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High-Ticket Merch Works for Academy Sports

Academy Sports + Outdoors saw net sales decrease 5.8 percent to $1.69 billion in its 2022 second quarter, while net income reached $188.8 million.

With sales in line with the $1.7 billion projected by analysts polled by FactSet and adjusted earnings per share (EPS) of $2.30, ahead of estimates of $2.10, the retailer’s stock jumped more than 14 percent in Wednesday morning trading.

The retailer said its total sales decline was primarily due to fewer transactions compared to last year, partially offset by an increase in average ticket.

In a Nutshell: Sales declined in all four of Academy’s merchandise divisions spanning sports and recreation, footwear, apparel ,and outdoors. The best performing division, sports and recreation, was down 2.5 percent versus 2021. Footwear was down 4 percent, while apparel sales dipped 6 percent and outdoors declined 9 percent on a year-over-year basis.

According to Academy chairman, president and CEO Ken Hicks, the biggest impact to the average ticket was a larger mix of higher-ticket products offered across the outdoors and sports and recreation categories. The retailer is investing in “better” and “best” assortment additions to complement private-label offerings such as the Freely, R.O.W. and Magellan Pro brands, Hicks said in an earnings call.

Hicks described price increases as the smallest part of the change in ticket, but noted that average unit retail (AUR) was up in the mid-single digits in the quarter.

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Steve Lawrence, executive vice president and chief merchandising officer, said a “good, better, best” approach to assortment planning helps Academy more effectively capture customers who may be trading down while retaining existing customers.

Families appear to be trading down more so than individual consumers, enabling the company to further prioritize value even as prices increase, Academy Sports + Outdoors executive vice president and chief financial officer Michael Mullican said.

Merchandise inventories increased 17 percent $1.3 billion from $1.17 billion in the second quarter of 2021. When compared to 2019, inventory dollars were up 8 percent, while overall units declined 12 percent. Even with less merchandise, Academy’s total sales increased 36 percent on the three-year basis, demonstrating the company’s ability to effectively manage inventory, Mullican said.

The higher-ticket outdoors and sports and recreation categories now represent 53 percent of merchandise from 49 percent in 2019, Lawrence said.

“The overall quality of our inventory is in a much better position this year in many of the key brands that we ran light in last year, such as Nike, Adidas, Under Armour and Yeti,” Lawrence said. “Many of our fall holiday receipts last year landed 30 to 90 days later than we would have liked. We moved the initial sets for these businesses back to their traditional timeframes…We should be able to maintain a much better inventory position across virtually all our categories throughout fall and headed into holiday.”

Lawrence cited “controlled distribution by key vendor partners” as a major tailwind for Academy as the retailer maintains its wholesale relationship with Nike.

Gross margin was $596.1 million, or 35.3 percent of net sales, compared to gross margin of $642.5 million, or 35.9 percent of net sales in the prior-year quarter. The company attributed the 60-basis-point (0.6-percentage-point) decline to an increase in e-commerce shipping and higher freight costs, which were partially offset by an increase in merchandise margins. The company attributed 10 to 20 basis points (0.1 to 0.2 percentage points) to supply chain headwinds, mainly due to an increase in private-label products.

Academy is reiterating its net and comparable sales guidance for fiscal 2022 and revising its earnings per share (EPS) forecast upward, with full-year EPS now expected to range between $6.50 and $7.25, ahead of prior estimates of $6.30 to $7.00. Adjusted EPS is now forecast to be $6.75 to $7.50, ahead of the previous projections of $6.55 to $7.25 range.

The company still expects to open a total of nine new stores this fiscal year. It opened one new store in the second quarter in Panama City, Fla. In the third quarter, the retailer has opened two new locations in Atlanta and Richmond, Va. It’s on track to open 80 and 100 new locations as part of a five-year plan.

New stores are expected to deliver a 20 percent return on invested capital, ramp to maturity within four-to-five years and be EBITDA accretive after its first full year of opening, Mullican said.

At the end of the second quarter, the company’s cash and cash equivalents totaled $399.9 million with no borrowings under a $1 billion credit facility. During the quarter, net cash provided by operating activities was $161.3 million.

Net Sales: Academy Sports + Outdoors’ net sales declined 5.8 percent to $1.69 billion from $1.79 billion. Comparable sales declined 6.0 percent.

When compared to the second quarter of 2019, net sales increased 36.3 percent.

E-commerce sales grew 12.1 percent year-over-year, bringing digital sales penetration to 10 percent of total sales in the second quarter—up from 8.4 percent the year prior.

Net Earnings: Net income dipped to $188.8 million compared to $190.5 million in the year-ago period. Diluted EPS was $2.22 compared to $1.99 per share in the 2021 second quarter.

Adjusted net income, which excludes the impact of certain non-cash and extraordinary items, was $195 million. Adjusted diluted EPS was $2.30, down from last year’s $2.34 per share.

In the 2022 second quarter, pre-tax income was $247 million compared to the 2021 period’s $240.9 million.

CEO’s Take: Hicks said Academy is taking a “test and learn” approach to stores opening in new markets.

“When we open a new store, the mix usually starts out on the hardlines of the store as people learn about us, and then the softlines catch up,” Hicks said. “We are getting smarter about the marketing that we do. Because of the way we’re opening stores, the marketing is going to vary. It’s one of the reasons we opened the store [in Richmond], which is an area we had not been in before. It helps us understand how we go into a new area versus an area like Atlanta where we already had a presence and people knew what Academy was. Those stores are helping us. The good news is, overall, they are performing ahead of expectations, and we’re not having issues getting people to work in the stores.”