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

Great. Good morning, everybody. My name is Chris Horvers. I'm the broadlines and hardlines retail analyst at JPMorgan. For those of you that weren't here for the Jamie Dimon event last night, it's my pleasure to welcome you to the 11th Annual Retail Roundup Conference here in New York with a great schedule, and we're super excited that you're all here, and we're super excited to have Academy Sports and Outdoors with us. To my left is Chief Executive Officer, Steve Lawrence. And to his left, EVP and CFO, Carl Ford. So the format for today is essentially -- I have a ton of questions, it's a 50-minute session. But at about 15 minutes before the end, I'm going to turn it over to the audience for questions. So please definitely chime in. It's a nice small room. We can all hear each other, and we'll go from there.

So maybe starting at a big picture level, I think investors don't appreciate what Academy maybe once was from a merchandising perspective and where Academy is going a lot of retail 101. We talked about Ken just a minute ago, coming in. But now you really have starting to transform the assortment. So maybe if you could frame it out in terms of where are you from an assortment change perspective maybe along the good, better, best spectrum? And what's your vision to continue to change that from here?

Yes. So if you think about Academy, traditionally in our marketplaces for those who are familiar with us or aren't, we were always kind of starting out place for whatever sport or past time you wanted to go into. So for example, my son started out and he was playing T-ball, right? Academy is the place you go to buy the bat, the ball, the glove, the cleat. And then the next month, when you decide you want to play soccer, you put that stuff in the closet and you come back and you buy the shin guard and the ball. And we were always good at the good. We really didn't have a well-developed better, best end of the assortment. What we found, this is going back 6, 7 years ago, when I first joined the company was that there was an opportunity and appetite for the customer to kind of -- for us to follow them through that journey through sport or whatever the past time was. And so over the past 5 or 6 years, we've layered on almost $1.2 billion in volume from where we were in 2019, and most of that's come in at better, best end of the assortment. So when you think about it, going back in time, we were probably 80%, 85% good, the rest being better. We're probably in the neighborhood right now around 60% good, 30% better, 10% best. That's an approximation. Obviously, adding things at the higher end like Jordan we'll shift that a little bit. It's not going to move it huge percentage points, but it will move it towards that best nation. And so for us, it's not about going after the better, best. It's about having a developed portfolio that allows us to take somebody from starting out in a sport, think about baseball, playing T-ball, then to maybe a rec league and then maybe even a traveling ball team. We probably aren't going to be the place where the elite athlete who's going to play college ball or pro would come in and buy their gear. But certainly, we can take you all the way through high school. And that's been a pretty substantial evolution of the assortment over time.

Is there a certain percentage that you want to get to from the 60% at this point? And related to that, as you think about your value to the brands from a customer acquisition perspective, obviously, controlling the value under the market is important for the Academy brand, but also some elevation is important to bring in new brands. So how do you think about that balance?

Yes. I don't think we set a percentage and say we want better or best to be x percent, we'll let the customer vote on that. Certainly, what it has allowed to happen is for us to keep customers. I mean, at a certain point, they had to leave us, right? And so we talked a little bit on our Q4 call that we're starting to see some trade down at the top. And I think having better brands in the floor is giving that customer permission to come shop with us. So we're going to continue to grow it and where there's an appetite. It's not going to be across the board in every category, but where it makes sense. And we'll let the customer kind of tell us ultimately where that needs to fall out.

So you can talk a little more some exciting news with the Nike expansion, I mean, this spring. Can you share the details -- remind us of the details of what exactly that is? And as you think about the Nike potential, I think it's 12% of sales now. Is that right?

That's right?

How do you think about the addition of not just Jordan, but what else is going on around the perimeter of the store in terms of expanding that brand potential?

Sure. So we had to speak a little bit in code during our Q3 call and we talked about premium Nike or an elevated Nike, which was code for Jordan being a part of it. But there's really two parts to it, and you keyed into that. So first, we're adding Jordan this year. It's going to launch in about 3 weeks. It's going to go in 145 stores. We're going to put it in shops, concepts within each parent department. So in other words, there'll be a women's shop, there'll be a men's shop, there'll be a kid's shop. We're going to cross merchandise apparel, footwear, accessories, bags, things like that, [ maybe now ] post a couple of sporting goods there. And so those will live kind of in the parent departments, we'll also have some categories like basketballs and things like that, which we'll have back in the classification category. So 145 doors, roughly half the store count, I mean that's a pretty big lift. To position this in, what we've had to do is clear out space in our apparel pad. And so we've downsized. For those of you are familiar with our store, we kind of do apparel in the center on a pad and then we do outdoor to the right and we do sports and rec to the left. So we've cleared out some space on the outdoor side down turning a category called Power Marine, which we sell like boat tires and motor oil and things like that. It's a good business 3 months of the year, but not -- doesn't earn its space for the rest of the year. So we're downsizing that, creating a seasonal valley where swim or outerwear can live on the perimeter, and that's freed up space in the apparel pad for us to put in the Jordan shop. And then at the same time, you include into this, we're also expanding our Nike presentation. So Nike -- the growth in Nike actually in the first year will be bigger than the Jordan expansion will be in the first year. Jordan, we didn't put a specific number to it. Obviously, we have internal plans. But how we described in our earnings call would be it's immediately going to be a top 20 brand for us. And that's only being in half the stores for 3/4 of the year. Obviously, next year, it's in the store for the full year and hopefully, we expand this deeper into the chain. It would probably a top 10 brand for us. And at the same time, with the Nike, what you're going to see us double down is on more of the better, best end of the assortment. We're getting more fashion footwear, more premium running shoes. So you're going to see an expanded floor positioning, so we'll have more floor space, more aisle frontage and then a deeper assortment of fashion going deeper into the chain.

