving forward.

We'll take our next question from John Heinbockel at Guggenheim Partners.

Let me start with better and best, right, with people having more money to spend at home. Is better and best selling sort of the flow-through of that versus good, are those stronger lines for you? And where are you in the build-out of better and best? I don't know how you want to describe that. But how much more to go is there on those volumes?

Yes. I'll start with kind of the principle and Steve to talk about some of the specifics. But in principle, we have a very strong position in good. And so as a beginner or novice, we were there. And as people grew and developed, we probably didn't have as good an offering. We have an offering, but not as good as we would like in the better and best for the enthusiast.

The expert, the person is going to sleep on a mountain cliff on a hiking or a camping trip, that's not us. But for a person who got a hobby and is developing, that's what we want. And so that was why we developed. We got out of some categories, which provided the inventory and space for it, but the idea was not to reduce what we had with the opening price for that initial customer because we're strong there, and we didn't want to run away from them. We want to continue to support them and allow them to grow with us. And I'll let Steve talk about kind of where we are.

Sure. So one thing I want to make sure I emphasize is that one of our key strengths is our value position in the marketplace. So I don't want anybody to mistake the fact that while we're trying to layer on a better, best piece offering that we're somehow -- that's foundational to who we are. And we really make sure that we address that.

But to Ken's point, it's really different by category. So you go through and you think about a category like grills or outdoor cooking where we've had a pretty established business there for a while. We're further along in terms of building out that better, best piece of the assortment. And what we're finding is customers who came to us for an opening price for our 6-burner grill are now stepping up to a Traeger pellet grill.

So we're seeing growth in those categories, not at the expense of good. I'd say fishing is another one where we're a little more further on the journey in terms of having the better, best out there. Other categories like camping, as Ken mentioned, we're probably in early innings on camping, building out a better, best. We're making some progress for next year. And I'd say sporting goods, in certain categories, we're a little early innings there as well.

Great. And then maybe secondly, what do you guys think about how well the business is doing, the idea of maybe pulling forward? You restart in-store expansion, is that -- could you do that? And is that desirable? And then maybe along with that, thoughts on capital allocation since the balance sheet has strengthened so quickly. Maybe for Ken, thoughts on how you want to use free cash flow going forward?

Yes. To the first part of your question. The challenge with the new stores is just the time that it takes to make sure we find the sites. And we have done that preliminary work that the detail work. And then also getting -- lining up the construction and things. That, as you can imagine, is reasonably challenging during what's going on with COVID. So if we find something that we can move quickly on next year, we will. But we -- the challenge is just the time it takes to make sure we have a really good site because we don't want to compromise and then build it. And that was why we said 2022. But if the right opportunity came up, and we could do it, we would do it in '21.

With regard to capital, again, we're in unsure times. We'd probably will be a little more conservative now than what you might have seen in the past. So we'll be conservative there and make sure that when we -- how we think about capital in terms of what we do with dividends or buybacks. We are in a very solid position. We will first make sure we're taking care of the business and our opportunities to grow and develop the business. And then we do want to make sure that we recognize and award our investors. But at this time, I think the prudent thing to do is to be more conservative than less.

And we'll take the next question from Michael Lasser at UBS.

This is Mike Schwartz on for Michael Lasser. You touched on it a bit earlier, but do you have a sense of what portion of the growth that you're seeing has been from wallet share gain with existing customers versus attracting new customers? Looking forward, how do you think Academy in the sporting and retail category more broadly is positioned to last some of these wallet share gains in a normalizing environment?

Well, again, I mean, we've captured 3 million new customers since the beginning of the pandemic. We are gaining share in many of our categories. I mean footwear, apparel has specifically been gaining over the past few years. I think that there's a little bit of noise that we were -- we've had strong sustained results through the majority of the year where others were shut down. So with respect to share, I mean, there's a little bit of noise in there because we were open when others weren't. And I think, Steve, I don't know if you want to add anything with respect to teams or to some...

Yes. So in terms of the share conversation, we've picked up a lot of share, obviously, in Q2. We've looked at some categories and actually gave up a little bit of share in Q3 based off of being out of stock in certain categories that we've sold through candidly in Q2 that other people were in stock but closed down. We're back in stock there, and we feel very good about how we're positioned for holiday and going forward.

And Michael, we are not -- at this time, we're not breaking down the amount of business we do with the new customers versus existing customers, or for that matter what Michael talked about, which is important, existing customers shopping in other categories. We will say that they are all accretive. It's kind of like what I said about the 3 components of sales. To get a 16% increase, you need all of them heavy, and they're all heavy.

I think what we found in this was we carry a very broad assortment in our stores. And I think we found customers who generally shop us for one category, not a rolling category, discovers that we carry a lot of the extra categories. And so we've seen that definitely be something that happened as the pandemic continued since then, where they're shopping more broadly across the store.

That's helpful. And as a follow-up, are you seeing much variation and trends across different regions within your footprint? Is there any performance differentiations between some of the legacy markets and some of your newer markets as this [drags] on?

No, we -- I'm sorry. No. Michael, one of the things that really good about what we're seeing. And I mentioned earlier that our nonheritage markets are growing faster, but not that much faster than our traditional. We're seeing good growth across our entire footprint. And that's impressive because some of the areas are having their own challenges, be it the pandemic or industry issues or things like that. But we're seeing some pretty consistent growth across the categorical ranges.

At a category level, I think to Ken's point, as the newer markets, particularly the East Coast markets are out comping the chain, and that's where we've seen a greater rate of new customer acquisition. So very, very exciting.

We have time for one more question. We'll take our next question from Daniel Imbro at Stephens.

This is Andrew on for Daniel. I just want to say, really impressive quarter. And I kind of want to drill in on SG&A and what's kind of driving your leverage. Those 2 expenses are up about $18 million this quarter over last year, excluding the nonrecurring costs. So what's making up this delta? And what else is driving the impressive leverage this quarter?

Well, good sales help to do that. And that's the one thing we benefited probably. The other thing that's really happening to the point I just made is that the newer markets, they're achieving the scale that we expected to achieve. So we're able to leverage the fixed costs that we have in those markets.

I think the other thing is through COVID that we learned is how to operate a little bit more efficiently across the board. Even we've done a lot from a labor standpoint in our stores, making sure that we're not cheating the customer on labor hours, but not doing things we don't need to do from a cost perspective. And then again, the other big one, which is really a game changer for a P&L prospective is BOPIS. And we've doubled this out for our dot-com business. And now we're driving bigger baskets to the store as opposed to the shipping products from the DC or from the store. That's all accretive.

And we also did take some actions to improve our expense structure as coming through forward, with things that we felt that we could save on. And that's also given us the opportunity to look at other areas where we can save. So we've got some work to do. While we're pleased with the improvement, we've got some work to do to continue to improve our SG&A.

Thank you, operator, and all the participants on the call. Hope that you'll all have a very safe and happy holidays. Wish you all the best and hope that all of those who's tucked-in or go online to shop in Academy get great gift for your family and yourself. Happy holidays.

This concludes today's call. Thank you for your participation. You may now disconnect.