Academy Sports and Outdoors, Inc. (ASO) Earnings Call Transcript & Summary

Great. Well, thank you, everybody, for joining us for Academy Sports and Outdoors. It's my pleasure to welcome Steve Lawrence, Chief Executive Officer; and Carl Ford, Chief Financial Officer. As with the other firesides, we will -- I'll ask questions, and then we'll save time at the end for audience questions. So please join in. So -- to set the table, I thought it was helpful to talk about your range of outcomes for same-store sales for the year? And how do you think about the drivers of being at the lower end of the range versus the top end of the range?

Sure. So we actually put forward guidance of down forward up 1%, which is a little wider range than we normally would provide. A couple of things that we thought about as we went through that. First, it's -- 2024 is going to be a little tricky year for us in terms of forecasting for a couple of reasons. First, we're up against 53rd week. Second, customers under pressure coming out of last year. I'm not sure when and how that's going to turn around. Third, it's an election year, so that creates some variability in our business. And then fourth, there's compressed holiday calendar this year. So when we looked at it, we assume that the down 4%, which is roughly the run rate we came out of Q4 with would continue all the way through. And the things that would move us from the down 4% to the up 1% tend to be a lot of things that are within our control, right? So some of the things that we've been working on -- we've launched a new customer data platform, and we're on a journey to move from being very traditional marketers, heavy print, heavy broadcast, more digital and using more CRM. And so we installed a new database last year. We put in place a lot of test and learn in the back half of the year, we're going to be scaling out a lot of those tests as we get through this year. So that should start paying some dividends for us and start providing a bit of a tailwind. At the same time, we've hired a new Chief Customer Officer, who came to us from Dollar General. His name is Chad Fox. He basically put the same kind of program and infrastructure in place at Walmart. He left there, took it to Dollar General. He's a Texas native, we managed to lower him back down to Texas, so he's helping us with that. And so it's like almost I describe it as we had a great race car before. Now we got a good driver for the car. And I think the deeper he gets into working with us, the more leverage we're getting out of customer data platform, that would be one. I would say that's going to help move that negative 4% to more positive territory. Second, we've seen the customer behave certain ways over the past couple of years when they're under pressure, they are gravitating towards value. They're kind of aggregating their purchases during key appointments on the calendar. And so we've really looked at where our big weeks are and that's kind of over the summer months, we tend to have a big spike in our business from about Memorial Day through back-to-school. And so we really leveraged a lot of our promotions and marketing dollars during that time period. So I think that's going to help us inflect. Third, obviously, the election kicking in, that's going to have some impact on certain sectors of our business. And then lastly, is newness, customer also, while they're looking for value, is also gravitating towards newness. And so we've been working really hard as a company to have a steady diet of newness in terms of new brands or new product from existing brands. And as we get deeper into the year, a lot of the tests that we've been doing in the back half of last year, or in the first half of this year, start scaling out on a more broad-based basis. So I would say it's those 4 head -- or 4 tailwinds to kind of start overcoming some of the headwinds and the negative 4% could be closed to up on, and that's how we thought about it.

Great. A question that we've been asking everybody in the webcast is about the consumer broadly, and you mentioned the consumer. We're hearing varying degrees of confidence or lack of confidence around the consumer based on what you're talking to. It seems like the low end is weaker and not necessarily improving. On the other hand, you're starting to hear some green shoots in some of the early COVID winning categories, maybe not the long replacement cycle stuff. But I guess you touched on all of that. You're an acute COVID winner, and you have a breadth of the consumer base. So can you talk about what you're seeing from the consumer? And have we seen any change over the past 6 months?

