Academy Sports and Outdoors, Inc. (ASO) Q1 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors First Quarter Fiscal 2022 Results Conference Call. At this time, this call is being recorded. [Operator Instructions] I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors First Quarter 2022 Results Call. Participating on the call are Ken Hicks, Chairman, President and CEO; Michael Mullican, Executive Vice President and CFO; and Steve Lawrence, Executive Vice President and Chief Merchandising Officer. As a reminder, statements in today's earnings release and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our filings with the SEC. The company undertakes no obligation to revise any forward-looking statements. Today's remarks will also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release which is available at investors.academy.com. I will now turn the call over to Ken Hicks, CEO. Ken?

Thank you, Matt, and good morning, and thank you all for joining us today. Let me start the call by thanking all of the Academy Sports and Outdoors team members for their continued hard work and dedication to our vision of becoming the best sports and outdoors retailer in the country. Before I provide a high-level overview of Academy's first quarter results, I would like to spend a few minutes discussing the opening of our first new stores since 2019. On April 24, we opened our 11th Metro Atlanta store in Conyers, Georgia. It was a great job by all of the team members who helped execute this highly successful store opening. This location was built with our new store format, making it an even more exciting place to shop with added visuals featuring brand and key item call-outs, key category shops, enhanced category sidelines and improved, more efficient checkout and more localized inventory. We now have 260 stores in 16 states, and we're excited about the growth opportunities we have across the rest of the country. Our current plan is to open at least 8 new stores this fiscal year and 80 to 100 stores over the next 5 years. We view this growth in 3 distinct areas. First is filling out existing markets to build scale, like in Atlanta, where we just opened and plan to open another store later this summer; second, expanding into adjacent markets like our planned opening in Lexington, Kentucky, later this year; and third, opening in new markets. Our current store base is located in only 16 states, and all states deserve Academy stores. We will be opening our first stores in Virginia and West Virginia as we enter these 2 new states later this year. Our unique concept has been well received because we sell fun, and customers are drawn to our broad assortment of top national brands and high-quality private labels at an everyday great value. We have an exceptional model with the highest store productivity in our peer group, making new stores our best investment for a high return on invested capital. Now turning to our first quarter results. The foundation of our business, which is built on the operational improvements made over the past few years, is very solid as we transition out of the pandemic environment. While some broader market headwinds remain, such as inflation and supply chain constraints, we are a fundamentally different company than we were 4 years ago with the improvements across all elements of the company, including merchandise, marketing, store operations, supply chain, systems and omnichannel, with a strong team that has demonstrated their ability to execute in different market and challenging environments. We also see a consumer trend to have a healthier, happier and more fun lifestyle which supports more of the sports and recreation merchandise we sell. We saw the benefits of these improvements and trend in the first quarter as we weathered the headwinds and last year's stimulus payments. Our comparable sales decreased 7.5% in the first quarter, in line with our expectations. As a reminder, the company was lapping 38.9% comparable sales in the first quarter of 2021, partially driven by the government stimulus payments. When comparing the quarter sales to the first quarter of 2019, which we believe more closely aligns with the normalized sales trend, total sales have increased 36%. Our expectations is to maintain a similar growth rate to 2019 for the remainder of the year. During the quarter, we were very pleased with our positive e-commerce performance, which grew 19%. We continue to invest in technology to accelerate our omnichannel growth to create a seamless and engaging experience for our customers. All 4 geographic regions and each of our 4 major merchandise divisions, sports and recreation, apparel, outdoors and footwear, saw a decrease in their year-over-year sales. However, when compared to the first quarter of 2019, each merchandise division grew by at least 20% with outdoors increasing by more than 50%. We believe this division is a real differentiator for us long term as fewer retailers are focused on it, and we continue to expand our assortment through relationships with vendors, such as Coleman, YETI, The North Face and more. Steve will discuss our merchandise results in more detail later in the call. Looking at the second quarter with our very productive and profitable stores, our growing e-commerce business, healthy inventory with broad and deep product assortments and upcoming major traffic-driving events like Father's Day and the Fourth of July, we are focused on winning the summer season. For the full year, we have confidence in the positive sports and outdoors market trends that have been driving our business, and we have a strong strategic plan to continue to drive sales and profits over the long term. However, we are cognizant of rising macroeconomic challenges. And as a result, we believe it is prudent to revise our full year guidance to account for these increasing risks. Regardless of the dynamics of the economy, though, our team has learned to successfully navigate our business over the past few years, and we will continue to win and service our customers at the highest level. I'll now turn the call over to Michael to review our first quarter financial results, discuss our capital allocation efforts and provide more details on our revised guidance to 2022. Michael?

