Financial reporting day for the fiscal second quarter did not start well for Academy Sports and Outdoors, Inc. as ASO shares fell in early trading on concerning news about cuts to guidance after top-line declines and issues with a new distribution center, major storms and tornadoes in key markets and a hurricane in its home market. But the second-largest sporting goods retailer in the U.S. made out great by the time the market closed as shares ended up more than 5.2 percent despite the company cutting guidance after coming up short in the quarter.

Analysts, in general, took the reduced guidance in stride as an action some saw as expected, while others pointed to renewed energy at the retailer as comps in August turned positive, giving a lift to the early Q3 period after declines in the second quarter. A positive footwear business in an otherwise negative Q2 period bodes well for the final back-to-school numbers. Bottom line, Wall Street found that the three events that were outlined in the company’s conference call with analysts that had the most impact were really one-time events and not trends after the retailer was able to assign a specific financial impact of each event to work into any trend models.

But while those events and events could be modeled away to assess a less negative underlying comp trend, the impact of the economy on the retailer’s core customer base was another issue that was out of the retailer’s hands but clearly had an effect on the business for the quarter – and that issue isn’t going away anytime soon. Instead, Academy will focus on the things they can control and laid out plans to improve the business by focusing on new store growth to drive top-line sales, a technology focus on the company’s internet business, and driving productivity of its existing business.

The company reported that sales for the second quarter came at $1.55 billion, which was down 2.2 percent versus the second quarter of last year and translated into a negative 6.9 percent comp on a shifted calendar basis due to the 53rd week in fiscal 2023. The decrease for the quarter was said to be primarily due to a decline in store traffic compared to last year. Comp transactions declined 7.4 percent, while the comp ticket increased by 0.5 percent compared to last year’s second quarter period.

“The active young families that we primarily serve remain under financial pressure. They are struggling with reduced spending power, driven by price inflation coupled with higher credit card debt and delinquencies, both of which remain well above pre-pandemic levels. We continue to see these factors constrain household spending on discretionary goods in the near term,” commented company CEO Steve Lawrence on a conference call with analysts.

“Our primary customers, those with annual incomes of between $50,000 and $150,000, remain very budget conscious and cautious, showing low consumer sentiment for certain discretionary categories. We also see an increase in credit card and buy now pay later usage in conjunction with household debt continuing to reach multiyear highs. So while inflation has moderated, prices are still high and that along with an increase in personal debt is impacting spend in our category,” added company CFO Carl Ford on the call.

“At the same time, we faced a very active storm season during the quarter, which included tornadoes in Houston and Dallas in May, and Hurricane Beryl in July, both of which disrupted the business in some of our biggest markets for several weeks during the quarter,” Lawrence added. “Hurricane Beryl was particularly impactful and left a few million people without power for multiple days. After making certain all of our team members were accounted for and safe, we started reopening stores as quickly as possible and began reaching out within the local communities to provide assistance where we could. As part of the recovery effort, Academy donated nearly 200,000 bottles of water to help provide relief from the summer heat to those without power. We also provided financial assistance to more than 450 of our associates through our team member assistance program. I’m very proud of the team for their efforts to quickly deploy the supplies to help out the communities we serve.”

Lawrence said they estimate that these events negatively impacted sales for the quarter by approximately $16 million, or roughly 100 basis points in comparable store sales.

He noted the other challenge the company faced had to do with some of the issues that arose as it converted its Georgia distribution center to a new warehouse management system.

“As we mentioned in our last call, the initial switchover went smoothly. The main issue we faced was that the ramp up in productivity from the system scaling up could not keep pace with the accelerated throughput we needed to keep us fully in stock during the large volume weeks we experienced during the key summer months,” Lawrence explained. “Working through these sorts of issues is par for the course in these types of systems implementations, and at this point we’re now mostly caught up in this facility and believe it will be ready to take on the accelerated volume we will see as we ramp up for the holiday season.”

He said their estimate is that the out of stocks created by the DC issue cost the company approximately $32 million in sales, or roughly 200 basis points in comps.

“We intend to apply the learnings from this go-live to our Cookeville, [TN] and Katy, DC rollouts to help minimize any impact on our sales,” he noted. “At this point, we believe we will convert our next DC in Cookeville, TN in early 2026.”

While the company was not happy (or satisfied) with the Q2 results, Lawrence reinforced that the goal remains to grow market share, and Lawrence said they are pleased that they continue to hold on to the lion’s share of the business picked up over the past five years, and with Q2 sales running up 25 percent versus pre-pandemic levels.