Yes. So from a consumer perspective, we describe our core customer as active young families. That's really who are core customers. And I'd say we overindexed with kind of the middle 3 quintiles. So our average customer household income is somewhere between $30,000 to $150,000 annually, but they're a family and they're trying to stretch their dollars. So what we've seen happen certainly over the last year is that, that middle income consumer to lower income consumer is under pressure. A lot of people generated a lot of savings during the pandemic at the lower to middle part of the consumer, and it's probably through stimulus or forbearance against payments on certain loans. At the higher end, it's probably through out spending, right? And so what we've seen happen coming out of the pandemic is that they've exhausted -- at the lower and middle end, they've exhausted their savings. They're living more on credit card, paying for credit card balances are up back to where they were pre-pandemic. And so the customer is being very thoughtful and choosy about how they spend, which is some of the behaviors I just articulated. At the high end, we think they're still spending. And so we've been building out the better, best of our assortments. We have a little more exposure to the high-end consumer. And then obviously, some of the tactics I talked about and how we're structuring our marketing and our promotions to really go after that middle to lower-income consumer. In terms of some of the COVID winning categories, they're kind of in different buckets. So kind of poster childs we had were I'd say, like grills spiked or bikes or fitness equipment. And so they're all kind of at different stages of recovery. So I'll start with grills, which is probably the healthiest for us. That business, wondering COVID, and it never really slowed down. And I think the reason it hasn't slowed down for us is because, first, the industry has had a lot of innovation and newness. So you think about a brand like Blackstone, that wasn't a big deal a couple of years ago and this whole flat griddle trend. A lot of people want to augment that and have that as part of their outdoor kitchen. And so that trend is driving it. And then at the same time, we've really expanded our business where we used to be solely focused on just the cooking surface. We expanded obviously [ our ] accessories. So if going to buy Blackstone, you got to have all the different griddle things for that. At the same time, there's a whole rise in things like sauces and rubs that you need to barbecue and cook outdoors. And so we've really built a very localized business with that partnering with local influencers on a store-by-store level. So that business has actually been pretty good for us. I'd say the second category I'd touch on would be bikes, where it's been a little longer to recover. If you bought an adult bike 2 years ago, probably don't need to buy a new adult bike right now. At the flip side, though, the kids business is a replacement cycle business, right? And so as kids all grow their bikes, you're starting to see that spike back a little bit. And so certainly, in those big months, the summer months when you buy a new kid a bike for Christmas, we think that business is going to help offset any softness in the adults. So we're seeing that business start to stabilize. The one we haven't seen come back yet is fitness or cardio equipment. It stands to reason if you bought an elliptical or treadmill 2 or 3 years ago, you don't need another one. And there's not been a lot of newness or innovation in that marketplace. So I would say that there -- that business has been on the down trend. We've been planning it down appropriately based off where the run rate is. We've been taking marketing dollars or average inventory and moving into other categories to offset it. Some of the categories around it like fitness nutrition, that's had a little bit of a moment. So we've certainly been putting more money behind fitness nutrition or strength training where we can offset it. But it's just planning it appropriately and managing it. That one hasn't recovered yet.

And so on the hunt and ammo side of the business. You've talked -- there's been moments of -- we're starting to see seasonality set in, stabilizing. It's easier to plan, but there's been some sort of spikiness around it. It seems like there were some fits and starts around it. So can you talk about what you're seeing on the hunt and ammo side?

Yes. I mean that was probably the most extreme winner during the pandemic, and it was driven by several things. Obviously, it's a business that reacts to unrest or uncertainty. There was a lot of that during the pandemic. It reacts to outside external events. So sometimes when the Ukraine war happened or when the Middle East conflict started bubbling up, you see that business spike. We saw obviously mediocre growth in that for several years. And then we were in about 7 quarters of negative comps in '22 through the first part of '23. We started seeing that business stabilize towards the tail end of Q3 of '23, and we actually flipped the positive there as we got into Q4. And that's the hunting category for us, but it's more broad-based than that for us in outdoor. I mean, our outdoor business also comprises fishing, which is another COVID-winning category. We've seen that business start to stabilize as well as our camping business. So I think we're kind of past the baseline and coming out of the pandemic. And hopefully, the business will start stabilizing and growing from where we're at today. So we see that as actually being a tailwind for us moving forward.

The large hunt [indiscernible] camp category tailwind.

Okay. And then can you just remind us just to put a finer point and move on -- can you remind us the sort of mix exposure to these individual categories or how you disclose it?

So firearms and ammo, what we've shared is, it's roughly 10% of our business. So during some of the heavy search time periods, it might have grown to 11% or 12%, it's never been much beyond that. But it's certainly -- we look at it as a -- ammo for sure is a traffic driver. It's kind of like our milk and eggs. If we look at -- we had a question earlier today from somebody and they said, what's the cross shop with ammo. And if you look at our basket, it's probably the most common cross-shopped item across the store. So if you're looking for commonality, ammo has the most commonality in our baskets. So it certainly is a traffic driver for us. Hopefully that answered your question.

Yes. And then just the other exercise equipment like...

Those are relatively small there. I mean it's -- those of you guys know our ex-CEO, Ken Hicks, is now Chairman of the Board. He used to say -- he said, the good thing about our business is nothing is important and everything is important. So we don't have any business that's more than 10%, 11% of our business. So it's a lot of little businesses that add up to big businesses. So we can survive having a soft trend in fitness equipment or bikes as long as we have the categories to offset it. So they're not meaningful enough to move the needle in and of themselves.

I would love to see the Ken Hicks-isms.

We've got a lot of them, we've got a lot of them. We'll break them out. Don't worry.

Great. As you think about -- there was a lot of volatility last year in the spring around tax refunds. There's been volatility this year around tax refunds. When you reported the fourth quarter, we talked a little bit about this of like it can have an impression but not sure if it was causation. So can you talk about how you think about -- how that affects your business?