Thanks, Ken, and good morning, everyone. In the first quarter, Academy delivered solid earnings on a planned sales decline. There were a lot of actions taken and operational discipline from our strong team across the company to deliver this performance. Let me walk you through the details of the first quarter. Net sales were $1.47 billion, a decline of 7.1% with comparable sales of negative 7.5%. The sales decline was a result of fewer transactions this quarter compared to last year when elevated demand was driven by the stimulus payments. The decline was partially offset by an increase in average ticket driven by higher average unit prices. Our e-commerce sales grew 19% and made up 9.5% of merchandise sales in the quarter. Since Q1 of 2019, e-commerce sales have grown 375%. We continue to transform our e-commerce site into a robust, seamless customer experience that is well integrated into our omnichannel platform. E-commerce growth should continue as we make further enhancements to academy.com. Additionally, both the number of markets we serve and our overall brand awareness continue to increase as we open new stores which will ultimately drive more omnichannel business. Overall, we gained market share during the quarter. Going forward, we believe we will continue to gain share based on the following factors: our position as the market leader in many of the fastest-growing markets in the United States; increasing customer visits and conversion rates through more targeted and personalized marketing campaigns; driving greater adoption and use of our Academy credit card; improving customer service through more team member training, optimizing schedules and faster checkout times; our continued commitment to the outdoors customer while other retailers have deemphasized the category; and lastly, our strengthening partnerships with major sports apparel and footwear brands. Moving to gross margin. Our gross margin dollars were $521 million with a rate of 35.5%. While our gross margin rate was slightly below last year's rate of 35.7%, we saw several positive developments as a result of the structural changes we have made to our business, including the merchandising and supply chain initiatives we have been talking about for several years. For example, our merchandise margins were higher than Q1 last year. Additionally, due to the incredible efforts of our supply chain team, freight expense as a percentage of sales was lower than the same period last year. Our gross margin rate has expanded by more than 600 basis points since 2019. We expect that it will continue to be structurally higher than historical levels as a result of the success of our initiatives. Our focus on expense management has paid off. SG&A expenses were 21.5% of sales during the quarter, including new store opening expenses. This is a slight deleverage to last year, mainly due to lower sales but was in line with expectations. For the full year, we still expect SG&A dollars to be less than in fiscal 2021. Interest expense was $3.6 million less than Q1 of last year as a result of repricing and paying down our term loan by $99 million in May 2021. In total, we achieved first quarter pretax income of $195 million. First quarter GAAP diluted earnings per share were $1.69 per share compared to $1.84 per share in Q1 2021. Adjusted diluted earnings per share were $1.73 per share compared to $1.89 per share in Q1 of 2021. From a store-level sales and profitability perspective, trailing 12-month sales per square foot were $363, and trailing 12 months adjusted EBIT per store were $3.6 million. As a reminder, 100% of our existing stores are profitable and accretive to earnings which gives us great confidence in our future growth potential. On the subject of store profitability, as Ken mentioned, we opened a new store in Conyers, Georgia, at the end of the quarter. It's off to a strong start. In fact, it delivered one of the highest first 2-week sales of any new store opening in Academy's history. We are excited and grateful that customers came out, liked our broad assortment at great prices, and most importantly, went home with something fun. The success of our first new store opening in several years gives us great confidence as we enter an accelerated phase of store growth. We plan to open at least 8 new stores in 2022, all of which should follow our general new store opening model. Each store is expected to have an average return on invested capital of at least 20%. The ramp to maturity is 4 to 5 years, and the model forecasts a store to be EBITDA accretive after the first year being opened. Now for an update on our strong balance sheet and liquidity position. We are pleased with the health and composition of our inventory. Our ending inventory balance was $1.3 billion, a 22% increase compared to Q1 2021. This growth was expected given the diminished inventory level resulting from the 39% sales comp last year. When compared to the first quarter of 2019, total sales increased 36%, while inventory dollars were only up 8.8%, and inventory units were down 8%. This demonstrates the effectiveness of our inventory planning and allocation initiatives as we are running higher sales on less inventory compared to 2019. We have the right inventory and the right stores at the right time. As we move into the summer and back-to-school season, having a strong inventory position enables us to be the destination of choice for the best value and assortment for our customers. We ended the quarter with $472 million in cash, had no outstanding borrowings on our $1 billion credit facility and generated nearly $80 million in adjusted free cash flow. As of the end of Q1, our trailing 12-month free cash flow yield was 14%. Our capital priorities remain the same: maintain a strong balance sheet, invest in the growth of the business and reward and recognize our investors. During the quarter, we repurchased and retired 2.3 million shares for $88.5 million and paid a dividend of $0.075 per share, returning a total of $95 million to investors. In addition, our Board of Directors recently approved a new 3-year $600 million share repurchase program, bringing the total amount available under both share repurchase programs to $700 million. The Board also declared a dividend of $0.075 per share payable on July 14, 2022, to stockholders of record as of June 16, 2022. Finally, while we are confident in our strategic plan to drive long-term sales and profit growth through our expansion and other operational initiatives, there are current macroeconomic developments that we believe are prudent to factor into our fiscal 2022 guidance. Therefore, we are revising our estimates as follows: total net sales of $6.43 billion to $6.63 billion and comparable sales of down 6% to down 3%. Our gross margin rate for the full year is still expected to range from 33% to 33.5%. We expect to have higher AURs offset by elevated supply chain costs and increased level of promotions when compared to last year. GAAP net income of $550 million to $615 million. GAAP diluted earnings per share are now expected to range from $6.30 per share to $7 per share. Non-GAAP diluted earnings per share, which excludes estimated stock comp expense of approximately $20 million and store preopening expenses, are now expected to range from $6.55 per share to $7.25 per share. We also expect to generate $450 million to $500 million of free cash flow and spend approximately $140 million in capital expenditures in 2022. The EPS outlook is based on 88 million diluted weighted average shares outstanding for the full year, which accounts for the share repurchase activity in the first quarter but does not assume any further repurchase activity for the full year. With that, I will turn the call over to Steve for more details around our merchandising and operations performance. Steve?

