Academy Sports and Outdoors, Inc. trimmed its outlook for the year as first-quarter results missed plan. However, company officials predicted improving sales in the back half of the year on confidence that more favorable weather and strong injections of newness will help offset macroeconomic pressures.

The Texas-based chain also maintained its 2023 expectations on gross margins.

Shares of Academy rose 89 cents, or $1.8 percent, to $49.42, Tuesday. The stock’s 52-week range is between $32.86 and $69.02.

”First quarter presented a very challenging economic environment on a number of fronts,” said Steve Lawrence, who succeeded retiring Ken Hicks as CEO on June 1, on an analyst call.

He noted that Academy had warned in April that the first and second quarters of the current year would be “the most challenging for us.” He also noted that while Academy logged a 7.3 percent same-store decline in the quarter, comps were still up 28 percent against the pre-pandemic 2019 first quarter.

Sales nonetheless were lower than planned due to fewer transactions and smaller ticket sizes.

“To be clear, the sales results were below our expectations,” added Lawrence. “We saw a softening in the business as we progressed through the quarter with April being the weakest month.”

He identified several factors that contributed to the sales decline.

“We know that our customers are contending with ongoing macroeconomic headwinds, such as higher costs on virtually everything. The customer is being more careful how and when they spend, which has resulted in fewer transactions compared to last year,” said Lawrence. “As we previously called out, we’re still comping up against strong results from several big-ticket categories, such as hunting, camping, fitness and bikes. And as expected, these categories were some of the most challenged within the quarter. Another consideration is that a large chunk of our business is meant to be enjoyed outside. And with the unfavorable weather patterns in several of our major markets, we got off to a slower than anticipated start in many of the seasonal categories.”

On the positive side, he noted that in some areas of the country where the weather has been more normalized, such as Florida, seasonal categories outperformed.

President and acting CFO, Michael Mullican, noted that Academy has “taken swift action” to minimize the impact of the quarter’s shortfall. He added, “Among other things, we have been able to substantially reduce operating expenses without impacting our long-range plan or our capital allocation strategy.”

Overall sales in the quarter ended April 29 fell 5.7 percent to $1.38 billion, falling short of Wall Street’s consensus estimate of $1.45 billion. The 7.3 percent same-store decline compared with a 7.5 percent decline in the 2022 first quarter and a 38.9 percent gain in the 2021 first quarter.

Apparel Paces Category Performance
By category, the strongest performing division was apparel, up roughly 1 percent year-over-year.

“We picked up market share here,” said Lawrence. “In apparel, we benefited from having a much better assortment of spring seasonal categories, such as shorts and short-sleeve tops from key national brands such as Nike, Columbia and Carhart. Our private brands in apparel also performed well, led by Magellan Outdoors, R.O.W. and Freely, which all grew by more than 20 percent. These brands represent the value of our assortment and the customer was clearly seeking out this product during the quarter.”

Footwear was the second-best division, down 2 percent versus last year. Strength was seen in “new brands and ideas,” with Lawrence calling out Nike, Hey Dude, Birkenstock and Skechers’ Slip-ins.

The kids’ footwear business as well as cleats were “standouts” during the quarter. Athletic shoes were the “most challenging” footwear category as softer demand for running-inspired athletic shoes wasn’t offset by strength in more casual court looks.

In the Sports and Recreation division, sales declined 3 percent with the team sports and outdoor cooking businesses being the strongest performers year over year. Said Lawrence, “In both cases, teams have had success by leaning in on new brands and ideas such as Blackstone in grilling and Marucci and Demarini bats in baseball, resulting in market share gains in these two categories.”

The recreation and fitness portion of the Sports and Recreation business was the most challenged in the quarter. The weakness was attributed to being up against historic demand in categories such as bikes and fitness equipment while other areas, such as water sports and outdoor furniture, faced delayed purchases due to cooler temperatures and rainy weather. Lawrence said the weather-impacted categories “should improve as we move through the second quarter.”

Outdoor continues to be the weakest performing division with sales down 15 percent. The hunting category remains a challenge as strong ammunition sales from last year are being anniversaried. Lawrence noted that Outdoor remains ahead 29 percent versus 2019 with ammunition sales running up about 100 percent. Lawrence added, “We did have some bright spots in outdoor with brands such as Yeti, which benefited from the strong delivery of new products and seasonal colors.”

Lawrence cited value and newness in innovation as key sales drivers in the quarter. He elaborated, “In terms of value, we’ve seen customers gravitate towards deals with a focus on promotions and clearance and both of these buckets driving sales increases during the quarter. We also see this drive for value in the performance from private brands which outperformed national brands. At the same time, customers have positively responded to new ideas and brands regardless of price. There are multiple places we’ve seen this such as Bogg Bag and seasonal totes, Blackstone griddles, limited-edition colors in Yeti, or in our new shoe brands such as Hey Dude and Birkenstock. Our plan going forward for the remainder of the year will be to push even harder on both the value and the newness fronts.”

