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

Hi, everybody. It's my pleasure to introduce Academy Sports and Outdoors to moderate and -- to moderate our fireside chat today. Today, we have Steve Lawrence, Chief Executive Officer of Academy; and Carl Ford, Executive Vice President and Chief Financial Officer of Academy. Thank you so much for joining us today.

Thanks for having us.

We wanted to talk about maybe the consumer first because while I do think you cater to a slightly lower income consumer, you see a broad -- excuse me, a broad swath of consumer. And so with the higher gas prices weighing on discretionary spending, particularly for the low-income households, how would you characterize the health of the Academy customer today?

Yes. I would say definitely, we saw it change as we progress through the first half of the year. So if you look at our first quarter results, we're pretty happy, ran almost a 3 comp. Definitely saw a slowdown as we got into the second quarter where we were in a negative 0.4% comp, grew the top line 3%. I think the difference was the consumer had probably some excess tax refund money in Q1 that helped kind of abate what was happening from an inflationary perspective. And I think as we got into Q2, that money was gone, right? And I think juxtapose that with gas prices going up at the same time, I think that definitely put pressure on the consumer. If you look at what happened with us specifically, we said in our call that we kind of bucket the consumer into 3 income groups, under $50,000 we'll call it low income, $50,000 to $100,000 middle, and then over $100,000 higher income. We saw the lower income consumer, that under $50,000 consumer, traffic be down almost high-single-digits, which was a deceleration from what we saw in Q1 where it was only down low-single-digits. Conversely, we saw the higher-end consumer, north of $100,000 shop, and come in high-single-digits up. And so that was also an acceleration. So I think you've got kind of 2 ends of the spectrum where you've got a lower-end consumer who's under pressure. And I think, with gas prices inflation being where they are, I think they can't afford much beyond paying rent and feeding their family and clothing their family. So I think they're opting out or only opting in when it's very promotional and they can get the best deals and they can stretch their spending. And conversely, the higher-end consumers actually still are very strong and hanging in there. As a matter of fact, if you look at our -- over time, we used to look at it like 1/3, 1/3, 1/3, 1/3 were that under $50,000 and 1/3 were over $100,000, just based off of the math. But over the past couple of years, that under $30,000 customer is probably a smaller percentage than it used to be for us. They're probably in the 30% range. Conversely, the over $100,000 is probably closer to the high 30s, low 40s now for us in terms of percentage of contribution. So I think it's changing, but I think that low-end consumer, whether it's our customer or not, is definitely under pressure and is pulling back spending.

I mean a lot of questions we are getting recently are on the health of footwear and apparel, athletic footwear and apparel. Do you worry at all that the strong athletic cycle we've seen for the last 7 or 8 years is waning in any way?

No, I wouldn't say it's waning. We're not seeing that necessarily in our business. We got a lot of questions around this on our Earnings Call. For us, footwear is about 20% of our business. So it's the smallest of our 4 divisions, still meaningful. We have a pretty diversified footwear business. So we certainly sell Sneakers, but a lot of the shoes we sell are kind of end use. So for example, the cleated business, right? And we've seen no slowdown in that business. Kids are still playing sports, still need cleats to play baseball, football, et cetera. We do a big work boot business. That continues to be very strong. A lot of our casual styles have been pretty strong as well. We talked about brands like Ariat that's doing well for us, or BIRKENSTOCK. There's been a little bit of softness in kind of the lifestyle piece of the athletic business for us because we have such diverse assortment, it's easy for us to kind of move money around between the 2. So we'd like the footwear business to be better. I mean we're down, I think, 1% for the quarter. According to Circana, we picked up share there. So we're happy with that, although we'd like that category to be positive. But we think we can mitigate it by balancing out the assortment and investment in other categories.

So footwear is not the biggest part of your business, and you don't have a lot of exposure to the legacy silhouette that I do think is the place where inventory is building a little bit. But it does sound like the promotional environment is going to be a little bit more aggressive as a result of that. So again, even though you don't overlap directly with it, how would you characterize how the promotional backdrop today would impact your business? And in what categories are maybe you seeing outsized promotions aside from footwear?

