Academy Sports & Outdoors, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended July 29, 2023, not 2022 Q2. Comparisons below are with the corresponding 2022 periods.
Business context and reporting period
Academy operates sporting goods and outdoor recreation retail stores and an e-commerce business. At July 29, 2023, it had 270 stores in 18 states and three distribution centers. The quarter included two new store openings year to date; comparable sales include e-commerce sales.
Financial performance
| Metric | 13 weeks ended July 29, 2023 | Change vs. 2022 | 26 weeks ended July 29, 2023 | Change vs. 2022 |
|---|---|---|---|---|
| Net sales | $1.583 billion | Down 6.2% | $2.967 billion | Down 6.0% |
| Comparable sales | Down 7.5% | Transactions down 8.3%; average ticket up 0.8% | Down 7.4% | Transactions down 7.6%; average ticket roughly flat |
| Gross margin | $563.4 million; 35.6% | Down 5.5% in dollars; up 0.3 percentage points | $1.031 billion; 34.7% | Down 7.8% in dollars; down 0.7 percentage points |
| Operating income | $211.0 million; 13.3% margin | Down 17.8% | $337.2 million; 11.4% margin | Down 27.1% |
| Net income | $157.1 million | Down 16.8% | $251.0 million | Down 25.9% |
| Diluted EPS | $2.01 | Compared with $2.22 | $3.19 | Compared with $3.90 |
Second-quarter SG&A was $352.5 million, or 22.3% of sales, versus 20.1% a year earlier. Year-to-date SG&A was $693.4 million, or 23.4% of sales, versus 20.8%. Management attributed the higher ratios principally to lower sales leverage, alongside higher compensation, facilities and advertising costs. Year-to-date adjusted EBITDA, a non-GAAP measure, was $416.4 million versus $525.9 million.
For the 26 weeks, operating cash flow was $243.6 million, capital expenditures were $109.8 million, and net cash used in investing activities was $107.8 million. Adjusted free cash flow, a non-GAAP measure defined by the company as operating cash flow less investing cash flow, was $135.7 million versus $210.3 million. Cash declined $25.8 million to $311.3 million.
Liquidity, debt and capital allocation
At July 29, 2023, principal debt was $593.3 million: $400 million of 6.00% secured notes and $193.3 million on a variable-rate term loan, reported at an 8.94% weighted-average rate. The ABL facility had no borrowings and $988.4 million of available capacity, after letters of credit. The company reported compliance with debt covenants and said cash plus ABL availability should fund requirements for at least the next 12 months. Long-term operating lease payments totaled $1.872 billion.
Year-to-date, the company repurchased 2.74 million shares for $156.4 million and paid $13.8 million in dividends. Approximately $143.0 million remained under the repurchase program. A $0.09-per-share quarterly dividend was declared after quarter-end.
Changes, outlook and risks
- Sales declines reflected lower transactions across merchandise divisions, particularly hunting-related firearms and ammunition, athletic apparel and footwear, and several recreation categories. New stores partly offset the comparable-sales decline. E-commerce was 9.4% of merchandise sales in the quarter, versus 10.0%.
- Quarterly gross margin rate improved 30 basis points, primarily due to lower freight costs, partly offset by higher shrink and promotions. Year-to-date margin rate fell 70 basis points, with clearance and promotional activity, shrink and inventory overhead costs outweighing freight savings.
- Management expected 13 to 14 new stores in fiscal 2023 and 120 to 140 over the five fiscal years through 2027. Fiscal 2023 capital expenditures were forecast at $200 million to $250 million. The filing provides no specific full-year sales or earnings guidance.
- The company changed inventory costing from LIFO to weighted average effective January 29, 2023. Management said the change had no effect on prior periods; for the 2023 quarter, reported net income was $3.2 million higher than the pro forma LIFO amount.
- CBP asserted that certain China imports were subject to additional anti-dumping or countervailing duties. The company disputes the determination and deposited duties pending resolution; the amount is not clearly stated in the filing text. The company said it did not expect a material adverse effect but could not assure the outcome or rule out further payments.
- Other disclosed exposures include $117.0 million of freight, technology, construction and other commitments, of which $88.1 million was payable within 12 months, and ordinary-course legal claims. Management identified consumer discretionary spending, competition, inventory management, supply chain, systems, labor and variable-rate debt among principal risks.
- The company completed implementation of a new ERP system during the quarter. Management concluded disclosure controls were effective; the filing notes significant process and control-environment changes from the system implementation.
Key facts for investors to verify
- Whether comparable-sales and transaction trends stabilize, and how much new-store growth offsets them.
- Whether gross-margin pressures from shrink, promotions and inventory turnover improve, and whether freight savings persist.
- Progress against the 2023 store-opening and $200 million to $250 million capital-expenditure plans, and the effect on cash generation.
- The status and potential financial exposure of the CBP duty dispute, which remains unresolved.
- Variable-rate term-loan interest costs, debt covenant compliance and the company’s continued liquidity and capital-return capacity.