Thanks, Michael. We knew heading into Q1 that this would be our most challenging quarter of the year as we lap the plus 39% comp from Q1 of last year. To help us get a good read on our performance, we've been using comparisons versus 2021 as well as 2019, which was the last normalized year we had prior to the pandemic. When you look at the quarter, the $1.47 billion of sales represented a negative 7.1% decrease versus 2021 and was up 36% versus 2019. As we look at the results during the quarter, we've seen the overall shape of the business pretty closely mirror how 2019 played out but at an elevated level of volume. This is helping inform how we're projecting the business moving forward. Breaking it down by category. Our best-performing division in the quarter was footwear, which was down 2% versus '21 but up 20% versus 2019. Improved inventory levels and content from key partners, such as Nike, adidas, Brooks, SKECHERS and Crocs, really drove this category. Our improved inventory position helped drive in stocks back to historical levels which was a key factor in our performance. One of the categories we're still chasing receipts is the cleated business which continues to experience shortages. A lot of this product was made in Vietnam, and the shutdown that occurred back in Q3 of last year created inventory shortages that we started feeling the impact of in Q1 of this year. The good news is that even with the much lower inventory, we've maintained a steady flow of receipts in cleats, and this category has continued to run positive to '21 and '19 despite running with lower average inventory than we would desire. Simply put, we're selling them as fast as they hit the stores, and we expect this to continue into the back half of the year. The #2 division for the quarter was outdoor, which was down 6% to '21 but is up 52% versus 2019. Some of the shoes were in a much better inventory position than most categories which is driving improvement in stocks. Some highlights during the quarter were our camping, coolers and drinkware and hunting businesses. We believe that our strong relationships with key partners, such as YETI, Igloo, Coleman and The North Face, were instrumental in driving these results. Our inventory levels in firearms and ammunition are also in the best position they've been in since pandemic began. But that being said, there are still constraints in some specific categories, such as hunting rifles and certain calibers of ammunition. Similar to cleats, we continue to see strong business in these constrained areas as goods continue to sell as fast as they hit the store. Apparel sales for the quarter were down 9% versus '21 but up 26% versus 2019. The strongest-performing categories within the division versus last year were the outdoor and licensed apparel businesses. Our biggest challenge in our apparel business during the quarter with its spring deliveries were delayed, we were not able to fully execute our spring sets until late April versus traditionally being fully set in early March. The good news is that we ended the quarter with overall inventory well positioned in summer product and started to see the business rebound as the assortments became more balanced. We expect to see this momentum carry forward into Q2. Sports and rec sales came in at down 12% versus '21 but were up 40% versus 2019. We're excited to see the team sports business drive a strong increase in the quarter, driven by the key spring sports of soccer and baseball. We worked hard on building out the better and best levels of our assortment in baseball with brands like Marucci, EASTON, Rawlings and Wilson, and this expanded offering has really resonated with customers. Our recreation business, on the other hand, was more challenged. Breaking the business down, we have several categories like water sports and grilling that historically have done the lion's share of their business in Q2. During 2020 and 2021, we saw these businesses accelerate into Q1 as there was scarcity of supply in the market for these categories. However, this meant that these businesses were very challenged in the second quarter in each of those years as we sold through a lot of our merchandise earlier in the season and were sold off during the peak time. As inventory levels in these categories have normalized across the marketplace, we did not see the same scarcity of supply or the pull forward this year. We anticipate that the sales curve has moved back to a more normalized cadence in these businesses and that they will be closer to what we experienced in 2019 and prior which would point to opportunity for Q2 in these areas. There were a couple of businesses you did not hear me mention as we went through each division, categories such as fitness, fishing and bikes saw an outsized benefit from the shutdown associated with the COVID pandemic. As we expected, these businesses are not sustaining the same level of demand as they did in 2020 and 2021. The good news is that even at the reduced volume levels, they're still, in aggregate, up over 20% versus 2019. Turning to margin. As planned, we held onto the gains we have made over the past couple of years. The gross margin rate for the quarter came in at 35.5%, which was a 20 basis point decline versus '21 but was up 600 basis points versus our 2019 baseline. Beneath the surface, our merchandise margins were up slightly versus last year. As we have discussed before, we attribute the majority of the margin expansion over the past 2 years to our improved buying, planning and allocation strategies and believe that this work should stick to our roots moving forward. The overall promotional environment has not returned to the levels we saw in 2019 and prior. We anticipate that as the year progresses, some discounting will creep back into the marketplace. To account for this, we built in targeted promotions around key must-win market share time periods. The impact of these preplanned events was built into the earnings guidance for the year that Michael covered earlier. Regarding inventory, there's still a couple of supply-constrained categories that I mentioned earlier, such as cleats and certain calibers of ammunition, that we'll continue to chase for the remainder of the year. That being said, after being chased on for the past few years across virtually every area in the store, we're pleased that we're in a good inventory position across most businesses. One thing to note is that our mix of business has fundamentally changed over the past couple of years. Our business in the first quarter broke out 56% hard goods and 44% soft goods. This compares to 2019 where the split was 51%, hard goods; 49%, soft goods. The reason I bring this up is that compared to 2019, our sales increased 36%, while our inventory in terms of units is tracking down 8%. When compared to 2019, you'll find a deeper investment into year-round seasonless categories, such as sporting goods, camping, coolers and other categories, that have leveled up over the past couple of years. We've also layered on a better, best assortment in some of our power businesses, such as baseball, outdoor cooking and fishing. The end result of all this is that the overall composition of our inventory has improved with better balance when compared with 2019. As we had in the second quarter, we believe we have the right inventory levels and content to fuel the business. Now that we have Q1 behind us, our comps versus last year moderate a little. We believe that all the work we put in around building out our core strategies and competencies will allow us to carry momentum through the remainder of 2022. There continues to be strong, natural demand for most of the categories we carry. All the work we've done to stable our supply chain and get back in stock has put us in the best inventory position we've been in over the past couple of years which should allow us to capitalize on this demand. A more controlled distribution by many of our key vendor partners will continue to funnel shoppers looking for the best national brands in sports and outdoors into our stores. Another key driver of traffic for us will be our position as the value leader in our space. As inflation pressures continue to mount, we believe our everyday value proposition will set us apart as active young families and sports and outdoor enthusiasts look to stretch their dollars as they pursue their passions for sports and outdoor activities. Lastly, our continued shift away from traditional print and broadcast advertising to a more digitally targeted approach will improve our marketing reach and effectiveness. In closing, we believe that the strategy we put in place should allow us to finish the year strong and carry the momentum that we've built up over the past couple of years throughout the remainder of the year. Now I'd like to turn the call back over to Ken for some closing comments. Ken?