Yes. We're monitoring the stats on total number of returns processed, total aggregate amount refunded. It's down year-over-year. I think I saw that the average return, although is up. We used to talk about tax miss for a lower income customer getting $1,000 back or whatever it is, that's a real opportunity to go out. We would see over penetration in work boots, over penetration in some of the fun family categories, treat that like a bonus. Look, I think that I see the stats about overall returns and dollars down year-over-year. We don't look at it as a huge driver of our business. It could cause some delay associated with -- when customers come in with that. But I don't think that's what's moving the business right now. I think it might move some stuff from March to April or April to May, but not a huge driver.

Since you joined, the assortment has changed a lot. And so some -- a particularly large brand is talking about really emphasizing wholesale partners. You have other innovation from other brands in the market looking to expand their footprint. So my broader question is, how do the brands look at you from a customer acquisition perspective? Like who are they trying to reach? And how is that evolving?

Sure. So we have a pretty unique position with the brands, particularly the athletic brands, but it also plays in a lot of the outdoor guys as well. We talked about our core customer being active young families. So in our marketplace, we're kind of the entry point for sport or some of these activities, right? So obviously this is an example. I've lived in Texas now 3, 4 years, I've got 3 kids. And so like when my son or daughter started out sports and they started out Tee-ball, like Academy is a place you go because you can get in and you can buy the bat, the ball, the glove, the cleat for under $100, right? And as a matter of fact, we just ran a promotion on that a month or so ago as baseball season kicked off, right? And then the next month when they decide they're going to play volleyball or soccer, you put that stuff in the closet and you come in and buy the shin guard and the ball and whatever you need and you won't break the bank. And so we've always been really good at that piece of that. And the brands really value that, right, because the belief is that if you can get them in the first pair of cleats and they're wearing a pair of Adidas or Nike, they're going to stick with that through their journey through sports. And that same thing, I think, plays out through fishing and hunting as well, right? And so the brands have always valued us. And so this is one of the things we've heard is Nike went on a bit of a tangent where they're really emphasizing D2C, right? And they talked about that very broadly. That never really impacted us or assortment or access to product. I would tell you that our business in Nike continues to grow year-over-year. It's been one of the healthiest businesses we have. It's the single largest spender we have in the store, it's about 11% of our total business. And we've continued to get better access to better product, both in the team sports piece of the cleats and sporting goods as well as apparel and footwear, running -- performance running, et cetera. So them saying they're going to go back and lean more towards wholesale, I think is probably a positive for all of us. I don't know how much it's going to really change our relationship because it's already been in a pretty good footing. But certainly, we like hearing that, that they are in favor of wholesale again. So...

We -- I think last year at the Analyst Day at the store, Ken was giving some stats around -- I think it was like opening price -- it's a good better spectrum and how that's changed. You gave some examples before and some running price points that were actually like by that sounds pretty high for Academy. So can you talk about the -- as a dovetail last question, the evolution of how you've shifted opening price point versus better investment.

Yes, it's a great question. So if you go back around 2018, 2019, which is when Carl and I both joined the company, we're really good at the good, right? So we were the place where you went and you bought that first batt or glove for your kid. The problem was that if he decided to stick or she decided to stick with the sport, and they wanted to move to [ Rickley ] or even start playing high school [ bowler ] with the traveling team, we didn't have the gear, right? So we arbitrarily kind of set certain caps like we wouldn't sell bats or gloves over $100. We wouldn't sell footwear over $100. And so one of the things that we found over the past several years is the customer gives us permission to have a better, best layer of our assortment. So we've layered in Marucci bats and things like that, that sell for $300 or $400 on the baseball side. We've layered in premium balls and cleats and soccer. And that's broadly across the store. We've done the same thing in firearms and in fishing, et cetera, and running footwear. We used to not have a shoe over $100, and we now have a really big franchise with Brooks that starts hot around $130, we sell Nike running shoes up to $180 to $190. And so we've built out that better, best end of our assortment. I would tell you that the growth we've had over the past couple of years has primarily come from those 2 buckets. We haven't lost our focus on the good. I don't want anybody to think that consider heart, we're a value-based retailer, but we've layered on that better best. And we've gotten access to that. And the customer has gone with us on that journey. The preponderance of the business is still -- it's kind of that traditional retail pyramid where the base of the pyramid, the biggest part of the business is in the good, but the better best has become a more meaningful part.

And will you continue to try to move up the continuum?