“The trends we’ve cited in previous calls in terms of customer shopping patterns continue to hold true,” the CEO said. “We’re seeing customers coming out to shop during the key moments on the calendar and then pulling back on spending during the lulls. Sales results during key events such as Memorial Day, Father’s Day, and the 4th of July were solid and in line with our expectations.”

However, he did say the back-to-school business, which straddles Q2 and Q3 for Academy, was weaker than anticipated at the end of July.

“As we turned the corner into August, we saw that customers were compressing their shopping closer to the school start dates, which shifted some volume from late July into August,” he continued. “Looking at sales across both months, we’re pleased with the overall results for back-to-school and the solid start to Q3 that it gave us.”

Lawrence did admit that the business outside of these key time periods was more challenging than anticipated, primarily driven by the storms and DC conversion issues.

“When the customer does come out to shop during the key events of the calendar, we continue to see them gravitate towards value as well as the new and innovative items in our assortment,” the CEO said. “We will continue to leverage these customer shopping behaviors by leaning into our position as the value leader in our space across all touch points. Our approach is to drive traffic with strong everyday pricing day in and day out, while focusing our promotional efforts into the key shopping moments on the customer’s calendar. At the same time, we will continue to incubate new ideas and roll them out aggressively as they resonate to ensure that we’re delivering a steady diet of newness to our customer base.”

Category/Division Sales
Looking at categories, on a non-shifted sales basis, Footwear was said to be the best performing division with sales increasing 1 percent over last year. Kids and Athletic Footwear outperformed for the quarter, driven by increases in Nike, Brooks, Asics and New Balance. Work Footwear was also said to be a key contributor for the period, with strong sales in Ariat and Wolverine. Lawrence said they were also “pleased with the momentum” they are seeing in the Casual business, driven by Birkenstock, Crocs and Skechers.

The Outdoor division also ran a 1 percent increase during the quarter, with continued strength in the Hunting and Fishing businesses. Drinkware also reportedly remains a strong trending category with Yeti, Stanley and Owala, all consistently delivering a strong pipeline of newness. Owala was called out by Lawrence during the Q&A session as maintaining growth right along the big two drinkware guys.

Apparel sales were said to be down 2 percent for the quarter, with the Kids’ Apparel business running “a solid increase” for the period. The Adult Outdoor and Athletic Apparel businesses reportedly performed in line with the average for the Apparel division.

“Across both adult and kids, we continue to see strong results from key national brands such as Nike, Carhartt and Levi’s, while also seeing solid growth in some of our newer private brands such as Freely and R.O.W.,” Lawrence noted.

Similar to Q1, the Licensed Team Sports business underperformed, primarily driven by slow starts by the key professional baseball teams in ASO’s key regions, including the Rangers and Astros.

“As a reminder, the bulk of this business is done in the back half of the year and we remain optimistic about our ability to turn this business around as we head into college and pro football season,” Lawrence noted.

The CEO said that the Sports and Recreation business was the most challenged division with sales down 7 percent in Q2 versus last year.

“We were encouraged by our Team Sports business, which ran a modest increase during the quarter, primarily driven by Baseball, Football and Pickleball, but that was not enough to offset the declines we continue to see in several of the big-ticket, long replacement cycle businesses,” Lawrence shared. “Certain Sports and Recreation categories such as Pools, Trampolines and Fitness, along with Kayaks and Power Marine and Outdoor division continue to be some of our softer businesses.”

To help manage through these slow sales trends, Lawrence said they are rightsized the inventory, floor space and marketing investments for these businesses to align with their current sales contribution.

“As I covered on the last earnings call, we also continue to invest in new ideas and brands as a way to spark demand and stabilize the trend lines in these categories,” Lawrence continued. “We’ve seen some early encouraging results with some of the new ideas in Fitness that started landing later in the quarter, such as walking pads, and we will need to continue to monitor progress here as we move forward throughout the fall.”

Lawrence continued, “At this point, we’ve made it through many of the key selling events for 2024, including a strong finish to back-to-school which just wrapped up in August, and we’re now more than halfway through the fiscal year. Year-to-date sales through August are down 2.9 percent to last year, which translates into a negative 5.4 percent comp on a shifted basis. We believe that most of the economic factors suppressing consumer spending on durable goods will continue throughout the remainder of the year. Based on this and our year-to-date results, we believe it is prudent to revise and narrow our annual guidance.”

Academy is now forecasting sales for the full year to range from $5.9 billion to $6.07 billion, which would be a 4 percent to 1 percent decline in total sales versus last year, and a negative 6 percent to negative 3 percent in comp sales.