So I guess, two ways to try to ask the question differently, which is if the Nike brand hits your plan this year and the rest of the store is flat, what would be the contribution?

I don't think we've quantified that, but we would probably be above the high end of our guidance if that happened. But as you downsize categories, right, there are some puts and takes in there. And so that's what we modeled. So we've modeled obviously an increase in Nike. We know what the Jordan is going to be worth. At the same time as we're taking floor space resource away from some other things, we're planning those businesses down, and so we're managing kind of the puts and takes across both.

And another way to ask the question is, as you think about like next year, it being a top 10 brand, obviously, you'll have a full run rate. So it seems like you expect to get to there in the back half of the year in and of itself, right?

Well, I think there's a couple of things that will happen. So what you're going to see happen this year is you'll see the initial launch in 145 doors. As we progress through the year, you're going to see certain items or categories probably go out more broadly to the full store count. So as when we get cleats in heading into football season, that's going to be in more doors. That won't be in a shop concept. Obviously, that will be in footwear department in the cleated section. You'll see that roll out. You'll probably see sporting goods and bags roll out deeper into the chain. And then next year, the expectation is that we're going to expand the door count from 145 to some number greater than where it is today.

And then, as you think about the top 10 brands, you've only disclosed the Nike percentage because I think that they're the only one above 10%, how quickly is the slope of that as it falls off from 1% to 10%?

We carry, I think, like 600, 700 active brands, depending upon the season and category. And so you're right, there's a long tail to it. The top 10 brands were meaningful. I mean we're talking brands like YETI, we're talking to brands like Winchester, Nike, adidas, Under Armour. So they're meaningful brands and contribution. So to be in that pantheon of brands, it's meaningful to us.

Great. I think a lot of analysts argue or have this perception that you're losing share. And I think a lot of analysts have maybe not seen the store, have not conceptualized the difference in your mix versus that of your largest peer. So can you talk a little bit about how you think about share performance maybe in the fourth quarter or last year relative to the industry in your -- in some of your larger categories?

Yes, I'll start with -- I recognize that a lot of times if you compare it to our competitor from Pittsburgh. I would say, for those of you who have been in our store, you recognize, we overlap on a piece of our assortment. I mean, certainly, we have apparel. They have apparel. We have footwear. They have footwear. We probably overlap a little bit on sporting goods but we have a whole category as a business so they really don't play in much at all or vacated. We have a massive hunting and fishing business. That's actually the biggest division for us, hunting and fishing. We do a big outdoor recreation business. We sell a lot of grills, patio furniture, above-ground pools, things like that. So when we look at our share, we're looking broadly across all those categories. To answer your question directly, when we look at our share of both in the short term being like a quarter or a year last year, our share in footwear, our share in apparel, and we use Circana data, was essentially flat, right? And so then we have to look at other sources of data. For things like firearms, we use [indiscernible] data, which I think is pretty standard in the industry. We show we picked up share there. There's no share for ammo, which is a really big business for us. Industry information tells us we're picking up share there. So broadly speaking, we look at it across categories. We were flat in share last year. We're not in this though to be flat, right? We're in this to grow share. And so that's what a lot of the growth initiatives that we're putting forward this year in terms of some of the new brand launches, technology rolling out, et cetera are going to do is help us pick up share. But we see our share is flat over the past year. And longer term, we certainly picked up a ton of shares since the pandemic and held onto that.

One of the changes that your peer made pre-COVID was really the shift out of these hard goods, outdoor lodge categories. How important is that to your core consumer from a lifestyle perspective? And is there any vision to shift away from those categories over the long term?

I would say our core consumer is very important. I mean, the simple fact that the outdoor category is the biggest category for us in our business speaks to the importance it is to our customer. What we see is we service, we call them always game or active young families, right? And it's the dad hunts and fishes on the weekend, their kid plays T-ball or softball. The mom's taking care of the family coming in shopping for the kids, for herself, for husband. And so vacating one of those categories, we think would not be the right approach to take because it's so important to our customer. But I think even more strategically than that, right, when you look at the landscape of sporting goods or sports and outdoor companies over the past 20 years, right, what you've seen happen over time is they fall out of love with some of these hard goods categories, which tend to be sometimes a little more volatile or maybe have a lower margin profile, and they become just an apparel and a footwear retailer. And I think we would all agree that the competitiveness in the footwear and apparel, there's a lot of people, department stores, specialty stores, other sporting goods stores itself, the same footwear and apparel, right? But having that diversified assortment, we think makes us unique and special. And so we're not going to go away from those categories. We think it's core to who we are. As a matter of fact, we're looking to grow those categories. So I don't see us moving out of them. And I think it would be a big mistake candidly for us at least to go out of those categories because we would disappoint our customer, and it would differentiate us less.