First-Quarter Profits Slide 33 Percent on Adjusted Basis
On an adjusted basis, net income in the first quarter declined 32.5 percent to $103.0 million, or $1.30 a share, from $152.5 million, or $1.72, a year ago. Wall Street’s consensus estimate had been $1.61.

Net income dropped 37.3 percent to $94.0 million, or $1.19 a share, from $149.8 million, or $1.69, a year ago.

Beyond the sales weakness, the profit decline reflects a decline in merchandise margins by 110 basis points. The decline in merchandise margins was similar to the fourth quarter and driven by higher promotions. The erosion also reflects higher shrink costs, which increased 76 basis points year over year. Overall gross margins eroded 170 basis points to 33.8 percent.

SG&A expense climbed 7.9 percent in the quarter, or 310 basis points to 24.6 percent of sales. The increase reflected increased stock-based compensation, new store expenses, and technology investments to support growth initiatives.

“While we are not satisfied with these results, it is important to note that our sales and profitability remain well above pre-pandemic levels,” said Mullican. “We have made significant operational changes over the last few years and believe that we will keep the majority of the gains we have achieved. We are actively investing in areas of our business that will further enhance our long-term profitability.”

Inventories Up 4.7 Percent At Quarter’s End
Inventories ended the quarter up 4.7 percent. In units, inventories were up 2 percent overall and down 1.4 percent on a per-store basis. Lawrence said the slight increase in total units versus last year is primarily positioned to fund new stores and is also focused into the areas that were under-stocked the prior year, such as cleats.

“The current depth and breadth of our assortment across all of our categories is healthy and fresh. And we believe we’re well positioned for the summer selling season,” said Lawrence. “Overall, I believe the team has done a good job managing the inventory and receipts over the past four years. Our plan as we move forward is to continue to thoughtfully manage our inventory. And to make sure it aligns with the trends in the business.”

Expansion Plans On Track
Academy remains on track to open 13 to 15 new stores in 2023 as part of its plan announced earlier this year to open 120 to 140 stores over the next five years. During the first quarter, Academy opened one store in Lafayette, IN, a new market, to bring its total store count to 269.

Mullican said the nine new store openings in 2022, which marked a return for Academy to expansion, as a group are operating with an ROIC (return on invested capital) above their hurdle rate and already driving positive EBITDA. The sales performance of its Lafayette store, open for two months, ranks among the top of all store openings completed in the last several years.

“A significant part of this new store success is driven by the implementation of several learnings from our 2022 store openings,” said Mullican. “These include more localized assortments, better preopening preparations, and the extension of post-opening marketing and activities. As we have seen in other new markets, our unique concept has been well received. We sell fun and customers are drawn to a broad assortment of top national and high-quality private brands at an everyday great value.”

In the second quarter, one store in Peoria, IL, is scheduled to open.

Outlook
Looking ahead, Lawrence said, “We anticipate that the consumer will continue to remain thoughtful in their spending as they navigate the current economic environment. We have a couple of natural high-traffic time periods ahead of us in the near term, such as Father’s Day and Back To School, and the results from these events will inform our decision-making as we head into the back half of the year. We’ve increased our focus on positioning Academy as the everyday value leader in our space that can help customers have fun out there at affordable price.”

He added, “Our inventory remains under control and beneath the surface we have a strong inventory position in seasonally appropriate products that typically peak during the summer months. We believe that this combination of value, plus strong in-stocks positions, positions us well as we move through Q2. You’ll also see us continue to drive improvements and efficiencies in stores and DCs while thoughtfully managing expenses as we navigate through this challenging macroeconomic environment.”

Mullican said Academy is controlling expenses based on the revised sales expectations. Mullican said, “We have already made cuts, and we will continue to reduce expenses to align with our new forecast.”

Lawrence added, “As the year progresses, we anticipate sales improve, driven by the implementation the following actions. First, introducing new brands and ideas in the back half of the year that will drive consumer excitement. Second, increasing traffic through upgraded targeted marketing, utilizing our new customer data platform. Third, we’ll start seeing additional sales contributions from our 2022 stores as well as the addition of new locations we’re opening up throughout the remainder of the year. Fourth, by continually enhancing our omni-channel functionality and features to improve the customer experience. And finally, by applying the lessons we’ve learned in Q1 towards driving sales and improving profitability the remainder of the year.”

The updated guidance calls for:

  • Sales in the range of $6.18 billion and $6.37 billion against previous guidance between $6.5 billion to $6.7 billion.
  • Comparable sales declining in the range of 7.5 percent to 4.5 percent against previous guidance calling for a 2.0 percent decline and 1.0 percent gain.
  • Gross margins in the range of 34.0 to 34.4, the same as previous guidance.
  • GAAP net income between $520 million to 575 million, or between $6.50 to $7.20, against previous guidance in the range of $535 million to $595 million, or $6.70 to $7.45.
  • Adjusted EPS in the range of $6.80 to $7.50, down from $7.00 and $7.75 under its previous guidance.
  • Capital expenditures in the range of $200 million from $250 million, the same as before.
  • Adjusted free cash flow between $400 million and $450 million, down from $450 million to $500 million under its previous guidance.

Photo courtesy Academy Sports + Outdoors