Thanks, Steve. In this economic environment, we know that value is especially important and believe our everyday value that we provide to customers will resonate going forward. Our value proposition allows customers to purchase high-quality products so that they can continue doing the fun things they enjoy without breaking the bank. In addition, the improvements made in the business over the past few years have prepared us to manage through this dynamic market. Our vision remains the same: to be the best sports and outdoors retailer in the country, so we will continue to focus on our mission to provide fun for all through strong assortment, value and experience by executing our key priorities in order to achieve our vision. These priorities are creating a consistent and meaningful omnichannel business that delivers a true omnichannel experience for our customer; growing our store base to strengthen existing markets and enter new markets successfully, starting with at least 8 stores this year with a goal of opening 80 to 100 stores over the next 5 years; providing a great customer experience across all of our points of contact that drives loyalty and long-term growth, and we will support our continued growth by maintaining and scaling our IT capabilities, strengthening the efficiency and effectiveness of our supply chain and developing and maintaining an industry-leading retail team. We believe these strategic priorities will help us continue to drive productivity to increase sales and profits for years to come. We remain excited and confident about Academy's future. Thank you. We'll now open up the call for questions and answers.

[Operator Instructions] Our first questions come from the line of Kate Fitzsimons with Wells Fargo.

Yes. Michael, you reiterated your gross margin expectation for the year. It sounds like looking for 33% to 33.5%, I believe. Can you speak to what you're baking in from a promotionality perspective as we get further into the year? Some of your bigger-box peers are calling out more aggressive actions on the promotional front here in 2Q and into the back half. So just curious about how you are thinking about the promotionality of the category all in and just whether or not you think you've embedded enough conservatism on that line item. And then I have one more follow-up.

Yes. I think we have embedded the view that the back half of the year could potentially be more promotional. Our guidance contemplates a range of scenarios, including the scenario where the consumer doesn't get a lot healthier. The other thing we've talked about a lot is inventory as a leading indicator. And an unfortunate element of retail is that the problems of others could become your problems, and we need to be mindful of the overall inventory build that we've seen in the sector and in retail in general. And I think in this environment, it's wise to be cautious, which is why we wanted to update our guidance to get ahead of the potential that the back half of the year could be more promotional as planned.

With that said, Kate, one of the things -- we have done a lot of actions that will allow us to maintain that gross margin rate at the higher level, 33%, 33.5%, through our planning allocation, the assortments, our pricing models and things like that. So we feel confident that even with a more promotional environment, we can manage that.

Great. That's helpful. And then just really quick on capital allocation, it was really nice to see the new share repurchase authorization. I'm just trying to think about how you guys are approaching, getting after this new authorization, just in light of the more tempered full year outlook, just what is the appetite to put some of this excess cash to use?

Yes. I don't think there's anything really new to discuss that we haven't discussed in the past. I mean, our general approach to capital allocation hasn't changed. We are generating enough cash to take a portfolio, do everything approach. And the additional $600 million, I think, frankly, demonstrates great confidence in our business and our ability to deliver strong cash flow regardless of the environment, whether it's at the top or the bottom end of the range. Our priorities, first, stability. We're not smart enough to know when this economic turbulence will end, and that means having a capital structure that can withstand various economic cycles, including the one that we're in. We look to maintain an appropriate cash flow and the ability to be nimble in challenging times. I think that served us well. Particularly in the supply chain, we're able to move some things around and actually lever, from a gross margin standpoint, freight as a rate to sales. I mean, cash was helpful there. Secondly, fund our growth. The real value of Academy is in its growth potential with a relatively limited geographic reach that we have today, footprint, the white space we have in front of us; our plan to open 100 stores in the next 5 years; academy.com, which has grown almost 400% since 2019; and frankly, the runway they still have. We want to make sure we preserve capital to fund those initiatives, and we've accounted for that. And then lastly, what you're speaking about is returning cash to shareholders via dividends, share repurchases and debt reductions; very strong free cash flow yield, 14%, 15%. So we have the cash flow. And as a reminder, we bought back in the past 2 years almost double what we raised in the IPO. So we think that's a very healthy amount. The $600 million additional authorization is just a signal that we're very comfortable and confident in our ability going forward.

Our next questions come from the line of Greg Melich with Evercore.

I guess my first question was on gross margin. You mentioned that the merchandise margins helped year-over-year and also that freight as a percentage of sales was down. Could you quantify that a little bit more and also speak to the sustainability, particularly on the freight side?

