In an interview with SGB Executive Steve Lawrence, Executive Vice President and Chief Merchandising Officer, Academy Sports + Outdoors, explained how the retailer updated its inventory management disciplines to drive second-quarter outperformance and position it for second-half growth. .
Academy reported second-quarter earnings well above Wall Street expectations. Earnings were down 6.0% from difficult prior-year comparisons, but improved sequentially from the first quarter. Academy reiterated its full-year 2022 net and comparable sales guidance.
Academy Sports shares rose 14% after the earnings announcement. What made the stock soar? If you look at how our industry has performed over the past two years, we, along with some of our competitors, have taken volume share in 2020/21. We have moved past the stimulus and are waiting to see what happens. The reaction we see in the stock is that they are happy that we are holding on to the sales. We are still up 36% from 2019, which was the last normalized year. We also keep the margin. Our gross margin rate is still up 420 basis points from 2019. Unlike other retailers, our inventory is online. They were up 17% from a year ago, but only up about 8% in dollars and 12% in units from 2019. Investors worried about excess inventory at certain other retailers and what this could mean for profitability in the future.
What drives the continuous improvement of the Academy? First, the behavior. I think people, certainly during the pandemic, have taken their health more seriously and started to adopt healthy habits, get out more, exercise more, and work out more. It’s a longer-term behavior change. Now some people have gone back to old routines and may not be training as much as they did during the pandemic, but I think people are. It’s also structural in terms of the improvements we’ve made to the business in terms of how we buy, sort, distribute goods, etc. The third is competition. Brands and suppliers have removed distribution from retailers outside of our space.
How did margins hold up during the quarter? Have you felt the pressure of promotions? Commodity margin increased by 20 basis points last year, which surprised some. We would attribute a lot of that to being better operators, to being more careful about how we buy goods, to routing them, to allocating them and to marking them down, to better localizing our purchases. We would say this is largely a structural improvement. Granted, the second quarter was more promotional than the first, but that’s the nature of the calendar.
The second quarter had events including Mother’s Day, Father’s Day, Memorial Day and July 4th, compared to few natural holiday events that are promotional in the first quarter, apart from Easter or spring break. But, we anticipate that with inventory levels, people will have to look more into promotions in the second half of the year to try and browse some of that inventory. We are not in that position. We don’t have to promote from a stock clearance standpoint, but we certainly have to make sure we’re price competitive. We take our position as a value leader in our space very seriously. We don’t want to compromise on price. We anticipate that people will promote to move their inventory, and we have to respond in part to that.
Has improvement in buying, allocation, planning and pricing been more technology driven or process driven? It’s a combination of both. I think we had good systems. KKR, who owned us before our IPO, did a good job of investing in having good fundamental systems in place; however, I don’t think the teams were probably using them to the fullest extent possible and therefore a lot of it was about creating a better process, fostering consistent adherence to the process and getting consistency of execution within the team. A good example is inventory levels.
One of our biggest pre-pandemic challenges before Ken (Ken Hicks, CEO) came on board was that we had too much inventory. It’s not a bad goal to be in stock. You want to meet customer demand, but because we were imprecise in our tools and buying patterns, we masked it by carrying heavier and heavier inventory, and that’s ultimately an unhealthy thing for a retailer . When we had a lot of inventory, we just threw the box over the gondola fixtures that circled the perimeter of our stores. As a customer, you cannot buy from these boxes. And as a store associate, you lose track of what’s in those boxes. So we had all of this inventory trapped in these boxes stacked above all the light fixtures. And so when you see us having reduced our inventory levels of units from 2019 by about 12%, we pulled out of the inventory pipeline sitting in the warehouse space above the devices and we weren’t selling. I think that’s where you’ve seen the team better understand how much to buy up front, how much to allocate up front, how much to keep in the DC That then gives you the ability to flow back better based on demand and traffic in stores.
How has the Academy gotten smarter in how it takes markdowns? We used to take off-season markdowns. If you’re going to sell cold weather products in May or June, there’s usually no market for them. If you score it mid-season and start this process a little earlier, you can run through it faster and have a better margin profile. And so I think it makes more sense when and how we clean up the seasons and get some discipline around that.
Do you see a lot of falling trade in a context of inflationary pressures? Is this a concern? Our private labels did very well in the quarter, so you can interpret that as maybe some people are moving towards private labels. That being said, Yeti, which is one of the premium brands in our assortment from a price point of view, also had a very good quarter. So I think one of the new strengths of Academy is that we’ve built a very logical and thoughtful “good, better, better” positioning in our store. We didn’t have that before. In some cases, we would have a “good”, but not a “best” or “best”. In other cases, we would have a “good” and a “better” but no “better”. So a good example is clothing. We’ve always had a sort of open price hunting brand called BCG that was really price driven. It’s t-shirts for $4.99 or $6.99 and things like that. And historically, from BCG, you had to go all the way to Nike, Adidas or Under Armor to find the next logical item in the assortment. So we felt there was a gap there and recently introduced two private labels, one on the women’s side called Freely and the other on the men’s side called ROW, as a way to kind of reach this “best” price difference between the two . So now there’s a clear “good, better best” positioning where you can buy BCG as our “good”, Freely and ROW as our “best”, and then you have the high end national brands like Nike, Under Armor and Adidas there to satisfy the “best”. So if the customer who buys from us wants to shop low, they don’t go to another store. They can either trade to ROW or Freely or to BCG. Also having brands like Nike and other high end brands, we think we are going to get some exchange business as shoppers from other stores are looking for a place where they can get that value. So we feel like we’re in a kind of great place where we can keep our customer who is with us buying more and at the same time attracting people who negotiate less. We think our position of value in space will really allow us to do that.