Can you talk about how the brands -- longtime merchant at your core, can you talk about how the brands think about Academy from a customer acquisition perspective? You think about why Nike now? And what does that say about the potential for other brands to expand into your store?

So I think when you see -- when we talk to the brands, obviously, the big sports brands like Nike, adidas, Under Armour, the value they've seen in Academy is that goods that we talked about earlier. We're the entry point for sport, right? So we're the place in our geography where that customer comes in when their kid is starting to fish or hunt for camp or play sports. And the belief is that if you can get them wearing Nike or adidas or Under Armour early on for their cleats or their gear that they will stick with that brand throughout the life of their sport. I mean I can tell you, I started running about 35, 40 years, [indiscernible] wearing Nike shoes, still wearing Nike running shoes. So I live that personally. That's critical. And so that's why the brands really want to partner with us. When they were pulling back, Nike, in particular, in 2020, 2021, they were pulling out of undifferentiated retailers. We never lost access to it. As a matter of fact, our business has never been stronger with Nike during that time period, and it's because they saw us as that key entry point for sport. So I don't see that changing. I just see that actually becoming more and more important. As there's a proliferation of brands and more people fighting kind of for that space. In terms of what that means for other brands, listen, we're excited to have Jordan. It's a big add. It's the most requested brand in our stores. It's the most requested and most searched term we have on our website. So it's going to be a big add for us. We believe that how we're positioning it, how we're going to market it, how we're going to put it on our website would make any other brand excited about the idea of us doing the same thing for them. And so hopefully, that will open more doors for us.

Asking a little bit of a different way. So is it -- I think about importance from a value perspective from a customer acquisition perspective, is it Nike managing the life cycle of the brand. Like now is the appropriate time for Jordan to come into Academy. And as you think about maybe a HOKA, which has seen some slowdown in terms of their growth as they manage the life cycle of that brand, do you think that's a natural extension?

I'll start with why now with Jordan, which I think is a good question. I think if you go back to what I said earlier, 5, 6 years ago, when we were predominantly good, it probably didn't make sense to have Jordan on the floor. Because there would have been too big of a price gap between kind of our upper end of our assortment, and where Jordan would start. Right now, I mean, the price points we're going to have in Jordan. And I just want to be clear for the group because we said this on earnings call, but I'm not sure everybody listened to it. Our focus in Jordan is in sport, right? So where we're going to be positioned with Jordan is the game shoes that the kid will wear to play basketball. So shoes we'll carry will be like the Luka shoe or the Zion shoe. We're not going to have like the limited edition retro releases of stuff immediately, right? And those price points on those shoes are right in line with kind of the better, best end of our Nike assortment currently. So it's price point-wise kind of in line, maybe one click up from where we are. We couldn't have done that a couple of years ago. That's why Jordan now makes sense because we built that bridge between kind of our good, better up to the best. Could it open up doors like a HOKA? I mean, sure, it's very possible. I mean the conversations we've had, and we've been pretty vocal when we get asked this question, we'd love to have access to HOKA. We'd love to have access to On. Our conversations with them, we have them frequently is that right now, they're still growing at a pretty fast rate, not necessarily filling all their channels of distribution as they enter a store and then push it deeper in their chain. When they get to that next point where they're looking to expand distribution, our goal is to be that next person they want to expand distribution to. And that's what we're trying to do in terms of how we position ourselves.

Dovetailing back to the consumer a little bit, you did talk about capturing trade down in the fourth quarter call. It was also a -- it's actually a pretty good quarter for goods retailers overall. There's a lot of uncertainty out there with the consumer. We've called out the first quarter being expected to be the low point for the year. I guess, how much of that is just what you've seen in the business around that uncertainty given all the news that's going on in the world versus some other gating factors such as weather and the timing of the Jordan Nike launch.

Yes. We started to see a trade down. And we measure -- we use Placer from a demographic standpoint to look at income quintiles, that's how we measure it. And so we began to see a trade down in quintiles 4 and 5 in the third quarter. And to me, I had expected that earlier. I had expected that a year before. I was seeing consumers jumping to bargain hunting and treasure finding type of concepts. And we experienced in the third quarter. It accelerated in the fourth quarter. How much of that is macro-driven? Like from a value standpoint, like that's what we want to be known for. And I think as consumers increasingly have trouble affording their lifestyle and switch to credit cards and Buy Now Pay Later solutions like that there's -- even if that is upper income quintiles, there's a quest for value. And I think Academy is known for that. So I think it's -- yes, we're offering more brands, and there's not just a new -- from a new brand introduction standpoint. It's not just Jordan. We do this very methodically, that's the biggest brand launch that we'll have. But as we carry those upper end brands, folks are more inclined in that quest for value to experience our store, their new customers, I like it, and it couldn't have come soon enough.