Yes. I would say that it certainly progressed from Q1 into Q2. And I think that corresponds with the customer slowing down and exhausting whatever tax refunds they had. I would say we saw it be more promotional within Q2, particularly back-to-school. How I think it manifested itself was a couple. I think you saw people extend the length of promotions. So maybe last year where they ran 1 week. This year, they ran 2 weeks or 3 weeks. In some cases, more categories were included in those promotions. Our expectation is that for the back half of the year, it's going to play out very similar to how Q2 played out, right? So we think holiday will be probably more promotional than it was last year, and we've modeled that in our plans this year. And how we're funding that is we're being very mindful about the fact that the customer is really leaning in what we call -- talk about episodic shopping, right? They're coming out and buying during the times of need, when they can get the best deals, and they're kind of pulling back in the lull. So we're rationalizing promotions in the lulls, and we're kind of in one right now once you get past back-to-school until you get into middle part of November. And so you're going to see us be very thoughtful about how we promote in there and then save some of those promotional dollars to fund what we think will be a more promotional holiday.

On the merchandising side, you've made a lot of changes in the last year to 18 months. You've brought in Jordan for the first time. You've expanded your assortment in Nike, and now you just announced the 15 stores that are going to have HOKA...

And online.

And online -- sorry, all online, only 15 stores with HOKA. And so could you maybe talk a little bit about what these brand extensions and additional brands have meant to your business? And what do you think it gets for you longer term?

Yes. I think if you think about Academy, we've changed a lot over the past 6 or 7 years. And if you go back pre-pandemic, we were always good at kind of that good level of pricing, right? And the example I always use is when my son was starting out playing sports and you needed to get him the Little League gear, right? And you can find the bat, ball, the glove at Academy for under $100 and get out. And then the next month, when he decided he want to play soccer, we put that stuff in the closet and go buy the soccer gear. And what we really weren't good at, though, was that better, best level. So if you wanted to stick with the sport and maybe play in a rec league or even a traveling ball team, we didn't have that gear. So we've been upgrading the assortment broadly across all the different categories, whether it's in sporting goods, apparel, footwear, outdoor to layer on that better, best end of the spectrum so that we had the gear that we could stay with people as they kind of progress through the life cycle of their passions. And so in doing that and adding these brands and assortments broadly, I think it's given customers, who in the past didn't think of us as a viable option for their sports and outdoor needs, a reason to come check us out, right? And so that's been more of a longer-term evolution. Most recently, what we found is that as we've been adding assortment, there's still pieces, there's brands. And we look at -- I'm sure like everybody else does this in retail, null search terms on your website. That's -- what's the most requested thing that you don't have in your assortment? It used to be Jordan. And so that led us to start up a dialogue with Nike about how do we get access to Jordan? And 6 or 7 years ago, they probably would not have given us access to brand because we hadn't built a footwear business north of $100. And we've built a really nice running business with Nike between $100 to $200, and that gave them confidence that we could sell the price points like Jordan. So we added that in 145 stores initially last year. We now have shops in over 200 doors, and we have some of the product in all stores. And that also helps open up doors for other brands who are requested. So HOKA, behind Jordan, was the second most requested brand that we didn't have access to. So we're excited that we're going to launch that in 15 stores and online. The good news of having it online is we, like a lot of retailers, have handheld devices in stores. So if you come into a store that doesn't have HOKA, that person working in that department can sell you the HOKA shoe that you want. They can either ship it to the store for you to pick it up or we can ship it to your house for free. So it expands that reach beyond just the 15 doors. And we're going to continue to add brands that our customer is looking for. And I think what that does is twofold. I think it, A, attracts a customer who maybe didn't consider us before for it; and B, it helps a customer who was shopping with us, who had to leave our store to go some other place to find what they're looking for to stay with us. And so I think there's kind of a twofold effect there.

And I mean, Nike, Jordan, and HOKA get all the kind of like top billing just because they're big, big brands. But I know you've brought a lot of other brands into the store as well. I wondered if you could highlight maybe a couple of examples of that as well.