The bulk of it was in the merch margin expansion. Freight was a benefit. I can't say that's -- we thought we'd be pretty close. I can't say that's exactly how we drew it up. But I'll tell you, we've got a very talented team, and our supply chain initiatives are really starting to work. Freight was a benefit, but majority of it is merch margin.

Yes. This is Steve. Merch margins were up roughly 20 basis points. I think, as Ken mentioned in his comment, we attribute that to a lot of the new disciplines we put in place over the past 3 years, the better planning allocation, the better upfront buying process and just overall better management of inventory. So we're pretty pleased with where we're sitting with margins so far through Q1.

Yes. The drag -- so merch margins, up 20. Freight was also a benefit. The drag was related to inventory overhead and the capitalization of that. All of the other -- frankly, gross margin items were favorable.

Great. And then maybe a follow-up right there is on inventory, obviously up, while sales were down. But I think -- did you mention the unit inventories? I can't remember. What are those running?

Units were down versus '19 about 8%, so we're actually pretty happy with where our inventory position. It's right about where we planned it. We said it's up 22% versus where we ended a year ago for Q1. Up about 8.8% versus '19 in dollars but down 8% in units.

Got it. And I guess...

I'm sorry, Greg. There are certainly a couple of areas where we have inventory over plan. That being said, those areas are areas that are, frankly, the inventory is evergreen. I mean, there's a little markdown risk associated with those would be some of the bulk items where we saw a little bit of a slowdown. But overall, we're extremely happy with where we're at from an inventory perspective. Again, dollars up 8% over '19 on a 36% sales increase, units down. This is pretty much in line with how we planned it.

And is credit -- are more consumers taking up your credit offer? And has that been helping gross margin or not?

Well, the credit program has grown consistently since we rolled it out. So yes, more consumers are applying. More consumers are using the credit card, and we're seeing that customer come back more and more frequently. I would not say there's been a dramatic trend shift to what we've seen in prior quarters. It just continues to grow because it's a relatively, frankly, immature program that's scaling and ramping.

Our next questions come from the line of Robby Ohmes with Bank of America.

Great quarter. My first question is just on inflation. Can you give us a sense of what the assumption of inflation is in your sales guidance for the rest of the year? Is it contributing more to sales than it did in the first quarter? And then also related to inflation, it sounds like you did a great job with freight costs in the first quarter. What's the assumption for the freight, the import cost outlook and transportation cost outlook? And then I have a follow-up.

I would say so far from an inflation perspective, it's been manageable for us. It's been a relatively low contributor in terms of our AUR increase. We look at the delta between being up 8% in dollars and down 8% units versus '19, and we started breaking that down. Really what a lot of the contributing factors of that are, first, the higher mix of bigger ticket items. If you think about it, we've really moved to more of a hard goods business over the past 3 years. It's about 56% of the business versus about 51% a couple of years ago. At the same time, we've also improved our better, best end of our assortment, so those come with slightly higher costs and higher AURs. And then the third one would be where there has been some inflation, but it's candidly of the 3 factors the smallest amount.

And I would say the team has done an excellent job in managing that. We have not seen some of the significant inflation that people are talking about in things like food and fuel, and we have been very, very surgical about where we have had to take the price up. We want to maintain that value effort. We're working with our vendors to put more make in some of the items so that the customer feels are still getting a strong value where we've had to take the price up. But it -- we do see inflation continuing, but we have managed it so far, and we feel that we've got the capability to manage it going forward. With regard to freight, as Michael mentioned, our supply chain team has done an outstanding job working with our vendors, taking actions such as making sure that we buy contracts upfront and negotiating to maintain that inflation under control.

I think the thing that we did really well is, frankly, not overbuy. We didn't have to pay more than we needed. Maximizing cube space and all of the things that we've talked about, that also really came into play as we manage freight. We're not expecting freight to get a whole lot better, and that's accounted for in our guidance.

That's helpful. And just a quick follow-up, a very large retailer came out and implied that they've seen some changes in what their customers are doing just over the last 3 weeks. Any recent changes in behavior that you guys are seeing in the customer base in the last 3 weeks?

Yes. I mean, obviously, we don't provide inter-quarter commentary on these calls. But that being said, I think in the comments -- prepared comments, we talked about the trend line versus '19 being very consistent at up around 36%. That -- we've seen that continue through.

And we have seen actually the customer improved over -- since the early part of the year. That continually -- continues to improve. Still has a lot more room to improve, but it's getting better.

Our next question come from the line of Chris Horvers with JPMorgan.

A bit of a follow-up to that last set of questions. So as you just step back, all the color on the category performance in 1Q is super helpful. Other than some of the late inventory receipts, did the quarter generally play out at a category level and from a monthly cadence perspective in line with how you had planned it?

Yes. I would tell you that it actually did. We knew that May -- I'm sorry, March was going to be the biggest challenge because that's where the stimulus checks came out. We saw obviously our biggest surge last year in that month. Once we got past that, we saw the business start to come back in April. And as Ken said, we certainly saw it get better as we progress through the month. Some of that was, I think, getting further away from the stimulus impact last year. I think some of it was improving inventory content. We talked about apparel being, I think, the #3 ranked division out of 4. So it was a little bit softer than the average. But when we started tearing it apart, we really attribute a lot of that to just getting later receipts on some of the spring transitional goods. And once those goods hit the floor, we saw the business start to come back pretty well.