Nice. The other side of this, I think there's -- we're all trying to understand how the tariff dynamic is affecting the consumer's behavior. I think there was a question in the fourth quarter, like how much of the -- because hard goods finally turn positive for a lot of retailers. Your guns and ammo business did well last year. A lot of that was assortment change, but some of that was, hey, 5 years later. One of the questions then, I think is very relevant now is, are you seeing any pull forward of buying of perceived tariff exposed goods?

I don't know if I'd say we've seen that yet. I mean the tariff thing has been so volatile, right? And it's on, it's off, it's this country, it's that country. So I think it's hard for the customer to, at least in our sector, figure that out. I mean obviously, what he's doing with auto. I've heard people saw auto sales pull forward in the month of March. But, what we saw, and you kind of hinted this to your last question, we had a pretty good holiday. We're relatively happy. And the way holiday broke out is we had about a 2-week start of the quarter, which is tough. We attributed that to, it was like, seasonally warm down in our geography, plus we're lapping a Rangers World Series win. Business got really good for 9 weeks, then it got tough for the last 2 weeks of the quarter. That's when we had these named winter storms come through and snow in Houston, which I've been in Houston like 20-something years [indiscernible] like once come through and that probably carried into February. And that's the question we were asking ourselves in early February, is okay, the slowdown that we're seeing at the time is this pullback from the consumer because of tariffs or uncertainty in the economy, is that weather? Once we kind of got past that and got into early March, we saw the business start to stabilize. We attribute a lot of that to weather. That being said, I mean, there's a lot of uncertainty today, hopefully get some clarity this afternoon, right? I think when people are uncertain, I think well, maybe -- I think when people are uncertain, they pull back a little bit because they want to wait and see what happens. So hopefully, at least getting some clarity what's going to happen, hopefully, this afternoon will give us a little bit of a better read on what's going to go on. But I think we haven't seen a pull forward of tariff categories yet.

Weather is always a favorite topic for retailers and retail analysts.

We really don't like talking about weather. I prefer we didn't have to talk about it.

But you have a very concentrated, I think 45% of stores are in Texas, some 40%?

Roughly 40%.

You also not only have soccer but baseball. Baseball is your biggest sport in the spring.

Correct, year-round actually.

Year-round, and fishing, also a very weather-sensitive sport. So I guess any color or commentary on how you've seen sort of the weather dynamic play? Because it is so relevant to Academy because of those factors.

I mean I'd stick with what we said on the earnings call. We saw the weather start to normalize as we got to the end of February and in early March, and we saw a lot of the spring categories open up. That would include baseball, that would include fishing. That include a lot of the things -- outdoor furniture, things like that, growing, have all been pretty good. So the question is, how does the weather maintain as you go through the quarter? The question always is, does later Easter help or not? Being a retailer, I can speak out of both sides of my mouth. But personally, I always believe the later Easter helps, right? Because I think Easter is kind of the psychological kickoff to spring. And the later it is, the more chance you have for it to be warm, right? So if it's cold kind of damp, Easter kind of sets a tough start to spring. This year, I think it's the latest it can be on the calendar. So having it later, in our geography, it's already warm, it's going to be warm. So I think that probably will help, but it probably delays a little bit of that kind of initial surge for spring goods until you get to that point in the calendar.

Yes. Sort of peak uncertainty right now between the Easter lap vs March 31 tariff and...

Last week, the week leading up to Easter. Like I think Sunday was Easter Sunday last year, so...

Yes, tariffs. Continuing on the tariffs. I know it's very difficult to -- you've measured your direct exposure, especially with the power of your private label brands, but there's a lot of unknowns around the indirect exposure. So any comment on the indirect exposure? If you have and if not, can you talk about, a, are you already seeing -- are you already raising prices for tariffs? And then more broadly, how do you think about your pricing strategy around tariffs?

Great question. Very applicable timing. Yes. So just to kind of back up like about 23% of what we sell is our own privately branded goods. If you look at that in the totality of the total company, we have about 10% exposure to China last year. We're at 9% now with a target to be at 8%. This has been a multiyear journey associated with diversification, just from an overall risk standpoint, not specifically related to tariffs, but 8%, 9% -- 8% direct exposure, no meaningful exposure to Canada, nothing to Mexico. As it relates to indirect, I'll really speak to this framework would be just as applicable to a national brand asking for cost increases as it would be for tariffs impacting our direct exposure. So we think about it from a quantification standpoint. I will tell you like at the HTS code standpoint for direct importing standpoint, getting the ability to quantify and understand that with any level of precision is not an overnight task. So we are very thoughtful around what is the quantification, that would be number one. Number two is vendor partnership. Going back to those factories, going back to -- we have not -- from a national brand standpoint, we have not experienced discussions about cost increases as we sit here today. But as it relates to tariffs for the direct imports, yes, going back to those vendors and [indiscernible] and having a partnership mentality associated with cost increases. And then third, we're going to take a portfolio approach. So if we sell a grill that's got a lot of steel and aluminum in it. And it has a direct tariff associated with it, we are -- we want to stand for value. And so at key events, we'll have like a $99 grill. Fourth of July, big, big family holidays. We want to keep that. So we're going to take a portfolio approach to it, and we use a pricing tool called Revionics, that's very prevalent within the retail landscape. We had implemented some of their modules much earlier in our life cycle right after Steve and I got there from a life cycle management standpoint, but the regular price optimization tool we use and it looks at comparability of our pricing on like-for-like goods in the marketplace, and understanding where we have a little bit of elasticity standpoint. So we're going to take a portfolio approach to offset what we've quantified in totality. It will not be like-for-like on a product standpoint. We want to stand for these key value items, and we want people to know us for that and to trust us for that. So that's how I'd answer.