Sure. Yes. I mean those are the brands I think people are most familiar with. But we have a very broad-based eclectic assortment, right? So you think about in apparel, we do a big athletic business, but we also do a big work Western wear outdoor business. And so we -- the team has gotten really good at this. I'm really proud of the work they've done of incubating a brand in a small door count and then once it hits, expanding that out broadly. So we launched a brand, God, about 3 years ago called BURLEBO, which probably a lot of people in the audience haven't heard of, but it's a younger trending outdoor brand that was founded by an ex-football player from the University of Texas. And he saw a void in the marketplace where he wanted outdoor apparel, but in a younger man's silhouette and styling. And so we have that in 25 doors. We now have that in all doors. It's in kids and men's. It's a top 10 apparel brand for us. So we scaled that very quickly. There's a new running short brand, conversational print running short brand called ChicknLeg. I've never heard of it, but it was -- we're seeing it in a lot of our research in some of these run specialty stores. And so we put it in 25 stores, did very well. We expanded that out to 200 stores. We've got work Western wear brands. You think about a brand like Ariat, that's been around a long time, right? We've had Ariat in our stores. But the demand for that just keeps growing and growing and growing. And so we just launched Ariat shops in 200 doors. We're pulling together a fully integrated presentation that we're really excited about. And even in private label, we have a stable of over 20 private label brands that we have in our store depending upon the different category. And one of the things we saw a void in was in opening price point hunting rifles and shotguns. And so we have a shooting sports brand called Redfield that used to be just about optics that we've expanded into other categories. We're launching Redfield firearms for the first time. And what we have is market-leading product that has features and benefits that we can retail for about $100 less than comparable national brand items. And so you're right, newness is not just apparel and footwear and -- from the big brands. It's across the store. Another thing that's having a moment is trading cards, right? You wouldn't think of us as a place for trading cards, but we have these queuing sections in front of our store that the mom takes the kids through if they're checking out, kids want the Pokemon cards or the baseball football cards that we have. And so that's also been a driver for us. So the team has, I think, really stepped up their game on this front. And I think it's really helped us unlock a lot of different things in the past couple of years.

Great. And just to kind of close the loop on merchandising, what does Texas winning over Ohio State mean for your stores?

Well, it will mean a lot if they win the national championship. But certainly, we have a bigger footprint in Texas than we do Oklahoma. So you definitely had a bias towards Texas and most of our team over the weekend.

But in all seriousness -- it was a great game, though. With the World Cup, it was a big contributor to your second quarter. But I think you've talked about it having a halo effect on the whole soccer franchise maybe for the rest of the year. Could you maybe talk a little bit about now that we're outside the World Cup, how has that come to fruition? Are you seeing what you thought you would see in the soccer category? And how do you think about lapping that in '27?

Yes. So we had plans like everybody did for World Cup. I think we had over 30, 40 matches in our footprint, and it generated a lot of excitement. We actually set up shops at the front of our stores that pulled together jerseys and balls and all kinds of fan gear. And I would say that it did exactly what we planned to do. It hit the plan. We're very happy with it. So it drove traffic into our stores. I would say that it wasn't as accretive as we thought because I think what we found was maybe for Father's Day, somebody got a team USA Jersey instead of Magellan fishing shirt. But we certainly were very happy with the traffic it drove in during that time period. Longer term, to your point, I think the benefit is going to be on youth soccer participation. And so we've seen that business generate double-digit increases within Q2. Those trends have continued into Q3. We're very happy about that. And this is going back a long way, but last time that the World Cup was held in the U.S., we saw a dramatic sustainable surge in youth soccer, and we think that's going to happen into next year. As we lap it going into next year, we think that there's Women's World Cup, although that's not necessarily in our footprint. It's in our hemisphere. So the games will be broadcast real-time, and you have to believe women's team is going to be a favorite. So I think we'll see some surge there. And we also think there's upside just in our licensed team apparel business to get better localization. We -- one of the things that didn't work out as well as we had last year, the Oklahoma City Thunder winning the NBA championship. Unfortunately, for us, we didn't have the mix in our footprint. So we were big Spurs fans. We didn't get that side of it, but maybe we'll get one of our teams in the NBA finals next year as well. So we think there's upside between Women's World Cup, soccer, in terms of participation and then hopefully other licensed businesses that we can capitalize on.