Lawrence said the team is laser-focused on aligning expenses, receipt flows and inventory with this revised forecast.

Income Statement Summary
Gross margin rate came in at 36.1 percent of net sales for the quarter, or a 50 basis point increase versus the year-ago quarter, primarily driven by inventory cost management and lower freight expense.

“Despite the softer than anticipated sales trends, we remain focused on our inventory control disciplines, which we believe will enable us to achieve our full year gross margin rate guidance range of 34.3 percent to 34.7 percent [of sales],” Lawrence noted.

Ford said shrink was five basis points better than last year as a percentage of sales.

“Our second quarter SG&A expense of $368.6 million was $16 million, or 150 basis points higher than Q2 of last year,” he noted. “All of the increase is attributable to spend on our growth initiatives, primarily for new stores and technology. We are confident in our long range plan and are committed to investing in it, while also controlling our existing cost structure,” he said.

Overall, in the second quarter, Academy had a double-digit EBIT margin rate of 12 percent of sales and generated net income of $142.6 million and diluted earnings per share of $1.95.

Adjusted net income, which excludes stock-based comp of $8 million, was $148.6 million, or $2.03 in adjusted earnings per share.

Balance Sheet
Academy Sports and Outdoors, Inc. ended the quarter with $325 million in cash.

Inventory balance was $1.37 billion at quarter-end, an increase of 4 percent compared to last year’s second quarter-end.

Total inventory units were said to be flat, and this includes having an additional 15 stores compared to the end of Q2 2023. On a per store basis, inventory units were down 5 percent.

Ford said the merchandising team continues to do a great job of managing inventory in sync with sales.

Cash Management
“In terms of capital allocation, our strategy remains the same, to execute against our three pillars, which are; one, financial stability; two, self-funding our growth initiatives; and three, increasing shareholder return through share repurchases and dividends,” Ford outlined. “We believe these priorities will help drive future sales and earnings growth as well as increase shareholder value.”

In Q2, Academy generated approximately $91 million in cash from operations.

“We invested $41 million in our growth initiatives, repurchased approximately 1.8 million shares for $99 million, and paid out $8 million in dividends,” Ford detailed.

Year-to-date, he said Academy has generated approximately $217 million of Adjusted free cash flow, compared to $136 million during the first half of 2023.

“This is a 60 percent increase, driven by strong retail operations across Academy,” he said. “Tangible examples include; one, disciplined inventory control leading to a decline in units per store; two, managing promotions in a strained economy resulting in 10 basis points of year-to-date gross margin rate expansion; three, controlling expenses while investing in growth initiatives; and four, reducing the amount of capital it takes to open new stores.”

Finally, he said, the Board recently approved a dividend of 11 cents per share payable on October 17, 2024 to stockholders of record as of September 19, 2024.

Key Initiatives
“Beneath the surface, we continue to see some green shoots in our business as our growth strategies from our long range plans start to take root. As a reminder, those are opening new stores and expanding our store base, building a more powerful omni-channel business and driving greater productivity out of our existing businesses,” he continued.

New Store Growth
New store growth remains the primary sales driver for ASO, and for the second consecutive quarter, Lawrence said “the 2022 vintage of new stores posted a positive comp despite the challenging economic backdrop.” At the same time, he said they are continuously applying learnings from each new store opening to future vintages, and remain pleased with the sales trajectory for both the 2023 and 2024 vintages of stores.

During the quarter, the company opened one new location in Zanesville, Ohio, the first store in the state, expanding the Academy brand to 19 states.

“As we’ve discussed previously, our goal is to quickly build density in these new markets after we enter them,” Lawrence said. “So you’ll see our second Ohio store open up this fall, with several others planned for 2025 and 2026.”

He said while Academy currently only has nine stores from the 2022 vintage in the comp base, they will lap the majority of the 23 stores opened in 2022 in the back half of the year and into early next year.

“We expect the contribution from new stores to increase their impact on the total company comp sales trend,” Lawrence added.

Year-to-date, Academy has opened up three new stores and are currently on track to hit its goal of 15 to 17 new stores this year.

DotCom Focus
“In terms of our second growth initiative, our dotcom business ran its third consecutive quarter of positive growth and our penetration increased to 9.7 percent of total sales, which is 30 basis points over last year,” Lawrence detailed. “While it is still early days and the contribution level is still low, we’re encouraged by the performance of some of our new capabilities, such as same day delivery, powered by Door Dash”

He said the the initial analysis of the Door Dash data indicates that the business generated through this platform is accretive as it attracts both a younger customer along with customers who tend to live in more dense urban city centers, where Academy doesn’t have a large store presence.