And so there are retailers, some home furnishings retailers, in particular, that have talked about already -- like we're cutting checks to the government. A lot of their product comes from abroad. And while they're not taking all of the pricing, they've already taken price. So, have you using that portfolio approach? Have you taken a price in your assortment?

Well, we -- I mean, we began experiencing tariff increase in February. There was -- in our guidance that we recently put out, there were three tariffs that were overtly included within that guidance, the February 10% from China, the March 10% from China, and then 25% on steel and aluminum. We've already begun experiencing that from an average unit cost standpoint. So we have taken pricing actions on that. We partnered with the factories upfront. And then the residual, we took a portfolio approach from an AUR standpoint. And goods have been marked up, and that's our philosophy on it.

And then as you think about that average unit costing dynamic, is your cost of goods accounting such that like if it's average unit cost, the unit cost that gets removed from the inventory is at a lower price. So there's like an intermediate gross margin benefit that goes away next year?

Yes, weighted average cost. And so to the extent that you take average unit retails up and the increased tariffs have not yet begun to materially impact that average -- that weighted average cost pool associated with the goods, you will see a spike in it. That is anticipated within the guidance that we put out for the three tariffs that we included in the guidance. It's like a short-term kind of sugar rush type of thing. It's not how you would manage a business long term. But from an accounting methodology standpoint, you will see a little pop.

It's also not -- I mean, the way this is unfolding is it's not real time. It's not like you see a tariff on Tuesday and prices go up on Wednesday. I mean, because there's been so much volatility in back and forth, what we've kind of landed on as a process where we every 30 days get together as a group, understand what the most -- latest rounds are when they're effective, come up with a strategy to offset it, then, of course, it takes time to market. And we're talking hundreds of thousands of units in some cases across the store. So there's -- it takes time to do that. So there's a little bit of a lag effect in terms of when we see the tariff to when the prices go up.

Yes, nice 30 years of deflation in hard goods. And nice to have a little bit of inflation to come through there.

A little bit is probably okay.

Can you talk about new stores? I think it's one of the greatest opportunity, but it's also probably the most controversial aspect of the Academy story. Let me just talk about how your new store strategy has evolved from the initial stores that you're opening? And then we'll get into some questions about how they're performing.

Sure. So -- we stopped opening new stores in 2019. That was the last year we opened up new stores part of the COVID, and then we restarted in 2022. So when we started in 2022, going through the pandemic, not opening stores, I mean we've really downsized our real estate team. We had a very small real estate team that was really just lease management, et cetera. So I'd tell you that the stores that we opened up in '22 were deals that were probably in the works part of the pandemic. And I would say they were opportunistic. We tried a lot of different tests, right? So some worked really well. Some were a little tougher, and we tend to gravitate to the ones that are little tougher. Like one of the things we found was we open up a store in Perimeter Mall, right -- Perimeter Mall in Downtown Atlanta, right? And store got off to a slow start. And when we started turning it apart, we realized a couple of things was our core customer is active young families. And when you look at that, there's not a lot of families there. It's a lot of either single or dual income, no kids, a lot of apartment dwellers. So there's no backyard for them to put a grill or a pool or a patio furniture. They didn't tend to hunt and fish and camp very much, right? And so a big chunks of our business weren't really activating there because that wasn't where the customer was. So what we found over time and we -- each year, we take the learnings from this and we apply it to the next vintage. It was about a year ago at this time when Carl and I came out on our earnings call and talked about how we're pivoting the strategy to be very focused on a couple of things. First, more suburbs and exurbs, more midsized markets that are underserved, and where there's a high preponderance of hunt and fish and families that live the lifestyle that we sell. So that shift really started taking place and our site selection from that point forward. So really the first group of stores that really felt the impact of that pivot were the back half of 24 stores. And as we said on our earnings call, those are some of the best-performing stores we've had right now. So another thing we've also talked about is having balance. So about half of the stores we're opening up are kind of infill within our existing markets. So that may be a store we talked about on our call, one in Meridian, Mississippi, right? It's a midsized market, 120,000 people. But there's no competition there upside, maybe a Walmart for the goods we sell. That store is doing very well. That would be an infill store, Corsicana, Texas, and then new markets. And so obviously, we are in Ohio now. We opened up our first store last year in Zanesville, Ohio. We're starting to push up into upper Pennsylvania and the reason for that is what we found is stores in our core geography that are infills tend to have high brand awareness. Like when we opened up the store in Corsicana, there are people lined up around the block to come into the store. That in and of itself is [indiscernible]. We didn't have to do as much marketing. Conversely, when you go into Ohio or Pennsylvania where there's not a store for 100 miles, you have to build the brand awareness, and probably overspend from a marketing perspective there. And so what we found is having that balance, overspend in the new markets from a marketing perspective, while underspending a little bit in the existing market to make the whole economic situation work out.

