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

Okay. Hi, everybody. Hi, Larry. How are you? Thanks for coming to the fireside chat with Academy. Today, we have with us Steve Lawrence, Chief Executive Officer. Steve has served as CEO and on the Board of Directors since June 2023. We also have with us Carl Ford, Executive Vice President and Chief Financial Officer of Academy. Thank you for joining us today.

Thanks for having us.

I thought we could start with just a high-level question, just how you would define the year of 2025 so far for Academy.

It's been an interesting year. I mean, I guess, that's what you get when you work in retail, right? It feels like every time things start to normalize, something else comes along. So for us, listen, obviously, I think the backdrop of kind of the changing trade war has had some impact on how we're navigating on the flip side. We've got some really good initiatives we've been working on that I think are really starting to bear fruit, right? So we talk about our long-range strategy, new store growth. We're seeing the stores we've opened up in the past couple of years start to comp positive in the mid-single digits. We're really excited about that. Our dot-com business has been accelerating. We've done basically a back-to-basics approach there in terms of making the site easier to navigate more functional, and the customers really reacting. And we ran almost up 18% in Q2 on that, and that's an acceleration versus Q1. We've got some new brands we've launched, which we got a little bit of press on. So we introduced Jordan this year. That was a big plus for us, obviously, and then we've rolled out some new technology. So it's been a year of investment, while we're kind of navigating the backdrop and what's been really exciting, we've seen the business progressively improve as investments are paying off, resulting in a positive comp for Q2, which we're excited about.

That's great. So maybe we can start with the health of the consumer first. I think if it's the right characterization, you're more middle quintile in terms of your consumer. But I also think you've started to benefit a little bit from a trade down from a higher-end consumer. So could you maybe go through some of the income cohorts and what you're seeing across each?

Yeah, absolutely. So one of the things that is a challenge, we operate a really diverse business, as you know. I mean, we sell things from apparel and footwear to grills, to firearms, to fishing rods, to sporting goods, and there's not one true source you can get all the data, right? But one of the things we really lean into is Placer.ai, I'm sure a lot of you guys are familiar with that. And they give us some really interesting cuts on traffic data. And so they give us some demographic cuts that we've really been leaning into. And so you kind of quintile the customer into $25,000 to -- under $25,000; $25,000 to $50,000, those are kind of the bottom 2 income quintile. That's about a 1/3 of our customers. We've seen traffic there down in the high single digits. And that's been a continuation. That's something we've seen over the last several years. And I think that's a function of that customer being more under pressure and opting out or trading down in some cases. The middle income quintile for us is $50,000 to $100,000. That's another 1/3 of our customers. We've seen that be fairly stable. But what's been really exciting is over the past probably 4 quarters, we've seen acceleration in the top 2 income quintiles, people making over $100,000 a year. We've seen a mid-teens acceleration there over the past couple of quarters. And that we saw it start happening last year in Q3, built into Q4, built into Q1 and once again into Q2. So we feel like we're adding customers in at the higher end faster than maybe we're trading at the lower end. And Carl and I talk about this, and Carl had a really good observation. If you think about it, I think sometimes when people thought of Academy because we're so rooted in value, I think people associated with us over-indexing with a lower income consumer. And that being a risk, particularly if the economy is a challenge, I think we've derisked the customer portfolio a little bit with some of the new customers added in. And I think a lot of new brands we've added in, I think, have helped give that customer permission to come shop at Academy.

That's great. So that's a good segue maybe to the newest brand that you've brought in, which you mentioned is Jordan. But in addition to Jordan, you've also expanded your Nike assortment as well. So I wondered if we could maybe take each initiative and ask a couple of questions around it. Jordan is the biggest launch you've had in your company. I wondered what the expansion of the brand will look like going forward. What's yet to come? And how much of a lift do you think that you're getting as a result of this?

So we launched Jordan at very end of Q1, actually April 23, obviously. Michael Jordan's number is 23. So we had a whole marketing campaign behind that. And so what we did is we launched the brand in 145 doors with a shop concept. And so if you walk into our stores, most of our stores, there's an outer perimeter ring that has hard goods, so that's sporting goods, outdoor, et cetera, around it. We put apparel in the middle and shoes is generally kind of at the backside of the store. And the apparel pads split between men's and women's. And so we built right in front of the fitting room on each corner, Jordan shop, one for men's, one for women's, but they merchandise together. That's expanded fixturing, more mannequins, a lot of visual collateral, obviously, to highlight the brand. We put a big kind of ring around it, so you can see it from all corners of the stores, wayfinding. And then we actually did something we've never done before. We took the footwear and we cross-merchandised that and put that on the fitting room wall. And we used a big Jordan graphic there featuring some of their best athletes like Luka who's very important or was very important in our geography before he got traded to Lakers. And built just a destination for Jordan between men's and women's. And then we replicated that on the kids' floor as well. I think visually, it was exciting and really engaged with the consumer. It really called out that the brand was there. A lot of great success with that. We haven't cited Jordan specific numbers, and we don't have a last year from Jordan. So we tend to lump Jordan and Nike together, at least when we're talking externally, and we've seen double-digit growth from that, the combination of Nike and Jordan, with Jordan being a significant contributor, but the Nike business is good as well. As we progress through the year, we've taken some categories within Jordan. So for example, as we got into the summer months and football became important, we took cleats, and we rolled those out to all stores. So all stores have cleats in them. We've also taken categories like backpacks and rolled those out to more stores. And then as we go into next year, the plan would be to expand that shop concept broader into the chain. So right now, the shops are about half the door count. I think ultimately, our goal would be to get it into all stores. That certainly, I think, will happen over the next 2 years. We're going to see how much we can get done next year.