Yes. I mean as much as we can and the customer gives us permission to. I mean we're constantly testing things. We used the grilling is a great example where we're primarily gas pellet kind of place, and we wouldn't go north of $500. We sold grills now over $1,000. And it's because the customer has gone with us on that one. Other places, we start breaking some natural price barriers. We've seen less acceptance of that. So it really, I think, is going to vary by the category where the customer gets us permission to do that. But I would even say where we've layered in, and this is a point that I want to make, where we've layered on some better best. It still doesn't mean that it doesn't represent value. So one of our growth initiatives is to grow private label. So we're -- if you go back to 2019, we're about 20% private label. Today, we sit at around 22%. Our plan -- our long-range plan, which is about a 5-year plan, calls risk gets 25%. We built a very -- it's not a hope and a prayer. It's like we built a very thoughtful roadmap on how to get there. And one of the things that is driving that growth is the kind of the better piece of our private brand. So we -- if you take a category like women's leggings, we have a fighter brand that we've always carried called BCG, and apparel women's leggings, there's about [ $19.99. ] On the flip side, the next choice up would be an Adidas or a Nike or an Under Armour legging that would sell for maybe $39 to $49.99, maybe even $59.99. So there's a price gap in there. So we created a brand called Freely, which I think you think about low impact kind of yoga brand like a CALIA, DEX or like an Alo or maybe a lululemon in some cases in terms of elevated fabric, silhouette, et cetera but at a value price at a $29 to $34.99 price. So we're looking at filling in those price caps with elevated product, but it's still a very strong relative value to what you'd find in the marketplace.

Makes sense. Can you talk a little bit about -- there's always a question when you have more discretionary merchandise that the promotions in the market, the level of inventory that you're exposed to in more at risk categories. What have you seen in terms of how rational or irrational the promotional environment is? And as you sit here, how do you feel about where your inventory health is?

Why don't we take this one. I'll let Carl go first.

Yes. We ended the year with our inventory position on a per store basis, down 11.8%. So we feel super clean from an inventory perspective that gives us the room to kind of grow and build and chase. Most of the overall reduction, while I'm quoting it on a per store basis is inventory out of our distribution center, we carry a little more inventory in our distribution center than Steve and I have experienced in a broader retail context. As it relates to promotionality in the space, I would kind of quote holiday, if you will, fourth quarter of '23. We were more promotional in '23 than we were in '22. For the full year, our merchandise margins were down 60 basis points, and I think some of that is the promotionality that we're talking about. Our gross margin overall is up about 500 basis points to pre-pandemic. And I don't think we're going back to the level we're not as it relates to the level of promotionality because of the inventory management disciplines that we put in. So I think it's more -- we saw more overall promotionality in the fourth quarter year-over-year. Not back to where it was, the gross margin gains that we've received over time is more around the structural aspects of managing inventory and allocating inventory to stores and open-to-buy disciplines and some things that we've done from a pricing perspective using some tools, but that's what I would kind of open it up with.

Yes. I'd say broadly speaking, certainly, there were all the shortages that were created during the pandemic. And then there was a obviously, well-documented inventory overhang for a lot of people that happened in '22 as we kind of overshot the market. Honestly, we don't feel like we ever really got too ahead of ourselves from an inventory perspective. Our inventory has been fairly consistent over time. But clearly, in the marketplace, it was heavy. '23 feels better than where it was in '22. It feels like it's more under control. As Carl said, I think we saw less promotions out there than maybe pre-pandemic more than they were the year before. The place where we probably saw various promotions were in some of the brands on their D2C sites or their outlet stores. So I felt like maybe they were still going through some cleanup of inventory there. But to Carl's point, not back to where it was pre-pandemic at all.

It's an interesting point on relative to some of the competition, your lower exposure concentration of brands is a risk -- relative risk minimizer in terms of having to compete with your vendor.

To a certain degree, I think the other thing we talk about at our core being a value-based retailer. So we drive value a couple of different ways, right? So one is the private brand that we sell. So we are very thoughtful about where we price our private brand. Like I say, we haven't raised prices there. So we saw a chair. I think we talked about this at the Analyst Day last year, we saw over $2 million of this portable foldable chair that you take to the sidelines for a soccer match or whatever. It sells for $5.99, spent the same price for about 10 years. Even though the cost has gone up, we've tried to protect price there. So we look at making sure we have a great everyday value there. In the brands, what we tend to do with kind of the big fighter categories like T-shirts and shorts within Nike, Adidas and Under Armour, they put an MSRP on their garments. And historically, we've put a ticket, it's about $5 for where their MSRP has been on that brand. And so we count that as a regular price sales. So when they're ticketed at $30 and we're $24.99, that looks like a regular price sale to us. To the customer, it looks like a discount of about $5. And so about 75% of our business is done on a regular price basis on an annualized time frame.

Yes. Maybe to explore a point that Carl brought up, retailers overall have been fighting this structural margin re-rate, so to speak. Since pre-COVID, some stocks in my coverage, and it hasn't been Academy yet, have received the benefit of, okay, this is the new level of margin. And I think to your deck, the differential MP is essentially that, and you haven't flipped the positive comps yet. Can you talk about -- because I'm sure you get the question a lot, why aren't -- what's so structural about the improvement? And why aren't -- why isn't the gross margin going back to pre-COVID or even going back?