And I want to tack on to that. You talked about controversial associated with from a capital allocation standpoint. I just want to -- I do want to kind of hit on, and I think you're going to talk about some of the other strategies out of the new stores, but we produce a lot of cash. We create a lot of cash as a company. So if you look at the last 3 years, our comps have been down and we average about cash flow from operations, about 9% of sales. That's through inventory management, that's through efficiency plays that we have. If you look from an investment standpoint and how we're investing that, we put -- mid-30% of that, we put back into the business. We bought back 60% -- 60% of our cash flow from operations was a buyback, and the rest is a pretty nominal dividend. So we're taking those learnings and we're -- we think we're getting better, quicker, faster, stronger associated with where we're investing with a customer-centric approach. But from a cash flow utilization standpoint, our CapEx was low 30% of the cash flow that we generated.

Yes. Inventory management and cash flow had been really incredible considering the duration of the headwinds -- post COVID headwinds. As you think about -- retailers and retail investors love a nice comp waterfall. As you think about, I think, next year, maybe it'll be sort of high -- lower end to high single-digit type footage growth.

That's probably fair.

As you reach that run rate, if you went back -- by the way, if you went back to the original target, it seemed like you would get to like almost low double digit. So maybe you could comment on that. But as you reach your whatever that run rate is from a unit growth or footage growth perspective, how contributory will that be to same-store sales?

Well, obviously, over time, as you get more stores into that waterfall, I mean, last year, we had 9 stores that were contributing to from the '22 vintage. Most of the stores in '23 open up later in the year. This year, the 14 from that will be in there as well. So we'll be at 23. And then obviously, as we get deeper in the year, some of the '24 stores will be in there. So it's meaningful. It escalates over time. We haven't disclosed a specific number externally to people, but obviously, we've modeled it internally. But I think you're hitting on one of the reasons when you say controversial, one of the implication is by spending money on new stores, we're not spending money other places. And I think that's what Carl was trying to articulate is. We're still buying back share. We're still paying a dividend. And we're still investing in our core base of stores. I mean it implies could we be doing something to our core base. I mean we remodeled 30 stores a year. We're rolling out new technology this year in terms of RFID and handheld devices. We're putting in Jordan shops. So it's not that we're having to choose between multitudes of investments. We have the ability to do all those because of the cash flow. And what we believe is, longer term, having this new store flywheel open up is going to be a big driver once we get out in 2, 3, 4, 5 years out. At the same time, one of the problems we had as a company, going back to prior to 2020, every new store we opened up was kind of within our core geographies. We're just cannibalizing ourselves in a lot of cases. And so having the ability to kind of expand that frontier so that 4 or 5 years from now, when we're talking about Pennsylvania, Ohio, it's not a new market, it's an infill market for us. It is core to our long-term success. We're simultaneously trying to execute in the short term, but also plant seeds in the long term. And I think investors, ultimately long term, are going to be very happy we did that.

I'll pause here for any audience questions for the Academy team.

You historically cited population demographic tailwind for your business -- given exposure to the Hispanic consumer in the geos you're in. So how much of a tailwind do you think that's been? And with the current immigration and deportation policies, do you think this switch to a headwind potentially going forward?

We can tag team this. I mean, I think having our core geography in the south, it's been well documented. There's been a migration into the south. So I think that has been a tailwind, and I think it will remain a tailwind. In terms of exposure to the Hispanic consumer, we do have -- we are -- we've a higher penetration there than a lot of our competition does, and that's geographically based. We were asked this question on the call. So we obviously monitor this. We haven't seen at the time we did the call any sort of degradation in that customer base. We're in the stores that over-index with that customer base. That doesn't mean that may not change, but we haven't seen it yet.

Yes. I would also say the same Placer information that I talked about from income quintiles, they give lots of other customer demographic standpoint. So we look at how that customer is performing in a number of different ways. Placer, I was kind of all over it in January and February associated with inauguration. I didn't see anything that concerned me there. We also have some of our stores. We have 302 stores now in 21 states.

[ Ought to be 303 at this point. ]

Yes. We have some that really overpenetrate from a Hispanic standpoint. So while I get demographic information monthly, I can look at daily sales, I can look at weekly sales of those. And we monitor it closely. And I'm not concerned with the actual data that I'm getting right now, but that's not to say I'm not going to stop monitoring.

On new stores, can you talk about the economics of small market versus large markets and the cost to build?

