Academy Sports & Outdoors, Inc. Q3 FY2022 Earnings Call

Good morning, everyone, and welcome to the Academy Sports and Outdoors Third Quarter Fiscal 2022 Results Conference Call. This call is being recorded. I will now hand it over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please proceed.

Good morning, everyone, and thank you for joining Academy's conference 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 SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks 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. Unless otherwise noted, comparisons are to 2021, with 2019 comparisons also provided where appropriate to benchmark performance given the impact of the pandemic in 2020 and 2021. I will now turn the call over to our CEO, Ken Hicks.

Thank you, Matt. Good morning, and thank you all for joining us today. As we anniversary our second year as a public company, I'm proud of the operational and organizational initiatives we've undertaken that have transformed the company and helped drive our solid financial performance. Our talented team of retail leaders have improved every aspect of our company when compared to pre-IPO Academy, including improving our merchandise planning and allocation processes, building an outstanding assortment of good, better, best products for our customers while maintaining our focus on value, significantly enhancing our e-commerce capabilities, increasing customer loyalty through the launch of the Academy credit card, modernizing our marketing along with our store experience, and meaningfully improving our financial stability. We are in excellent financial health, capable of self-funding all of our capital priorities, which include new store expansion, omnichannel growth, technology enhancements, increasing supply chain capacity, and rewarding shareholders through share repurchase and dividends. The third quarter was challenging, and our reported net sales of $1.49 billion, a negative 7.2% comparable sales were below our expectations. We saw sales increases in footwear and apparel but experienced sales declines in outdoors and sports and recreation. Steve will discuss our sales results in more detail later in the call. When comparing third quarter sales to 2019, we maintained a 30% growth trend, which is in line with what we have seen year-to-date. We believe this is a strong indicator that our business is baselined at a much higher level post-pandemic, and there is ongoing durable consumer demand for the sports and outdoors category. Looking at our third quarter profitability, adjusted earnings per share were $1.69, which is below last year but in line with our expectations. We maintain a 35% gross margin rate with an improved mix of products, increasing merchandise margin rates and controlling costs. We also held a double-digit EBIT margin. And for the second year in a row, we expect to end the fiscal year with an annualized EBIT margin rate above 10%, which is one of our long-term financial goals. The freshness and in-stock position of our inventory across most of our categories is in very good shape. We believe we have the right amount of product from key partners like Nike, Adidas, and Under Armour to offer customers what they are looking for this holiday. There will likely be more promotional activity in the marketplace this holiday season, but we are prepared to be competitive with our own planned promotions as well as our everyday value positioning. While we know that our customers have been under inflationary pressure and do not have the stimulus money they had last year, they are still focused on health and wellness, pursuing their hobbies, and getting their kids to participate in their sports and activities. Our good, better, best assortment of top national brands and strong private brands available at everyday value prices allows them to continue to do that at an affordable price. As a reminder, the majority of our customers are in the middle three quintiles ranging from $50,000 to $150,000 in annual household income. There's also an ongoing population migration to our base in the South and Southeastern United States. We currently operate in some of the fastest-growing markets in the country, such as Austin, Texas; Atlanta, Georgia; and Raleigh, North Carolina. We are uniquely positioned to benefit from this shift and intend to capitalize on it by executing our growth plan of opening 80 to 100 new stores between 2022 and the end of 2026. During Q3, we opened four stores in Richmond, Virginia; Atlanta, Georgia; Lexington, Kentucky; and Jeffersonville, Indiana. We have also opened three stores in Q4, one here in Houston, one in Tampa Bay, Florida, and one in a new state for us, Barboursville, West Virginia. These store openings were a mix of locations in existing, adjacent, and new markets. We are measuring and analyzing the different market types and all aspects of the opening process: marketing, merchandising, localization, seasonality, and staffing, to gain a better understanding of our approach and optimize our process as we open even more stores in 2023 and beyond. I want to give a big thanks to all of the team members who helped execute through successful store openings. The Academy team remains focused on executing our priorities to achieve our vision of becoming the best sports and outdoors retailer in the country while providing fun for all through assortment, value, and by delivering a great experience for our customers and creating value for our stakeholders. I will now turn the call over to Michael to provide more detail on our third quarter's financial results, new stores, and provide an update on our 2022 guidance. Michael?