Was Jordan something your existing customers were looking for? Or was this a way to maybe again, address the new customers?

Yes. I think it's both. So like all retailers, right, we listen to customer feedback. And one of the key places we get customer feedback, obviously, is anecdotal in store. But we look at our website, and there's a term no search terms, right? People search for something on your site, a brand or a product that you don't have, and it's generally a good indicator of something you should add to the assortment. And the highest no search term we had on our site was Jordan. And so we knew there was an appetite for the product in our stores. So we certainly used that as we were talking to Nike about adding the brand in. And we also told them the story of who Academy is and how we think we help them reach customers. We over-index with the Hispanic consumer in some of our stores, helping them reach a customer they weren't reaching through their own website or through other points of distribution. So that certainly, I think, has helped us on one end where there are customers clearly who are shopping with us, right, and had to go other places to find the brand. And at the same time, we also are tracking people coming into the store for the first time, signing up for loyalty, and we can see they're purchasing Jordan, certainly, but in a lot of cases, they're broadly shopping across the store and discovering the value we have in our private label or other merchandise categories we carry. So it's been a really nice addition in terms of both keeping all older consumers who are shopping with us -- already shopping with us and attracting new consumers.

Could you maybe just talk a little bit about the Jordan assortment versus other retailers? Is there quite a bit of exclusivity or uniqueness in what you're carrying?

I wouldn't say there's exclusivity. I think it's the lens that you focus on. So to be clear, and we talk about this very broadly, our focus is sports. So one of the reasons I think our partnership with Nike is so strong as well as adidas and Under Armour and all the brands is, at our core, Academy has always been known as the good retailer. And so you think about as a kid's beginning sport, right? We're the entry point for that. So when my kids were younger, and my son wanted to play baseball, right? Academy is the place you take them to, to get the bat, the ball, the glove, the cleat, you can get out for under $100, right? And then, of course, the next month, when they decide they don't want to play that sport anymore, you put that in the closet, and then you go buy the shin guard and the ball for soccer. And we've always been good at that, right? We've managed to add on a whole better bestsellers. We can now stay with that customer on that journey through sport. But the belief of the brands is if you can get them wearing a pair of Nike cleats or adidas cleats in their first sport, they'll stick with that through life, right? And so I think that same idea applies with Jordan. So where we're really focused in Jordan on footwear is on shoes that kids will play basketball in, right? So we don't have the limited edition '92 Retro Jordans, right, that are limited edition, that's not our model. At some point, it may evolve to that. But really, the opening assortment has been focused on kids' shoes that they'll play basketball in, cleats they'll play football in. We've expanded into flip-flop slides and other categories that they may -- if they're not in the field, trade into socks. And because we launched in spring, we're kind of at the tail end of basketball season, we only had 2 or 3 shoes in a couple of different color ways, that's expanding dramatically as we go throughout the year. So I think there's 5 or 6 different styles and other color combinations that are on the floor now, that will just continue to grow as we progress. So nothing terribly exclusive, but I think the way we're curating it and focusing it around sport, I think, is probably unique. On the apparel side, obviously, it's a little harder. I mean, obviously, kid will wear a basketball short or jersey or something like that, both from a sportswear kind of a casual perspective as well as to play in. There, I would say we have access to the full line and have a pretty robust assortment of goods there. And then, of course, we carry footballs and basketballs and all those other categories in sporting goods as well.

And I think you've said that actually the additional Nike product that you're now carrying might even be bigger than what Jordan is. So I was wondering if there was a way you could contextualize that. What are you carrying now that you didn't carry before? Is this new product bringing in a new customer? And then just when thinking about both Nike and Jordan and the fact that Nike as an enterprise is going back into more wholesale points of distribution, how do you differentiate that?