We tend to talk in ranges. So from a sales perspective, we gave a range. We think one of the changes we made is we said, new stores are $18 million, which is an Uber precise number. One of the learnings we've had is that, obviously, this is something really profound, right? Stores that are in new markets that have low brand awareness tend to start out at a lower volume level. Stores in existing markets that have high brand awareness tend to start out higher, so we set a range of $12 million to $16 million. $12 million probably is more related to new markets in smaller markets. $16 million would be more of the Corsciana, Texas where it's in an existing market. Obviously, the economics of building a store in a smaller market, you can get some benefits there. You can get some tax incentives, things like that. So one of the things we've changed in the model is to go back and not just level set the volume, but also level set the cost structure to build the store. And we've gotten very smart about value engineering the store. So we have an ABC prototype. And obviously, the A is more for the premier lifestyle centers and the C may be for a smaller market store, so we can value engineer from that perspective. We're working with municipalities around tax incentives. So the economics between the two, yield about the same ROIC which may have a lower cost structure for a smaller market store with a lower volume, conversely a higher cost structure with a higher volume for an existing market store. Danny?

You didn't really talk about the marketing, which I think has really changed and the online. I have no store in my area [indiscernible]. But I get the online, the marketing, and I think it looks pretty damn good and I purchase things from there.

We appreciate that.

And that's without having any store around. So what's going on there? Because that's got online, the marketing and [indiscernible], kind of something that's becoming much more important.

It definitely is. We talked a lot about this on our earnings call. I'm glad you asked the question. We hired a new Chief Customer Officer about a year ago. His name is Chad Fox. He came to us from Dollar General. He's at Walmart before. So a couple of big moves we made first. We combined marketing, dotcom and customer analytics under one leader, and that's Chad. So he now has kind of the full portfolio where in the past, it was segmented out and not reporting into each other. So that's given us a lot of synergy between marketing and dotcom. We've done some pretty aggressive testing during that time period, around beefing up marketing in core markets, top 15, top 25, top 35 markets. We've also done some work in terms of changing the creative. We talked on the call about moving from kind of a more transactional marketing to something that really kind of brings the soul of the brand to life. And so the Jordan Air, we have out on our investor site right now. It's the first work from that, but you're going to see more of that as we go forward. We talked about how we're trying to balance our approach around the idea that we -- we've won in the holidays, we've won in the peaks, but we haven't always won in that -- those shoulder periods in between. So how do we get that repetitive rhythm to drive that traffic in the lulls in the calendar? And so we have a new marketing team. We've restructured the budget to really drive traffic consistently throughout the year, both in the shoulder periods and in the holiday time periods. We moved the spend to be more upper funnel to track new customers versus lower funnel conversion, which ultimately is going to be a good thing for us because it's adding more customers to the brand. And then we've changed the creative. So there's been some pretty massive things there. And then the big thing that we talked about on the call that I think a lot of people didn't pick up on is we did this massive identity resolution project, right? Where we put in a new customer data platform a couple of years ago, and we really started sanitizing all this data that we had. And we found that we have almost 2x the addressable customer file that we initially thought we had. And what I mean by that is that's an e-mail, that's a social ID, that's a phone number that we can send a personalized message to somebody. That's going to be a huge thing. So change the structure of the spend, change where we're targeting that spend, change the creative. It's a pretty big move for us, and we're excited about what that can do for us. Thank you for asking that question.

And that's a long runway you got there.

It should be, yes.

Yes. Coming out of the pandemic kind of the big question in the space was kind of the gross margin gains that you saw, how sticky they were and they've been quite sticky. Having said that, it down ticked a little bit last year. I know the guidance is for it to kind of pick back up. So I was just wondering if you could kind of share kind of the visibility that you have. I know some of the stuff last year was intentional with the DC and bringing stuff in early and things of that nature. But so just kind of your visibility and confidence in kind of your opportunity to get back to kind of that mid 34-ish margin. And with the new brands and stuff like that?

Yes. Yes. I think -- said succinctly, I think the things that are tailwinds for us in the gross margin space is category mix, apparel and footwear, what we commonly refer to as soft goods, have a higher margin profile. Pre-pandemic, it was about a 50-50 balance between soft and hard goods. And we're not back there yet. I think things like Nike, things like Jordan, some of the other new brands that we're bringing in, in the softline space, they will mix up associated with the margin profile. Two, I would tell you, our private brands are doing good. While a lot of our private brands, so just 23% of our business, a lot of the private brands that we've added since -- I think since Steve has gotten there have been at that better level. So athleisure, brands ROW for men and Freely for women and then Magellan Pro, it's got a lot more technical features from like a hunting and a camping perspective. Those private brands have a meaningful margin differential. And as they grow, they will mix you up, and then supply chain. You spoke about some of the headwinds that we experienced in 2024. We had about a 30 basis point headwind as it relates to supply chain, broadly speaking, we implemented a new WMS system in our Georgia distribution facility. We got behind from an in-stock perspective in the 80 stores that it serviced and we threw a lot at it from a DC labor standpoint. And then secondarily, and this really manifested itself in the fourth quarter, we thought there was going to be some port strikes. And we primarily import on the East Coast, and we switched a lot of that product mix to West Coast. So we think over getting that back, but beyond that, the supply chain upside. We've been in retail for a long time. Our distribution centers operate in a way that is not as efficient as it could be. The WMS is an unlock associated with how you position goods and how you move goods in and out of that distribution center. It's in one of our three DCs right now. Doug, we've talked about in the past. We -- from a logistics standpoint, we dedicate 1 door and a distribution center to 1 truck that services 1 store that is not how modern supply chains work. Typically, you do it in a [ milk truck ], run and drop off product at 3 or 4 stores, and pick up something on the way back. We're new there. The WMS unlocks them. So I think there's 3 things that are tailwinds associated with the gross margin profile. We -- on the flip side, I would expect that promotionality will continue to be a headwind. This holiday was more promotional than last. Some of those tools that I talked about in Revionics, reg price optimization, kind of life cycle management with clearance. There's also promotional effectiveness. And not all of our promotions are elastic and how do we get out of those that aren't and invest more in those. I think that will be a headwind, but something that we've got that we can buffer a little bit with promo optimization.