Thanks, Ken, and good morning, everyone. Academy delivered another profitable quarter for shareholders despite ongoing macroeconomic headwinds by prudently managing inventory, expanding merchandise margins, and controlling expenses. Since going public more than two years ago, we have consistently demonstrated that we have achieved a material step-up of our earnings potential and free cash flow generation compared to years past. In the third quarter, net sales were $1.49 billion, with comparable sales down 7.2% as we anniversaried a strong Q3 2021 comp of 17.9%. The sales decline was a result of lighter traffic and fewer transactions compared to last year. But overall, we have maintained the market share gained over the last two years in each of our merchandise divisions. We saw share gains this quarter in apparel and footwear, resulting in our sales mix being more balanced between hard and soft goods compared to recent quarters. Our e-commerce sales increased 10.5%, marking the fifth consecutive quarter of double-digit growth, and represented 9.5% of merchandise sales. When compared to Q3 2019, our e-commerce business has grown 173%, and the penetration rate has more than doubled. As we have stated before, we believe academy.com is a competitive differentiator for us in a very meaningful part of our future growth that we intend to invest in for the foreseeable future. As Ken said, we have completed all nine of our planned store openings for 2022. Academy stores have the highest store productivity in our peer group, making our new stores an effective use of our capital with a high return on investment. During Q3, our existing store productivity was once again best-in-class. Trailing 12-month sales per square foot were $351 per foot, and trailing 12-month operating income per store was $3.2 million. Gross margin dollars during the quarter were $522.5 million with a rate of 35%, only 20 basis points below last year's record third quarter of 35.2%. As Steve will tell you more about in a minute, we increased our merchandise margins compared to last year despite various external pressures, as our refined merchandise planning and allocation processes continue to generate margin opportunities. We also saw a shift in our sales mix towards soft goods. These margin gains were partially offset by an increase in e-commerce shipping costs and shrink during the quarter. Since the pandemic, we have over-indexed on the hard goods side of the business that, as our mix shifts back to soft goods, our gross margin rate should benefit. SG&A expenses were 23% of sales, a 140 basis point increase compared to last year. The change was primarily a result of fixed cost deleverage from the decline in sales and additional pre-opening expenses associated with opening new stores. Operating income for the quarter was $179.5 million, or 12% of sales. Academy has now delivered double-digit operating margins for seven straight quarters. Through the first three quarters of this year, we have generated over $640 million of operating income, which is more than the company earned in all of fiscal 2019 and 2020 combined. This is a clear indicator that the operational and organizational improvements made over the past few years have structurally changed and enhanced the earnings power of Academy. Third-quarter GAAP diluted earnings per share were $1.62 per share compared to $1.72 per share last year. Adjusted diluted earnings per share were $1.69 per share compared to $1.75 per share last year. Looking at the balance sheet, Academy ended the quarter with $318 million in cash and had no outstanding borrowings on our $1 billion credit facility. Our positive cash flow generation remains strong as we delivered $50.8 million in net cash from operating activities. During the third quarter, we executed on our capital allocation plan, in part by investing in the following: opening four new stores, repurchasing 2.2 million shares for approximately $100 million, paying out $6 million in dividends, investing in supply chain and technology enhancements, and lastly, maintaining a healthy cash balance. In addition, the Board recently declared a dividend of $0.075 per share payable on January 13, 2023, to stockholders of record as of December 20, 2022. Looking at our inventory, our ending inventory balance was $1.5 billion, a 12.8% increase compared to Q3 2021. When compared to Q3 of 2019, inventory dollars were up 12.3%, while units declined by 10% on the 30% sales increase. This demonstrates that we have effectively managed our inventory while experiencing significant sales growth. To illustrate, when comparing revenue versus inventory per square foot this quarter to Q3 2019, revenue per square foot has increased 28%, while inventory per square foot has only increased 10%. Lastly, based on our year-to-date results and current trends, we are narrowing our sales and earnings guidance and raising our full year 2022 earnings per share forecast as follows: comparable sales are expected to range from down 6% to down 5%. GAAP income before taxes is expected to range from $790 million to $810 million with an expected gross margin rate of 34% to 34.5%. GAAP net income of between $610 million and $620 million. GAAP diluted earnings per share of $7.25 per share to $7.40 per share. Adjusted diluted earnings per share, which excludes certain estimated expenses such as stock compensation and store pre-opening expenses, are now expected to range from $7.50 per share to $7.65 per share. The earnings per share estimates are calculated on an updated share count of 84 million diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity using our remaining $400 million authorization. We remain confident that our business model, driven by our transformed retail capabilities and the everyday value of our products positions us well to navigate this uncertain environment and to win this holiday season, but also to drive long-term sales and profits. With that, I will now turn the call over to Steve, who will give you more details around our merchandising and operations performance. Steve?