Drive Greater Productivity
“The third leg of our growth strategy is to drive greater productivity out of our existing business,” Lawrence reiterated. “We expect that a key contributor to this will be the work we’re doing around expanding our customer base while also cultivating a deeper engagement with shoppers who are already in our ecosystem.”

He said that during the second quarter, the company launched My Academy Rewards, which rolled out to all stores in early July. The CEO said it is meant to supplement its Academy credit card, which remains the highest tier in its loyalty program.

“We know that our best customers are omni-channel shoppers and they shop with us three to four times more frequently than a single channel shopper, and that on an annual basis they spend four times as much with us,” Lawrence said.

“To reiterate, we’re not satisfied with year-to-date results, but are encouraged by our performance during the key shopping moments in the calendar, including the strong finish to back-to-school,” Lawrence concluded in his prepared remarks. “The team is moving with urgency across all fronts and is single-mindedly focused on improving our top-line performance. While we cannot control many of the economic factors our customers are dealing with, we can control how we deliver in market, value and newness to our customers on a consistent basis, which should lead to improving our top-line performance while maintaining our bottom line profitability. Our focus remains on managing through the short term by growing market share while also planting seeds for the future executing against our long range growth platforms.”

Outlook
Based on the current state of the consumer and our year-to-date results, we are revising our previous guidance for fiscal 2024,” reported Carl Ford. “One note, in addition to GAAP measures and adjusted free cash flow, we are also providing guidance on two non-GAAP measures, adjusted net income and adjusted earnings per share.”

Net sales are expected to range from $5.9 billion to $6.07 billion, with comparable sales of negative 6 percent to negative 3 percent.

“Let me provide a bridge between the low end and the high end of the comp range. The low end of the range assumes that the economy does not improve meaningfully over the back half of the year and that there is no real change in our customers behavior,” Ford explained. “The delta from the low end to the high end estimates that sales remain on the current August trend, and we benefit from some or all of the plans and tactics we are deploying to drive traffic and sales in our stores and online. These include adding 12 to 14 new stores, focusing on promotional efforts around the key shopping events utilizing our customer data platform, being more pronounced with our value messaging, bringing in more new and innovative products, capitalizing on our resurgent outdoor business, growing the new My Academy loyalty program, and finally leveraging Door Dash, especially after the Christmas shipping cutoff dates.”

  • The gross margin rate is still expected to range from 34.3 percent to 34.7 percent.
  • The SG&A expense rate is now expected to be approximately 150 basis points higher than in 2023.
  • GAAP net income was forecasted between $400 million and $460 million.
  • Adjusted net income which excludes certain estimated expenses, primarily stock-based compensation of approximately $27 million, is forecast to range from $420 million to $480 million.
  • GAAP diluted earnings per share is forecasted between $5.45 and $6.20, and Adjusted diluted earnings per share are forecasted at a range of $5.75 to $6.50.

The earnings per share estimates are based on a revised share count of 73.5 million diluted weighted average shares outstanding for the full year. This amount does not include any potential future repurchase activity using the company’s remaining $476 million authorization.

“We also remain confident in the strength of our cash flows and still expect to generate between $290 million and $340 million of adjusted free cash flow, including $175 million to $225 million of capital expenditures,” Ford noted. “The reduction in CapEx guidance is primarily from the work of our real estate and construction team, finding ways to open stores more efficiently and building those cost savings not only into 2024, but ’25 and beyond.”

Ford said when they first restarted opening stores in FY 2022, they were far from optimized.

“As we build our capabilities and leverage our scale, we have found a number of ways to optimize costs, inclusive of raw material procurement, construction services and landlord participation. This value engineering is also benefiting our store remodel program, allowing us to better serve our team members and customers for less,” he said.

“Finally, as we focus on our growth strategy, we have elected to pursue fewer technical projects to focus on our biggest projects associated with omni-channel, our customer data platform and our new WMS system,” Ford explained, closing out his prepared remarks. “Through the first half of the year, our sales were lower than expected, but we have prudently managed expenses, resulting in a double-digit EBIT margin. We also increased our adjusted free cash flow by 60 percent over last year, which we utilized to repurchase 3.8 million shares, or 5 percent of the outstanding shares of the company. At the same time, we have self-funded the investments in the growth pillars of our long range plan. We believe the actions we are taking to grow the business will drive future sales and earnings growth.”

Image courtesy Academy Sports and Outdoors, Inc.