The other thing that we are seeing is there has been some shifts -- there were some businesses during the pandemic where the buying patterns shifted up. One of the best examples of that was like in pools, and that has more normalized. We used to do the majority of our pool business in the second quarter. The last couple of years, we did it in the first quarter. We see that coming back to a more normal trend because we're in a better stock position.

Got it. And then so as you think about the change in the outlook, maybe can you talk about how you're thinking about where did you change the top line outlook? Was that more of a back-half call? And you talked about it in the context of the gross margin, but it seems like the real change in the outlook was the sales. So is that just you're expecting less AUR growth in the back half of the year because of promotions?

Well, one of the things that happens, we've got a terrific team here that has done an excellent job managing through all these challenges, making sure that we weren't overbought. But we also recognize when we started seeing other people come out that they were overbought, so we figure there will be some more promotions. And promotions don't always mean more sales because as you take some of the pricing down for promotions, you will get less sales dollars for the units. And so that's part of what we have figured in along with the margin to go with that. But the adjustments were made, as Michael said, more for the environment than for the way we were managing the business.

Yes. The business compared to 2019 is following the same general trend line. It's been fairly predictable from that perspective. But as Ken said, there may be a need to be more proactive and respond to what others do to maintain share in the back half. And we wanted to get ahead of it and build that in. At the high end of the updated guidance, we're squarely within the prior guidance. From both the sales and income standpoint, we just felt like this was the right thing to do.

Our next questions come from the line of Brian Nagel with Oppenheimer.

Nice quarter. Congratulations. So look, my first question, and I think it's really just -- it's more of a clarification and a follow-up. But just to be clear, so the revision down, the moderation in guidance for the year. That's -- what you're saying is that's just conservatism what you're seeing in the overall environment but not reflective of anything you're actually seeing in your business?

That's correct. Yes. I think we're happy with the way that we've managed the business. We're happy with our initiatives. If you go down the list, we're happy with what the way our business is playing out. But we're looking at the environment, and all the leading indicators we've talked about, we've got to be cautious about what the back half looks like.

Got it. Then my follow-up, and so in the prepared comments, you spent time talking about some of the categories that have performed particularly well during the pandemic and then what you're seeing in those categories now. So I guess the question I have is as you look at the trajectory there, certainly, there were some categories, nothing like home fitness was maybe being one of them. Do you think we're now at the point where those -- that we have found the new run rate, they've stabilized or past the pandemic? Or do you think there could be incremental weakness in those categories going forward?

Yes. I would tell you, we kind of look at the business in 3 buckets. You've got -- the first bucket of goods are things that are selling at or better than the average, and those are trending better than the -- or better than the 36% trend line versus 2019. The second bucket is what Ken just mentioned, comment or 2 ago about where we've seen businesses start to normalize. I think pools is a great example of that, and I think grill is a great example of that, where -- they were softer in Q1 than they were in the past 2 years, where we're seeing the shape of that business kind of revert back to where it was historically, and it's showing there's opportunity probably in those businesses in Q2. The third category, I think, is the one you're mentioning, which would be things like bikes, fitness, fishing where they are settling in below last year where we ran the last 2 years but still at an elevated level versus where we were in '19. And those, in aggregate, are around up 20%. So we do feel like those have shown a lot of stability, and we've kind of seen what the new baseline is. It's higher than where it was in '19 but a little bit lower than where it trended in '20 and '21.

Yes, it's important. We're not going back to Galveston. We're -- maybe some of these are heading to Taos but while some of those businesses have leveled off below where they were last year but well above '19. We also have some businesses that are picking up because they were lower at that time, and in particular, apparel and footwear, a couple -- are examples of those.

Our next questions come from the line of Michael Lasser with UBS.

This is Atul Maheswari on for Michael Lasser. Granted that sales were down in the first quarter as planned, can you provide more color on the retention rate of the new customers that you picked up over the last couple of years? And are you seeing those customers shop for new categories at Academy versus what they were doing previously?

Yes. We've added about the same number of customers or we're adding about the same number of customers on a continual basis that we did last year, and that trend continues. We are seeing our existing customers shop more categories. And we are also seeing returning customers, those people who might have lapsed and shopped in us for over a year, we're seeing an increase in returning customers.

So as Ken just said, I mean, what's most exciting is the overall inflow, outflow of customers have been fairly similar, but the reactivation rate has really been something we've been focusing in on. And I think that's a real testament to the work that the marketing team has done. But we'll be much more targeted with our messaging and being a little more personalized in our communication there. We're seeing a much higher reactivation rate as we've gotten better and better at targeted marketing.

Okay. Got it. That's helpful. And then as my follow-up, it sounds like you're resuming modest increase in promotions over the rest of the year in your guidance. A, is that right? And then, b, what if some mass merchants or other players are meaningfully more aggressive where they're discounting and clearance activity later in the year, would you have to follow suit? Or do you believe that a product overlap with some of these competitors is more limited, such that you would not have to raise your promotions beyond a point, even if those competitors are much more promotional?

I would say that I think we talked about having very thoughtful promotions around key market share in must-win time periods. We know we're going to have to be competitive there, and that's in our guidance. To your point, we also know that the competitive environment could get a little more challenging as we get deeper into the year. But that being said, we have a different merchandise mix in some of these mass guys. We have access to a lot of vendors that they don't have. I mean, there's not an exposure of Nike or adidas around them or in a lot of these places. And when we do overlap with them on like categories, candidly, we have a much better, deeper offering than they do. So I don't think -- there may be occasionally a category here or there. We might have to react if something crazy happens from a pricing perspective, but we feel pretty good about how we forecasted out our promotions and what we're going to have to do to react to competitors.

