In an interview with SGB Executive Steve Lawrence, EVP and chief merchandising officer, Academy Sports + Outdoors, elaborated on why Academy sees 2020 as a year of “stabilization” as the chain seeks to recoup the benefits of two gangbuster years of growth. He also discusses Academy’s renewed expansion plans.
The interview was conducted last week, just after Academy reported fourth-quarter earnings that handily topped Wall Street estimates to cap off a record year.
In the quarter ended January 29, sales increased 13.2 percent to $1.8 billion, topping Wall Street’s consensus estimate of $1.76 billion. Compared to the fourth quarter of 2019, sales jumped 32.0 percent. Comps climbed 13.1 percent on top of a 16.1 percent gain in the fourth quarter of 2020, marking seven straight quarters of double-digit growth.
Excluding the impact of certain non-cash and extraordinary items, non-GAAP profits in the quarter advanced 40.9 percent to $145.3 million, or $1.61 a share, surpassing Wall Street’s consensus estimate of $1.37.
For the year, sales increased 19.1 percent to a record $6.77 billion and were up 40.2 percent to fiscal 2019. Non-GAAP earnings climbed 129.9 percent also to reach a record $716.5 million, or $7.60 a share.
How would you sum up the quarter’s results? It was certainly a record quarter for us. We had a strong performance, both top and bottom line. All of our regions and divisions posted strong gains. So we’re happy with the quarter, and it’s a punctuation mark to a really good year.
Academy guided same-store sales to decline between 4 percent and 1 percent in 2022. What’s behind the guidance? We think this is a year of stabilization or normalization. We’ve had two back-to-back years of just whirlwind growth, chasing inventory and trying to get back in stock, and it’s been just one thing after another. We believe that our business will plateau at this level, and it’s not going to fall off from here, but reach a new base where we’re going to operate from. The negative four to negative one percent guidance is driven primarily by the first quarter when we’re up against a 39 percent comp gain from last year. There was a lot of stimulus out there in Q1 of 2021, and we saw an impact on our business. And there’s no stimulus out there this year to offset it, so we were trying to be thoughtful about incorporating those numbers in our annual guidance.
How’s the supply chain situation? I think it will continue to be a headwind that everybody will have to deal with this year. That being said, I feel like we’ve done as good a job as any, if not better than most, managing through it. We went into Q4 with inventory up 22 percent and finished the quarter with inventory up 18 percent. That’s a big deal. Our inventory position allowed us to cash in on sales during the holiday. And last year, coming out of the holiday, we were pretty depleted in a lot of categories, but we’re generally happy now with the levels and content. We can always use a little bit more, but generally, most of the categories are back in stock or where we’d like them to be. The categories that surged, like fishing and fitness, are all in pretty good shape. Probably the areas of concern still would be ammo, firearms and cleats. But even in those cases, they’re in a better position than a year ago.
Academy also guided gross margins to decline in the range of 120-to- 170 basis points this year, although that’s still 250-to-300 basis points higher than fiscal 2020. What’s behind that guidance? That was based on probably two things. Number one, just continued escalation of freight costs to get goods here. We wanted to take that in because we don’t see that getting better. And then we also built in the ability for us to be a little more promotional if things do tighten up and there is the need to move to a more normalized promotional stance. At this point, we haven’t seen that or done that. But we wanted to make sure that if things returned maybe more to historical promotional levels, we would have a little bit of ammo there to take advantage or participate in that.
What makes you confident Academy will be able to hold onto much of the margin improvement seen over the last two years? We don’t anticipate giving up the 500 basis points we picked up during the pandemic. We said we might give up a little bit of it, but a lot of the improvement is tied to things we think will last. We’ve worked hard putting in place planning and assortment disciplines. We’re much better in how we buy products and quantify our buys. We used to historically overbuy things and trade too much goods into clearance, and that was where the margin got compressed. We’re better at planning our up-front buys. Better at allocation and getting the right goods in the right stores. We’re better at how we construct the buys from a size optimization perspective—buying the right sizes and getting them in the right stores. We have a much better markdown cadence and process than we had in the past, where we go through, and we know how much we should sell each week. And if we get in trouble, rather than bring in more goods we cancel them. We don’t get into markdown problems. So we feel like a lot of this work that we’ve done on planning and allocation and better buying disciplines are sticky, and they’re going to allow us to hold on to a lot of margin gains we picked up.