I'll add one thing to what Earl said, being coming from the merchandising side, the best way you can sustain your margins is control your inventory. And when we look at our inventory, we tend to look at it on a per-store basis. We were down 2% in units at the end of the year. We feel like we've done a pretty good job of managing inventory and we'll continue to do that. And I think that's another way that we believe we can also sustain the margins by maintaining clean inventories.

Just one quick clarification. So the 30 bps from the DC and then bringing in around the tariffs for the West Coast.

Port strike.

Port strike, right. So that gives -- assuming you can get that back, there's pretty high visibility. And that pretty much gets you to the range that you're already talking about.

Yes, I think there will be headwinds. But we ended last year with a 33.9% gross margin rate. We guided to 34.0% to 34.5%. If we got back to 30 basis points, and that was the only thing that impacted us for the year, we would be within our range. There are clearly other things in those 3 capacities that I talked about that we're working on.

Softer macro periods historically, what does the trade down look like? I mean you talked about it a little bit, but I just want to kind of go a little bit deeper there. But is it -- like are you getting trade down and then there's some trade out, there's some leakage? Is it trade down from higher quintiles and then you also have trade down within the box in the lower quintile where people are buying like maybe they were buying best or better now buying good? Like what does that typically look like historically for you guys?

I'd say there's a couple of data points, so when we're citing trade down, we're looking at Placer data, and we're looking at income, the top 2 income quintiles, we're seeing traffic increase within those 2 top income quintiles. One of the challenges we've seen, last time, we're pretty public about this is we were seeing some trade down on the bottom end. Like if you looked at our lowest income quintile under $30,000, we're seeing some trade down there. We're seeing share erosion there. We translated that as trip consolidation. They're going to Walmart, they're buying groceries and maybe they're picking up a soccer ball over there. So step 1 is get the trade down that we should be capturing. We haven't seen that until the back half of last year. So we're excited to see that. Step 2 is to shore up that leakage at the bottom end. And so the way we do that is through value. And so back to your point, we've seen some trade down. It's hard to track, but I would tell you that if you look at private label, which is generally the value representation in our assortment, that's been the healthiest business for us over the past year. And so I definitely believe there is some behavior of people within our box trading down from better, best maybe in the private label. That being said, Nike, which is also one of our higher-end brands has also been very good. So it's that barbell effect we keep talking about where there's newness and a brand has done a really good job of keeping current with a lot of innovation. They're doing well and then we're seeing the value end do very well. And if you're kind of in the middle and you don't have newness and you're not value, you're struggling a little bit right now.

You guys just -- it sounds like the Nike extension is like the big step change this year, relative to Jordan expansion. Can you maybe just talk on like what that's going to look like in practice? Is that primarily more footwear? Or obviously, [indiscernible] give us a more color on what it looks like.

It's across the board. So it's more footwear. It's exposure. So an example we use is there's a shoe they have called 270. We had it in 75 doors last year. It's in 150 doors right now, and that will be over 200 doors by the time we get it back to school. So it's taking maybe fashion that we had in very limited doors and expanding that more deeply into the chain. You can take that same idea in apparel, where we might have had a fashion capsule that is in 50 doors last year that may be broadly out into most of the chain this year. Those tend to be at higher price points. It's getting some new things like we're getting access to a couple of new shoes. P-6000 is a new shoe we're having access to. We just got in the Pacific, which is a really cool retro running shoe that's a fashion shoe lifestyle that we probably wouldn't have gotten access to before, but we've got it in a multitude of colors out there. So it's expansion broadly apparel, footwear, even in sporting goods. It's more floor space, and so we've expanded the footprint. They have more aisle frontage, and it's also more marketing exposure. So it's a combination of all those things.

And just going back to the 125 stores you guys are expanding [indiscernible], what's the path to expand to the other? [indiscernible] there's going to be categories like sporting goods [indiscernible] within the shop-in-shops, is there a path to get that to full base?

Yes. I mean that's our goal. Obviously, we're working with Nike on that. We'll have -- I know there's going to be a door expansion in 2026. We haven't identified exactly what that looks like at this moment in time. But the goal would be ultimately yes, we'd like this to be an all-door brand.

Awesome. Well, with that, our time is up. We really appreciate your time. It's a great session.

Thanks for having us. Appreciate it.

Appreciate it, thank you.