Our next questions come from the line of Seth Basham with Wedbush.

Congrats on a very good quarter. My question is a follow-up, first, on gross margins. Thinking about the normalizing environment that you suspect will occur over the balance of the year, but beyond 2022, should we expect gross margin to come down even further because of promo normalization and other factors? Or do you think we've reached a new baseline in your guidance currently?

Yes. Again, I don't think much has changed there from what we've discussed prior. We feel pretty good that where we're going to be with maybe some, again, additional promotion in the back half of the year. The bulk of the gross margin builders to 2019 revolve around the merchandise planning and allocation work that Steve and his team have taken on. And we think that, that is 475 to 500 basis points of sticky gross margin benefit. We still have a lot of benefit coming our way with our work in the supply chain that we've taken on. We've done a better job managing freight as we've shown. So we feel like that's the best, the right level, and we're comfortable with it going forward.

Yes. The other thing to keep in mind, these systems that we put in place, we use the word learning systems, and now they call them AI. They continue to improve over time, so we have not received the full benefit from all of the changes that we put in place. And we continue to add new capabilities that will allow us to improve our merchandise planning, allocation pricing and markdowns as we go forward.

Seth, one other thing I'd just add on there, I mean, we've been able to expand our margins, frankly, with a relatively unfavorable mix shift. So as the mix normalizes over time and that may not happen this year, that will also be a benefit to margins going forward.

That's helpful color. And then secondly, just thinking back about the outdoor seasonal category, just trying to understand what gives you confidence that 2Q will be strong by 2019, especially as some of the macro pressures build. If you could provide some more color on that, that would be great.

Yes. I would tell you that within the outdoor business, I mean, there's a lot of categories underneath there. We've seen a lot of strength -- continued strength and growth in categories like camping. Our camping business is actually running up to last year. It has been really strong. The hunting business has been pretty strong. The softness we've seen is primarily in fishing. Once again, that's running up better than it was versus '19 but a little bit lower than it has in the past years. And then when you take categories like field, all those categories are continuing to comp well above where they were in '19, maybe a little bit lower than we were last year where we were more hand to mouth on some inventory.

Yes. The long-term trend from the customers, I think, is continuing and will continue as people looking for more fun, looking for health and wellness. But team sports is another category that's performing well for us. And so we think people are -- right now, we all could use more fun, and they're looking for it, and we sell it.

Our next questions come from the line of Daniel Imbro with Stephens.

Yes. Steve, I think on cleats and some of the outdoor categories, you talked about the ability to run stronger sales with leaner inventories. And I'm curious, how does that change your long-term thinking about how much inventory a store needs? And then, Ken, to your point around ROIC of new store builds, how does this updated thought around inventory impact your thoughts around how much investment a new store needs to support it. Could you run these doors leaner and therefore drive stronger cash on cash returns with less inventory?

I think we are. I mean, I think that's one of the things we're demonstrating is that the inventory levels, at least from a unit perspective that we used to run 2 or 3 years ago, we don't need to run to drive increases, and we can be much more productive. If you've been in our stores 3 years ago, we had a lot of inventory that was on top of [ gunnels ]. We call it top stock. That's virtually out of our stores. That being said, I mean, there are categories like cleats where I mentioned we're selling as fast as they're coming in. I mean, that's not healthy, candidly. I mean, we're -- our shelves are empty. Customers can't find their sizes. We need to get in a better inventory position in that category so that we can service a customer on a day-in, day-out basis. That being said, it will turn a lot faster than it did back in '19 and prior.

Yes. We -- our new store format is designed to do more flowing of inventory, less store stocking of inventory. And the -- we got up last year over a 4x turn which was a significant improvement from '19 where we were under a 3x turn. We believe operating in the mid-3s probably is where we will be operating. And as we continue to improve and enhance both the supply chain and the planning allocation, we can continue to move that turn up and be more -- much more productive with the inventory.

If I could tie in store growth, maybe the balance sheet. 80 to 100 stores, Ken, over the 5 years. That's a pretty nice ramp. Should we assume that's going to be linear at about 20 a year? And then tying up the balance sheet, Michael, sub-1x levered. I think around the IPO, your target was 2x plus. Would you guys put leverage on the balance sheet to accelerate the new store growth investments or accelerate the buyback? Just how are you thinking about using debt at this point, given the strength and consistency of cash flows?

Yes. I don't think there's a need to add any leverage to the balance sheet. Particularly in this environment, I don't think that would -- long term, that's probably a good thing. And honestly, because our cash flow is so strong, we don't need to do that to hit our growth targets. From a ramping perspective, I would stair-step it. I mean, the later years, we'll do more than we will next year, but it will accelerate over the next 3 -- or excuse me, 2 to 5 years from here and till we get the target of 100.

Yes. We're building the capability of opening new stores. We haven't done it in a couple of years. So...

And by the way, first one out of the gate, we touched on it on the call, we said it was one of the strongest we've had. The lawyers made me say that because I couldn't actually go back and prove that the first store didn't open higher than this one, but it's the best one in recent history by a long shot. It was nice to do it in a market that was outside of our legacy market here in Texas, and it gives us a lot of confidence that, frankly, we're going to have a great success with this program.

Our next questions come from the line of John Heinbockel with Guggenheim.