Thanks, Michael. As you heard earlier, our Q3 sales came in at $1.49 billion, which was a 7.2% comp decline versus 2021, but up 30% versus our 2019 baseline. This is a little lower than the first two quarters, which were up 36% versus '19, but we're pleased that we continue to hold on to the large majority of the gains from the past couple of years despite a more challenging macroeconomic environment. It was also good to see three of our four divisions showing an improvement in the trend versus last year during the third quarter. Footwear was our best performing division, up 32% versus '19. We got off to a strong start during back-to-school in footwear and saw the momentum carried throughout the quarter. As you'd expect, a lot of the categories that spike during back-to-school, such as kids' shoes and cleats, were some of the leading performers during the quarter. We also continue to see strong sales in key brands such as Brooks, Crocs, and SKECHERS, along with a very successful launch in Haidu across all of our stores. Apparel sales also rebounded in Q3 with an increase of 0.5% versus last year, which was a dramatic improvement versus our spring trend. White footwear continued to run double-digit comps for the 2019 baseline, up 24%. Back-to-school results were also strong in apparel, and the momentum that started early on carried forward into the remainder of the quarter. This momentum, coupled with an improved inventory position and top brands such as Nike, Columbia, and Carhartt, helped spark selling in fall seasonal categories, such as fleece and outerwear. While our sports and direct business in Q3 was down 4% to last year, it was also an improvement versus our spring trend and was up 40% versus 2019. We continue to see solid gains in our sporting goods business, with strength across key categories such as football, baseball, and golf. The softest category in this area remains the home fitness business, which declined double digits versus last year but has stabilized at up over 25% versus our 2019 baseline. Our biggest challenge during Q3 was our outdoor business, which posted an 18.3% decline and was the only category where Q3 sales softened versus the first half trend. It's also important to note that we continue to hold on to the majority of the gains we picked up over the past couple of years in outdoor, with this business still ringing up 30% versus 2019. The soft goods category was hunting where we struggled to anniversary high double-digit comps in ammunition from last year. We're up against the sales spike driven by large receipts that were helping us get back in stock during Q3 of 2021. Broadly speaking, the overall inventory level from ammunition has stabilized across the industry over the past year. We started to see a lot of the stock-up surge activity by consumers drop off, which has resulted in slowing demand. While running negative comps versus last year, the ammunition business continues to run up triple digits year-to-date versus 2019, and we saw the declines versus 2021 start to lessen as we got deeper into the quarter. To sum it up, the miss in outdoor, largely driven by ammunition, comprised over 100% of our drop for the company, so stabilizing this business is a clear priority for us. Shifting to margins, as planned, we held on to most of the gains we've made over the past couple of years. Gross margin rate for Q3 came in at 35%, which is a 20 basis point decline versus '21, was up 340 basis points versus 2019. Similar to the last couple of quarters, beneath the surface, our merchandise margin was up 60 basis points versus last year and continues to run well ahead of 2019 levels. We attribute the continued strength in gross margin to a combination of the hard work the teams have done over the past couple of years around improved buying and planning and allocation disciplines, coupled with a favorable mix of sales in the higher-margin categories of apparel and footwear. As we finish out the year, we built in a well-thought-out promotional calendar for this Q4. This cadence is more aggressive than the past two holiday seasons and is focused on driving traffic to our stores by providing our customers with outstanding deals on giftable items. These additional promotions are accounted for in the guidance Michael discussed earlier. Our expectation is that despite this uptick in discounting, we will continue to hold on to most of the margin gains from the past couple of years. We also believe that our everyday value pricing, coupled with our thoughtful promotional strategy, will allow us to maintain our position as a value leader in our space and gain market share during Q4. In terms of inventory, our teams continue to do an outstanding job in managing through a challenging environment. We ended the third quarter with inventory up 13% versus last year, which is lower than the 17% increase we entered the quarter with. Our inventory levels and content are in the best position they've been in over the past couple of fourth quarters, putting us in a prime position to take advantage of the holiday traffic surge. Another sales driver for us is continuing to lean into new initiatives and brands that resonate with our core target customers. A couple of funding ideas that we put in place for this holiday, including launching Christmas-themed Magellan Outdoors apparel, expanding into gas-powered ride-ons from Coleman, along with adding Yukai and BioLite FirePit into our outdoor heating. All of these ideas should help reinforce Academy as the best destination for all things sports and outdoors. The team has worked hard to get back in stock and ensure that our inventory is much better balanced to position key brands and categories that will drive customers into our stores for this holiday. Our everyday value pricing, coupled with a strong, well-thought-out promotional cadence will allow us to deliver a strong value proposition this holiday. When you combine that with our broad assortment of the most desirable brands and our strong in-store experience, we believe we have a winning formula to continue to pick up market share. Finally, we also continue to lean into more digitally targeted advertising while reducing our reliance on traditional broadcast and print. This shift helps improve our overall marketing reach and effectiveness while also allowing us to be much more nimble in reacting to pricing promotions. In closing, we believe that we have the proper strategies in place and are well-positioned to drive the business and continue to gain market share during the very important Q4 timeframe and beyond. Now I'd like to turn the call back over to Ken for some closing comments. Ken?