Great. Thank you. Carl, maybe I can turn it to you with regards to unit growth. Academy's unit growth strategy is now, you announced, 125 stores to open over the next 5 years with 20% of those in new markets and a focus on outer suburbs. Could you maybe walk us through the strategy in opening the new stores since it is a little bit of a shift in what you've done prior?

It sure is. Yes, if you think about our long-range plan, we're going to go from $6 billion to $8 billion. The bulk of that sales growth is going to be through launching the 125 stores. We've changed a lot. We restarted our new store opening program back in 2022. I would say it was very opportunistic. If there was a box available, we were interested in talking about it. We really honed what it is that we're looking for in a new store. And I think it has to do a lot with the demographics of the market around there. And so what we found is that stores come out of the gate at $12 million to $16 million in year 1 sales. It's going to be $12 million where there's low brand awareness. As an example, we launched our first new stores in the state of Ohio last year. There's 0 brand awareness of what Academy Sports and Outdoors is there. You have to invest into that. In Pennsylvania, some new stores that we're launching. On the flip side of that, when we launch in one of our legacy markets where Academy is a known commodity, but maybe the closest store is 1 hour or 2 away, they're going to come out at $16 million. They are comping mid-single-digits in the second quarter. Very pleased with that. If you think about from an overall ROI standpoint, $3 million to $4 million in CapEx. It's about another $1 million in net inventory, 20% ROIC, EBITDA positive in year 1. If you look at where it is that we're opening those stores, they tend to not be in urban centers. They tend to be in the suburbs or exurbs where a lot of the categories that we sell around outdoor, and grilling, and backyard fun, and things of that nature, they resonate more with that local consumer. And so we've pivoted our strategy significantly. I like what we're doing. I love the pipeline that we've got visibility to. And so we feel good about 125 stores.

I think the biggest unlock is the work we've done around our customer. We've done so much customer research over the past 2 or 3 years. And I think we have a really good beat on who that core customer is. And it sounds like a pretty logical thing, but putting stores where your biggest base of customers is. That's been the biggest change. And they live in these suburbs and exurbs and mid-sized markets that are underserved, and that's been a big unlock for us.

Great. And I know there's a great waterfall effect with some of these newer stores coming into the comp base over the next couple of years because of how they're performing. But how are you looking to your older locations, your more mature locations? And what steps are you taking to continue to improve the comp trajectory there?

Yes. So if you think about our new stores, so I'm talking about stores from '22 to '25, we've launched 63 new stores, 47 of those stores were in the comp base at the end of the second quarter. They provide mid-single-digit comp provided about a 50 basis point tailwind to comp. If you look at e-commerce, up 12.8%, about a 12% penetration. That's call it, 150 basis point tailwind to comp. So by default, those stores that are non-new have a low-single-digit comp, and that's what's drawing us down to a 0.4% negative comp in second quarter. I don't think you can think about those stores in isolation from what's going on with the e-commerce channel. I think those are -- over half of the goods that we sell online are picked up in store, whether it's through buy online, pick up in store, or special order firearm, the customer is coming into the stores. And so this sounds cliche, but that is a miniature fulfillment center in those locations that is helping to prop up the overall growth of the business, and we were up 3% in total sales in the second quarter, 4.7% first half of the year. So we're investing into shops. We've talked about Jordan shops or Ariat shops. We've talked about the loyalty program, this 3-tiered loyalty program that we've launched. It's providing a tailwind. We're refreshing those doors to make sure that they're fresh for the customer and that it's an appealing environment, and we're launching new brands. And where we're launching those new brands, those tend to not be in these underserved markets. They're in those doors that are non-new doors, those legacy doors if you will. So it's a part of our overall strategy. They are improving, and they provide a meaningful EBITDA to the company.