Yes. So Steve and I joined in early 2019. And what I would tell you is the company was not well run historically associated with inventory management. So when we got there, we did our first open-to-buy meeting. It's a standard tool and every retailer's toolkits to make sure they're aligned with the merchants on what they were doing. And it was unlike anything that we had ever seen before. And I think Ken was just waiting for us, honestly, to come to our first one. And had reset transparency and accountability related to what the buyers are expected to deliver and how that flows up to the DMMs and the GMMs. So some of the things that we did quickly is we exited some categories that aren't very intuitive to sports and outdoors. We got out of toys and we got out of luggage and we got out of some electronics that I don't think were expected from us. The second is we put in an open-to-buy discipline that was very rigorous associated with what is your receipt budget, what is your promotions budget? Where do you need to land from an inventory perspective as you exit a category? Historically, on that note, a buyer could take markdowns sort of when they saw fit and because some of their compensation was driven by their margin achievement, they may not have wanted to take markdowns or they may not wanted to clear goods. And what that looked like was clearing goods way out of season at an AUR or a margin rate that was bad. And so we assigned -- we had -- we went in and lots of our products are not year-round products. If you think about water shoes or baseball bats or some of the things that are more seasonally intensive, we assigned season codes to them and let a pricing engine that we have sort of algorithmically manage, okay, to maximize the margin as you exit the season leading up to its life cycle, how do you maximize that and there's not a lot of discretion associated with it. We use that same margin -- that same pricing tool to look at our reg price optimization, RPO program. And Steve said about 75% of what we sell is regular priced goods. And so as it relates to our private brands, should we price that at $14.99 or $15.99 like what is it individually and that tool helped us sort of more science versus art, maximize the AUR associated with the product. We allocated goods in a way that was very manual. We implemented a new allocation tool to what store should carry what product. And we did not have a replenishment tool. So as you think about MINs and MAXs at a SKU level, we were getting out of stock on things, and we weren't replenishing the stores in a thoughtful way. All of that led to lower clearance, better margins on promotions and clearance product, not overbuying certain categories and doing what you did last year. And the sum total of all of that is about 500 basis points in gross margin back if you harken back to 2019, not a ton of that is related to promotions specifically. It's more of those kind of like foundational elements of how you manage inventory.

That's very helpful. A segue is gross margin going forward, maybe '24 but longer term, I remember we did this on Zoom in 2020. And some good Ken Hicks-isms came through over the Zoom. But we were talking about the supply chain opportunity. It was really early stages in cross-dock, you got one truck per store per trip, like just so many things that seem extremely 1992. And he sort of floated out a triple-digit supply chain margin opportunity. So I'd love to think about '24 but then even beyond '24, like is that right? And how quickly do we see those benefits?

Yes. When I was interviewing for the job, in late 2018, they walked me through the -- our distribution center outside of Houston, Texas. And I have never seen a retail distribution center like it. It looked like a warehouse more than a distribution center. We had a lot of inventory at rest sitting on shelves, almost like an e-commerce DTC operation, but it was our retail distribution center. And so a month or 2 after we get into the job, I see some opportunities over here related to supply chain and some other things related to e-commerce and marketing, and Ken was just very methodical. We're not going to boil the ocean. We're going to take things one step at a time, and we're really going to place an emphasis on what I just walked through, which is like being good merchants like maximizing the inventory that you carry and not doing silly things. And I really think that's where our margin growth thus far has come from. Now we've entered this period as we launched a new long-range plan to get to $10 billion over the next 5 years, where supply chain capabilities, e-commerce and customer data are really the foundational elements around the strategy. And so what we've guided towards for next year is approximately 40 basis points of margin expansion. We ended last year at a 34.3% gross margin rate and we've guided that on the low and on the high, it's 34.7%. So about 40 basis points of upside potential. So where I see that coming from is not from shrink. We're at an elevated level. We were -- shrink was up 40 basis points. I don't think that's all going to come down. And in 2024 based on some of the things that we've been doing about it, I don't think it's going to come from freight. I think we'll see import pressure, and I think it will be offset by some domestic lane opportunities that we have, where I do think the 40 basis points would come from is, call it, half in distribution center operations, where we have a lot of opportunity. Two things that kind of make me think that is we have a 30-year-old WMS product. It's called Exeter. It's not really we kind of own the software, and we're implementing Manhattan's active program, our first distribution center in Twiggs County, Georgia, which is our lowest productive facility is the first out of the gate. We'll do that in the next, I'll say, 2 months, but it's upon us now. And so you pair that with -- Steve hired a new Chief Supply Chain Officer, Rob Howell. He came with a 20-year background, most recently at Sysco with [indiscernible]. He is really good at DC operations and logistics and his eyes were as wide as mine when I came in, in early 2019. And I think you pair those 2 things together, and I think you're going to see our units per hour go up and the merchants leaning into more cross-docking and pack by store from the vendor, and I think those are all very healthy things. The other 20 basis points would probably be in merchandise margin. Our merch margin was down 60 basis points in 2023. And some of that is because in 2023, we did not achieve our sales plan. We did not plan to have a negative 6.5% comp. And the team, after Q1 quickly realized what the customer was telling us and what their help was and we were able to proactively stop and cancel some inventory in advance. But we had some inventory on hand that we needed to deal with, and we took that in addition to the promotional space that Steve kind of talked about. But I think we got 20 basis points of upside in merch margin in 2024 related to private brands penetration growth. We're doing really good. The customer is resonating towards it, and we're launching some awesome new things. And that has an elevated margin rate. Two, kind of soft goods, hard good penetration. We used to be 50-50 and hard goods have been outperforming a little bit. So I think footwear and apparel, carrying a little more load has an elevated margin as it relates to hard goods. And the third thing is when I talked about needing to mark down and clear some inventory, I think that pairs up to 20 basis points. Longer term, I think we have 150 basis points in gross margin upside. 100 of it is from supply chain. We have significant opportunities in distribution center efficiencies. We have -- our leading competitor has 20% less distribution center square footage than us and that's twice the sales volume. That tells me we have opportunities with efficiencies and some of those will be garnered by the new stores that we put in. But let's say, a little more than half of the 100 basis points of gross margin expansion over the next 5 years is from DC operations. The other is what you talked about from a logistics standpoint, something specifically related to how we run product from our distribution center to our stores. It's 1 DC dock door, 1 truck, 1 store and back. That's not the loop that I'm used to doing in a city and dropping off with a little more frequency, I think there's opportunities associated with outbound logistics. The last 50 basis points that makes up that 150 basis points of gross margin opportunity is really in the merch margin space. I would point you towards the same 2 things that I talked about for 2024. Private brand penetration, we see getting to 25% versus our 22%, not as a target, but because we see opportunity there; and two, that hard goods, soft goods normalization.