Thank you, Steve. Despite the challenging macro environment, we've delivered a solid operational and financial performance this year. We've made significant improvements over the past several years, resulting in our profitability being materially higher than just a few years ago. This is the result of our dedicated team working diligently toward our vision of becoming the best sports and outdoors retailer in the country. Academy is well-positioned to have a successful holiday season. This past Black Friday was the largest sales day in the history of the company, and we are maintaining the 30% plus sales trend compared to 2019. That being said, we still have the biggest three weeks of the year ahead of us, but we are confident in our plan. Academy has enormous future potential growth opportunities from opening new stores, expanding omnichannel, improving existing stores, and from operational improvements. There's a lot to be excited about, and we are prepared to execute to achieve our near- and long-term goals. I would like to close by thanking all of the Academy Sports and Outdoors team members and wishing everyone a joyful holiday season. We'll now open up the call for your questions. Thank you.

Our first question comes from John Heinbockel with Guggenheim.

I wanted to start by discussing the fourth quarter. The implied comparable sales at the midpoint show a decline of 2, which follows a similar trend. Considering the four categories within the divisions, I am curious about where you see the biggest opportunities for sequential improvement based on the merchandise and customer behavior.

John, thanks for the question. We obviously have seen good strength in our soft lines, apparel and footwear categories, and they continue to provide an opportunity, as well as team sports, which has been a very good business with us. So those are three of the businesses that I think we have good opportunities with. That said, there are still challenges out there in some of the outdoor areas. But I'll let Steve provide a little more color.