I wanted to start with -- Ken, if you think -- your business, technically, right, is all discretionary. But when you really think about your core customer what percent of the business do you think is really discretionary, right? We're in a -- maybe in a normal downturn, they would actually defer a purchase. I'm curious how you think about that. And then if you did think that we were headed for a recession next year, other than inventory management, what would you do tactically, right, from a merchandising standpoint? Would you lean into good a little more? What would you do?

Well, we're going to maintain that balance of good, better, best, and we offer value. Even at the better and best level, we offer a value. And so I think that the customer sees that. With regard to discretionary, I think discretionary is an interesting term. Most people think that their morning coffee is not discretionary. And the children are still going to play softball. The people are still going to participate in their activities. They may not buy as much or they may not buy the best fishing rod or baseball bat, and that's where we come in because we trade broadly across good, better, best. And I can come in, and I can make a decision of which bat I want to buy or which treadmill I want to buy. I can buy a $399 treadmill or I can buy a $1,700 treadmill. And so I think that gives us an advantage over the competition and allows people to still do what it is they want to do. We trade in those mill 3 quintiles of customers, and we have shown in our past that we performed well during economic downturns.

Yes. I just want to reemphasize one thing that Ken said. We know we're the value provider in our space. We know our everyday value pricing proposition gives us an advantage. And we think in an environment where people maybe are looking to trade down or looking for ways to stretch their dollars, we win in those environments. And so strategically, it's leaning into that, making sure we're getting credit for that, whether it's in our marketing, in our stores and just really making sure the customer understands the value proposition that we offer day in and day out.

And I think just maybe as a follow-up to that, right, your philosophy on seasonal product, right, is to -- or I think more recently write market down and get it out as opposed to pack it up and sell it the following year, correct? That's the philosophy on seasonal. And seasonal as sort of a percent of your business, the way you would characterize it, take the fourth quarter, right, that would probably be what percent of your business do you think?

It's relatively small. It's probably in the teens. And just to be clear, seasonal, I think there's a couple of even kind of subcategories of seasonal. So you're right. We don't traditionally pull goods out of the store, send them back to DC, pack them up and then ship them out the next season. That being said, we do have DCs that can hold capacity. So a great example would be if we were a little long on a category like pools, that we're going to get out of for a couple of months and then reset the following spring. In the past that we've been long on pools, we might hold on to that and use that extra inventory, not send it out to stores and use it as the setup for the next season. So we do that occasionally from an inventory management perspective. In terms of apparel and fashion and seasonal, that doesn't usually age very well, right? So we had to packing that up and then bringing it out next season. Generally, it's not one we've really done.

Our final questions come from the line of John Zolidis with Quo Vadis.

Can you hear me all right?

Sure, John.

Okay. Great. I wanted to zero in a little bit more on the comment that was made earlier about the store growth being where the value is located. And in particular, for the 100 stores, just looking at the current EBIT per store of $3.6 million, can we just -- if you're going to do some rough math, multiply that by the 100 stores to see the potential that you anticipate for those stores, which I estimate is a little bit more than $4 per share in earnings, depending on what the share count might be? Or is there some reason that those incremental stores are going to be higher or lower contribution?

Yes. From a modeling perspective, that's probably fair. Now there's some ramp time that takes them to get there. Typically, it takes 4 to 5 years for a store to ramp. But, look, I mean, we're planning to open stores that are accretive, and that's the plan. Ken, I don't know if you have anything.

If you think about it, there are 4 big growth levers that we have. One is new stores. That's the largest because the 100 is the starting point. We have the opportunity to add significantly more than that over time. But I think 5 years is a long time. But over time, we'll add even more stores. The second is our dot-com business, which now, at the end of the first quarter, was running just under 10%.

That's penetration.

Penetration, I'm sorry. Penetration is running 18% sales growth. We see that continuing to grow, particularly as we grow our territory because somebody outside of our current market wouldn't even know to go online for us, although we are finding like on cleats and things like that, they're in short supply. People in Ohio and Pennsylvania are some of our best dot-com markets. But we are -- we see that as a growth, and that can continue to increase. The third is our existing store base. With the things that we're doing in terms of customer service, in terms of our presentation, we have an opportunity to continue to have real comp store growth in the future. And the fourth is the improvement in our operations with things like we're doing with our supply chain. And even within the store, our new queuing checkout allows us to be more efficient in the store to get more hours focused on the customer, and our sales associate productivity has continued to go up. So the stores, when you do the math, that's, by far, the -- or that's the biggest, but the others are significant growth opportunities that we have. And not all retailers have all 4 of those that they can take advantage of.

Yes. And lastly, just to be clear, we certainly don't plan to stop at 100. That's our plan for the next 5 years, but there is a lot of white space beyond that. And look, we've been very disciplined in our process to make sure that we're opening stores that allow us to achieve the profitability levels that you've discussed.

John, you've known me a long time. You know that I -- some people call me pedantic. Some people call me methodical, but we are going to be controlled and managed and provide the continued direction. It's one of the reasons why our inventory was under control and a lot of other retailers' inventory wasn't. It's we're able to go out now and buy merchandise that we're hearing other retailers are canceling that are in very good categories that are performing for us. And so managing that, we are -- the systems that we're putting in place, making sure we're rolling those out, and we don't over -- get over our skis. Same thing with store growth, we're managing that, but we are going to continue to move forward and drive the business forward in a strong way but not get too far ahead of ourselves. That concludes the questions. So I want to thank everybody, thank our team for having -- helping us achieve the results that we've had and all of you all for following us and our investors for supporting us as we continue to move Academy to achieve our mission to be the best sports and outdoor retailer in the country.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.