Great. With that, I'd love to open up for questions. If you want to ask a question, just grab the microphone so people...

Can you talk about the productivity of the new stores inside of Texas and outside of Texas and how they differentiate.

Yes. So we came out on earnings calls. So if you go back at our Analyst Day, a year ago, we gave a pretty precise volume target for year 1 of new stores. Those $18 million, right? I think in hindsight, made a couple of mistakes on that first. Obviously, stores open up to a range, right? There's not -- they're not all going to hit $18 million. Second, when we're looking at that volume, we were looking at probably the most recent vintage stores we opened up, which is 2019. The challenge with that is when you look at 2020, '21, et cetera, there was some pandemic impact on that to surge activity that probably inflated some of the volumes there. So as we've opened up these stores over the past 2 years, we've opened up 23 stores, there is 9 in '22, 14 in '23. We've seen them come in closer to $12 million to $16 million is the range that we're now talking about. And so what we've actually done is gone back and looked at some of our older classes of stores we opened up in 2012, 2013, 2014, to kind of get a sense of what their model and run rate was, and they're actually performing a lot like the new stores are. And so that's why we changed $12 million to $16 million because it's more realistic. In terms of Texas versus non-Texas, I would frame it up a little differently. It's probably more heritage existing markets where you have high brand awareness, tend to open up towards the high end of that and new stores and markets we have low brand awareness. It's a little bit lower than that. And so -- which stands to reason, right? And so that's why we're tweaking some of our strategies there to make sure we have a better balance between new and existing markets. At the same time, we're looking at some of the learnings to invest a little bit more money in some of these newer markets to build brand awareness at a faster rate. We're looking at trying to come in new markets with greater density when we go into them. All common sense kind of things, but tweaks that we've made since we did our Analyst Day a year ago.

And what is the actual differential between stores in existing markets and new markets?

I think it's $12 million to $16 million, it would be that right range. $12 million on the low end, $16 million on the high end. Now once again, that's a range. I will tell you, we've opened up some stores and heritage markets have been well over $16 million, have been north of $18 million, right? But in terms of how we're modeling this going forward and looking at it, I think that's a good range to work off of.

One thing I would add is like Charlotte, North Carolina, Atlanta, Georgia, Jacksonville, Florida, Nashville, Tennessee, those all were new markets for us at one point. We're a company that was birthed out of Texas. And with our cash flow position, so we threw up about $535 million in cash flow from operations last year. And the way that we invested that is $200 million into ourselves, $200 million in the share buyback, $100 million into debt service and $27 million in the dividends ending the year with $10 million more in cash than we began. And so as we think about planting these seeds and it could be new markets, it could be infill markets, we know that those seeds come to fruition. We've seen that in the past associated with some of the expansion beyond Texas, Oklahoma, Louisiana, to be now an 18-state footprint, and we feel good about generating the cash to be able to invest into the future growth of the company. And we're very happy with the ROIC that we're seeing. Even if it's not the year 1 volume that we contemplated a year ago.