Can you talk about the impact of inflation? We didn’t see the impact on Q4. Our sales increase in q4 was driven by both traffic increases as well as the AUR (average unit retail) increases, but the main AUR increases are primarily driven by pulling back on promotions. We got off to a strong start in November and didn’t see the need to get too aggressive from a promotional perspective, and that yielded higher AURs and better margins for us. As we get into this year, we know the inflation is real. Supply chain disruptions and all the things are happening in the world are increasing costs on virtually everything, whether it’s shipping or raw materials. So we’re trying to be thoughtful about where and how we position things. First and foremost, we view ourselves as a value provider in our space. We feel our customers gravitate towards us versus some of our competitors because of our value proposition. So there are some categories we’re not taking prices up on at all. We’re going to hold price. There are other places where we’ve got a pricing optimization tool called Revionics we’re utilizing to help us find where we can take prices up to offset some of the inflationary pressures. But we’re being very mindful that. When we do raise prices on something, we first want to make sure we’re at or better than the best price in the marketplace. We’re also trying to add value to some products so that it will command a higher AUR. For example, we had a t-shirt where we took the price up $1. But we moved from carded cotton to combed cotton, which is better, so we’re giving the customer a better product for that newer price.
Can you talk about the potential promotional climate and the possibility that the industry won’t return to the promotion levels of the past? It’s hard to tell if it’s ever going to go back to where we were back in 2019 or 2018 because it’s not only the pandemic. If you think about it, there are fewer retailers today than there were two or three years ago. There are also fewer retailers who have access to some of the products that we have. If you take a brand like Nike or Adidas or Under Armour where they’ve been very public about pulling back wholesale distribution. The places where they pulled back candidly were the people who tended to promote the brands more. So that’s out of the marketplace. We also have places where competitors purposely pulled out certain categories like firearms and ammo, such as Walmart. So it’s not just the pandemic that’s happened. The whole playing field has changed a little bit, and we’re not sure it goes back to where it was pre-pandemic because of all those other changes.
Can you talk about the benefits of being a preferred partner to many of your brands, including Nike, as well as how vendor collaboration has evolved? Our top three brands in aggregate were up in excess of 25 percent. We’ve been pretty public that Nike is one of our top three brands. So that comes from having access to the brands, and that comes from us investing in the brand with them. So if you go into our stores, we hold Nike together as the center point of our men’s and women’s pads. It bridges the two pads together. We created a Nike shop there. We’ve added visual mannequins in the stores to celebrate the product, put in signage, and organized the floor by end-use, which they were very passionate about.
We use a lot of the content they provide for imagery on our website. So we’re collaborating with them more today than we have in the past. It’s a good partnership there. And we’re trying to celebrate their brand and candidly, we work with all of our partner’s brand to bring their brand to life in our stores. We’re doing the same work with Adi and Under Armour as well as Columbia, The North Face, Yeti, and Coleman. We’re a house of brands. We talk about 80 percent of our business being roughly branded product. Twenty percent is private brands, and some of our customers regard our private labels as brands. But we’re a house of brands. Customers want those things from us. Where we’ve got really great brands, we’re celebrating them. We’re bringing them to life visually, making inspiring statements in the store and online, and the vendors like that and partner with us on that.
Besides less uncertainty around the pandemic, what’s behind the decision to return to and ramp up store openings? We stopped opening new stores back in ’19. That was the last tranche of stores that we opened. And the reason was, candidly, we weren’t very good at it. We had a playbook that had worked in Texas, Oklahoma and Louisiana and as we started expanding into new states and new geographies, we weren’t really localized in the assortment. Things that play well in Texas don’t always play well in Florida or the Carolinas and vice versa. So we spent the better part of the past three years getting better at localizing assortments and being smarter about how we assorted our stores. Based on that, it gave us the confidence to open up somewhere between eight to 10 stores this year. The stores are a mixture of new and existing markets. We’re going to go into West Virginia and Virginia for the first time. We’re currently in 16 states. A couple other stores will open in existing markets. The first store we’re opening in about 30 days will be in Conyers, Georgia, a suburb of Atlanta, where we already have stores.
But what we’re excited about is that we feel like we have the ability and the wherewithal to start expanding well beyond that. We announced that over the next five years, we plan to open up 80-to-100 stores. Not many retailers in America have the ability to grow the way we do. We have three ways to grow. We can open up new stores and go into new markets. We’re still underpenetrated in dot.com, which is roughly nine or 10 percent of our business. That’s up from 5 percent, so it’s grown dramatically, but we still think it probably could be in the high-teens or low-twenties at some point down the road. So we’ve got that as a growth engine versus people who are already at that kind of penetration. Finally, we feel like there’s some opportunity to get better productivity out of our existing store base. So we’ve three different platforms for growth that we’re really excited about.
Does opening stores become more important as Academy establishes an online presence? We do believe dot.com growth is tied to store growth. Roughly 75 percent of our online orders are fulfilled by our stores. And one of the things that’s our secret sauce is we sell a lot of big bulky things like kayaks and gun safes and stuff that are very expensive to ship. Customers don’t want to pay to ship them. You can buy them online with free shipping at some sites but the shipping costs are built into the price, so it’s not free. So they like the idea getting such items at our price and being able to pick it up. So we know that there’s a linkage. As we go into new markets, the dot.com business picks up.
Photo courtesy Academy Sports + Outdoors