So I would tell you that it's maybe less about getting access to stuff we didn't have before, but certainly getting more access and spreading it deeper throughout the store. So we've always had 25, 50 store cluster where we do higher-end fashion, right? And as we expanded Nike, so what we actually did is we physically expanded the square footage for Nike, depending upon the store 10%, 15%, gave more aisle frontage, very similar to what we did with Jordan. We brought in mannequins, signage and really amped up the brand presence in the store. It's getting more of that fashion product, having it a bigger percentage of each store's assortment and driving that fashion deeper into the chain. So from an apparel perspective, you'll see higher-end things like Phoenix Fleece, which is a $70 fleece piece that they'll sell that in the past may have been in limited doors, it will be broadly distributed across the chain. In footwear, we would get some access to things like the 270, which is a hot shoe for them. We had it in a limited door count, that's now in all stores. And it's actually our #1 shoe from Nike. And so I think it's a little more access, and then I think it's more broad distribution of that. In some cases, it's around timing. So for example, they're really focused, as most of you guys probably know, on the performance running category and reclaiming their heritage there. And so they've come out with a new Vomero 18 and then they also have Vomero Plus. Traditionally, when they roll a shoe like that out, they would put it in like run specialty first, like Fleet Feet or somebody like that. And then maybe 6 months later into a bigger box. And then after that, a year or two later, we might get access to it. We actually have that on the floor now, and I think we got it a couple of months after the release there. So it's trickling down much faster into our store as well. So it's both timing as well as probably breadth of exposure we're getting there.

And so we kind of talked about some of the shorter-term pieces to the product you're getting, how it's filtering through to all the stores. But I think we've seen at other retailers that when you do carry a little bit more depth and breadth of a brand, perhaps it begets other brands, other higher-quality brands. Have you seen any movement yet from brands that maybe you wanted to bring into Academy because of this bigger relationship with Nike?

Look, it doesn't hurt, right? I mean I think that -- we talk a lot about Nike, but -- and certainly, they're our #1 brand and a very important brand. But with the category merchandising that we have that is diverse, I mean, it's equally important to get whatever the hot new thing is happening in fishing or hunting or team sports. And so I think when some brands have seen how we can bring a brand to life, how we treat it, how we launch it, I think it's opened up some doors. So we've got some exciting new brands across the store, one we've talked about several times with people is there's a brand out there called Turtlebox, right? And it's kind of a new emerging brand that is kind of like the YETI for outdoor speakers, right? And it's got limited distribution. It's something we're a big believer in. They believe in us. I think we share a customer base that we're going after. In drinkware, it's going after. Obviously, everybody knows popularity Stanley had over the last couple of years. But Owala is right behind that, right? And then after that, there's brands like HydroJug. We have some brands in apparel that are more outdoor centric, like there's a brand we carry called BURLEBO. And so I think in every case, having something you can point to like how we launched Jordan or how we treated the Nike Power Up is a great proof point for them to say, "I want you to do that for my brand as well," and we certainly use that to help unlock and open doors.

And with all this merchandising effort and change, are we at a place now where you think that we can see a period of sustained same-store sales growth?

That's our hope. That's our belief. I think that it feels like the initiatives are gaining traction and momentum. Our belief is, obviously, we're here for growth, right? And so this year, we returned to top line growth in second quarter positive comps. And the goal will be to sustain that, right? And so I think we've got a really good game plan. I like the initiatives and how they're playing out. Certainly, I think that as you think about the back half of the year and as I think tariffs continue to find their way throughout the cost of goods and you see retailers adjusting prices, I think we have been focused on value. Value is our North Star. It's who we are at our core. It doesn't mean we don't sell higher-end, better stuff. But at our core, it's offering great value on our private label, great value from the national brands that we carry. And so when we think about all these price adjustments that are working their way through, we spend a lot of time making sure that we still maintain our relative value on those things. And I think what we're seeing at the high end is customers trading in. And I think it is because of the value offer, and we think that's going to continue to accelerate.

Maybe if we can transition to tariffs, your June guidance update included a range of expectations for the tariff environment. Can you remind us of your exposure and what's reflected in the guide?

Yes. So from a tariff perspective, we've done a lot to offset them. I think the best way is to not pass them on, [ pay them, ] pull forward a lot of inventory, about $100 million in the first half of the year at pre-tariff prices [ that's between that ]. We've partnered with our factories. I think we've done the other things that you see proactive retailers do. If you look at our gross margin, we're up 30 basis points year-to-date, and most of that's driven by in the merchandising space. And our guide for the full year was to either be up 10 basis points at the low end, so we can get back some margin or be up 60 basis points the last year. We feel like we're right in the middle. And from a preventative standpoint, I think we've done more than most associated with not having to pay that overseas tariff by capitalizing on domestic purchases, and we hope to manifest that for the customers this fall.

If we could just move to margin. Actually, in an environment -- if the environment was to get tougher, how are you thinking about addressing any kind of incremental SG&A spend?

Yes, I think -- well, let me just be straightforward. We delevered SG&A by 150 basis points in the second quarter, more than all of it was related to these initiatives that Steve is talking about. So e-commerce being up 18%. We're proud of that. We've invested into that. The new stores, once they get around that 14th month and they're comping mid-single digits, we've invested in new stores and the brand launches, which we outlaid some costs associated with that and Nike and Jordan together being up double digits, we're proud of. On our base costs, we're leveraging. And so as it relates to the fall, the annual guidance had embedded into it about 100 basis points of deleverage in SG&A. Every nickel of that is going to be focused on initiatives. As it relates to base, we've got a new CIO. He's doing a great job at controlling costs with his third parties and making sure that they're kind of helping us offset some of those tariff pressures in a long-term partnership way. And so we think that we can lever in the back half of the year on the base, but still invest into these initiatives that are working well.