Just one follow-up on that. If you look at the new versus existing stores in [ old ] market and new market, what is the difference in new market?

I will -- I'll just be candid with you. We use 20% as a floor. On some of the new markets, if we're going in there with mass like 2 or 3 locations in an urban center, I need those to average at least above 20%. If you look at those that have a higher brand awareness, we're into the mid-20s, but we kind of use that ROIC threshold as a governor for how do we feel about investing in that. And actually, it's helped us to say no to a lot of opportunities where the landlord then says, hey, maybe we can do something different here. Maybe we can make this footprint a little bit different or maybe we can structure that rent a little bit differently. It's been a really good like guardrail.

So actually working with a lower year 1 volume has, I think, been a very good exercise for us because to Carl's point, it's more requiring, right, in terms of the rent we pay, the build that we put in the store. And so these don't all average to 20%, like we're not trying to get them to 20%, and that's why we set the volume. A lot of these were approving them could be in the mid-20s. When we look at the class of '23, which hasn't anniversaried itself yet, but when we extrapolate out what we've seen through the first 6 months or whatever the store has been open and look at it, they're actually -- because they're coming in at a lower build and the volumes closer to the average, it's actually coming in at a higher ROIC than we initially thought in some cases, but it's too early to tell because it's only one. We're not even a full year...

Carrying a little less inventory, staff and a little bit differently from an overhead perspective.

Question is on how you're planning the categories. You sort of touched on it in the first 2 questions. But you mentioned, for example, you've got an election coming up, firearms and ammo 10% at peak, it's been 12%. I mean if firearms and ammo, 10% of your business, gross 20%, 2 points comp, maybe low single digits. I guess what would be -- is that the plan co see a similar sort of seasonal spike? And if so, how do the other categories trend within your comp guidance?

Yes. So we expect apparel and footwear, obviously, which are to the more margin-rich categories to perform better than they did in the back half of last year. And a lot of that is driven by the flow of newness that we've talked about, where we targeted the promotions, the value we built in there, et cetera. So we certainly have planned to see some growth within the firearms and ammo piece of the category, but we also have growth in the apparel footwear side of it that offsets that. So we don't see it as being a margin headwind. We see it being neutral to margin tailwind.

And just to clarify on that, when you said you expect hunt to be a tailwind, you expect hunt to come positive this year?

We don't get down to guidance down to that level. But the fact that we ran positive in Q4 in outdoor and obviously hunting would be part of that. The hope would be that we'd see that trend continue.

I wanted to maybe clarify the densification comment against also what you said on the earnings call that you're more willing to consider 1 store, 2 store markets. Just wanted to understand how you're thinking about approaching new markets, which ones gain like densification? Is it a population thing, demographics, like what's the, I guess, thinking behind when do you do 1 store, 2 stores...

Yes. So I would say that the first round of stores we opened up, I would describe it as opportunistic like we were starting a new store engine up from a dead stop. We hadn't an open up stores in a couple of years. We have disbanded the real estate team. So we had to rebuild the real estate team. We had to start building the pipeline back. And we've had a lot of experience part of the pandemic and even some of the stores we've opened in the last couple of years where we're dropping in one store in a market that probably needs 3 or 4 stores ultimately service and left it alone. That's not a winning formula, right? And so what we're trying to do is as we go into a new market, and I think Indianapolis is a great example of this, where we open up basically 3 to 4 stores in that surrounding geography over about a 12-month time period so that we could get some leverage and scale from a marketing perspective. So when we're looking at going into new markets, I think you're going to see us have more of that approach where we're not going to just drop in 1 store in a large metro market that may ultimately need 3 or 4. We're assessing upfront saying, the size of this market needs 3 stores. We want to have them roughly position in these 3 different retail nodes to kind of service broadly the customer base. And we want to be in the #1 retail nodes in each of those places, not third or fourth option, right? So sometimes there may not be availability of all those at the same time. And so what we started doing is working on deals the ones we have, and we hold off until we get the third location and try to open those up at the same time. So as we're building out that pipeline and trying to get that densification, we also want to make sure we're opening up new stores, and we found that some of these midsized markets that maybe only need 1 or potentially 2 stores that are underserved are very, very productive for us. And so we said, you know what, we initially were only focused on large metros. We probably need to consider some of these midsized markets as well, which would probably be the one store markets.

And I would describe -- I would give an example of Panama City, Florida. Need one store there. We don't need to go in with a densified position in multi-store. And we went into Panama City, and we went right in town where the population lives and not the tourist live, and we are really happy with the year 1 productivity, the operating margins of that. So I think that's the juxtaposition that you're looking at is if you're going to go into a big city, [ go up, ] come strong. If you're going to come into a middle market, choose your location really, really well, make sure there's the brand awareness that you want on the forefront of it and afterwards and then enjoy the fruits of launching a good store.

Two questions, follow-ups. The first one is just market share in guns and ammo, what do you think that is today versus when you were at your peak previously? And then the ROI on new stores, surprising, but encouraging also that you could have 20% lower volume than you planned, but have higher ROIC. Can you just like maybe walk through how that's possible.

I'll take the first part, Carl. So there's no true market share in guns and ammo. It's not [indiscernible] doesn't track it. We look at mix data from a firearms perspective, even that's a little cloudy because if you apply for like a personal carry permit, sometimes you have to do a background check and that's what the mix check is. But we look at that as kind of a proxy, there's no market share for ammo. What I will tell you is we have picked up share in both from every data point we look at, and that's talking to vendors and having them tell us -- and in some cases, that's -- there's been a pullback, right? So there's been an exit. Certainly, Walmart has pulled back on the category quite a bit. DEX has pulled out of the category completely. And so we've picked up a lot of market share in both of those. And the interesting thing is from an ammo perspective, I believe we're in the position with most ammo retailers or manufacturers where we're their #1 customer. And so in the past, Walmart was kind of the anchor on pricing on ammo. And I think a lot of markets now were kind of the anchor from a pricing perspective. And that's been helpful in terms of holding the volume there and not chasing to the bottom on price.

From an ROI standpoint, yes, we've lowered the capital investment associated with the stores in some cases, because the team was exploring ground leases in those first 2 vintages, '22 and '23, and that may be really applicable in one market. And what I told them -- what we told them is, hey, then you get your one market per year. But the rest is going to be a traditional build-to-suit or reverse build-to-suit, which we have a lot of. So that brought the capital investment down. In some cases, if they're doing less sales volume, the net cap -- the net working capital investment is smaller, so that addresses 2 points on the denominator. On the numerator rents in these middle markets, obviously, is lower than in a city. And so we're seeing that, and we're seeing landlords be more accommodating as it relates to rent. And then second, the store payroll, if it's doing a large volume, do we need 4 salaried positions versus 3 salaried positions. There's other things under the covers, but those 2 numerator and those 2 denominators make me feel good about the ROIC profile of what we're investing in.

I threw one other one in there, which is we're looking at the build out of these stores, I mean, we're using a prototype we developed prior to pandemic in 2019, and that's the first year we opened this prototype up. We opened up 4 of them, I think. So when we started building out these new stores, we started with that as a prototype. A lot of inflation during the pandemic because of shortage of supply. So some of that's died down a little bit, so that's gotten a little better as we've had more scale, and now we've opened up '23 of these, we're getting better sourcing costs and a lot of the build out of some of these things. And then three, we're being very thoughtful about how much and where we build out. In some cases, we're getting some pretty good secondary boxes that don't require as much build-out in some cases. And so that would be another piece we've looked at value engineering a little bit better.

I think last year at your Investor Day, you had a slide in there that showed, I think, the bottom quartile Academy store was as good or if not better than the average sporting goods store in terms of profitability [indiscernible] economics. Is that still the case? And I guess, what is like a simple reasoning behind that? Is that just a matter of the size of the box or productivity? Or what exactly goes into that?

So I'm going to tell some factual data points and then I'm going to answer your question. So if you look at the profitability of Academy Sports and Outdoors, we are top decile in retail. If you look at the cash flow generation, cash flow from operations as a rate to sales, we are top quartile in retail. We feel really good about managing expenses, managing promotions, managing inventory, we got a multiyear track record of doing this. So essentially, you're asking like why are your unit economics different from the unit economics? I would encourage you, there's a really good slide on this. If you go to our Investor Relations website that shows us again some of the higher growth unit economics in retail and juxtaposes that against our valuation. I think it's very telling. If you look at a sales per square foot standpoint, we're up there. We have a goal to be at $365 in sales per square foot over the next 5 years. I think we're at $306. We're in that range. The specifics are in the investor deck. If you look at a sales per store standpoint, $22 million per store is pretty strong. EBITDA on average is $3 million per store. So what drives that staying clean on inventory. So from a store labor standpoint, you're not marking stuff down and moving it around a lot. In some cases, look, we're not in New York City. We're not in Chicago, we're not in LA, where these rents are really high. We're in markets, and we're entering markets where we feel really good about the rent profile and in some cases, doing it with multiple stores to help spread out some of the operating costs around that. I do think there's a secret sauce associated with the sales profile of the store, this whole like diversity of products being true to sports and outdoors. It meets a lot of people's lifestyle needs. And they come in there and like to buy a lot of stuff. Is there anything else? Yes, it's a good question.

Well, great. With that, our time is actually up. So thanks, everybody, for joining us. And thanks to the Academy Sports and Outdoor management team.

Thank you.

Thank you guys for coming. We appreciate it.