Yes. If you go back to a year ago, the supply chain was still pretty much in disarray. When you look at where we're sitting today in terms of our ownership and seasonal categories, cold weather goods, giftable items for Christmas, we're in a way better shape than we were a year ago. So we feel pretty confident about our inventory composition there. We feel like our inventory is under control and that it's well-balanced across all the areas. The one category called out as being challenging for us was the outdoor category, and beneath that, it’s the ammunition that’s really the biggest challenge there. The good news is we're starting to see the trend line versus I get a little better. It's still negative, but it's less negative than it was early in the quarter, and we're starting to see that business stabilize. So that's going to probably be a challenge for us throughout the remainder of this year, but we do feel like we're seeing strength in the other categories, which is helping offset some of that.

And John, a couple of more points in addition to the categories. We expect to have a good finish to December. The guidance that we provided implies that we're going to be up 30% to 2019, which is consistent with recent trends. That's in line with our quarterly and monthly builds, which are usually a pretty reliable indicator of our performance. In addition to being better in stock and key holiday programs, as Steve mentioned, we're looking at the consumer and how they are behaving. We have some planned traffic dropping promotions, and we were not in a position to do that last year because we didn't have the inventory. And if you recall, last year, there was a scarcity of goods in the market, which led to a lot of early purchasing. This year, there's an abundance of goods. And so we think that coupled with a favorable calendar, there's an extra Saturday this year before Christmas, we'll probably see some late shopping. The weather hasn't been terribly helpful to sales. It's been a pretty warm start to the holiday season. So we think in the last couple of weeks, we'll see a lot of sales coming late. And as a reminder, we've invested a lot in our buy-online-pick-up-in-store business. Our customers are leaning into that, and we're going to be in a good spot to deliver for them down the stretch.

And then maybe as a follow-up, right, on supply chain, you've had this distribution initiative for a little bit. Where do we sit on that? And when you think about capacity, I know you've got capacity for the time being. But as you look out capacity in the three DCs, and then at some point, I guess you'll need a fourth DC, I guess, further north. How do you think about the network over the next three or four years?

You're correct. At some point, we need a fourth DC, and then we'll need a fifth. And as we grow to reach the potential of the company, we'll probably need a sixth at some point. For the next several years, we're in good shape. We've got plenty of capacity. As we think about the next five years of the business, we will start to incur costs and frankly, think about adding a fourth distribution facility. We’ll be speaking more about that later. But for the next several years, probably until 2025, 2026, we're in a good position.

Our next question comes from the line of Daniel Imbro with Stephens.

Congrats. I want to start on the top line, maybe following up on the last line of questioning. So you kind of implied in your continuation of 30% growth versus pre-COVID in the fourth quarter. I know it's early to think about 2023, but I guess maybe could you qualitatively talk about how you're thinking about next year? I mean, if you execute on your merchandising initiatives that Steve laid out with the new brand, I mean, can you grow on this new base? Have we rebased to a point where growth is possible as we look out to next year?

I think one of the things that we're pretty confident is that we have rebaselined at a higher level. If you go back each quarter this year, it's been in that low to mid-30s in terms of the performance versus 2019. So we do feel like we're going to be building off a higher base. That being said, it's still too early for us, I think, to give guidance for 2023 at this point in time.

We are not ready to provide guidance for 2023 at this moment. However, there are several categories that accounted for the entire decline this quarter, primarily in hunting and outdoor areas, which are significantly stronger compared to 2019. We anticipate retaining most of those gains from 2019 this year and into the future. Certain categories that thrived during COVID, such as outdoor cooking and outdoor furniture, have seen higher performance this quarter than they did last year. Overall, the business remains exceptionally healthy. We managed to gain market share in soft goods this quarter despite facing substantial clearance activity in the market. Our inventory levels are in good shape, and we have not had to take severe steps to reduce inventory like many other retailers. We are producing industry-leading free cash flow and achieving top-tier store productivity, with our EBIT net income rates outpacing many competitors in the sector. This positions us well to end this year on a strong note and carry that momentum into next year as we plan for the future.

Really helpful color. And then I guess just a follow-up on that. Mike, I know you guys were private during the great recession, but could you provide any color on just in case studies of the kind of benefit you saw from the trade down? It sounds like you guys are bullish that you'd see your everyday value offering maybe helped take share. Can you help quantify what you've seen during past downturns to the data you have on that?

No doubt, none of these economic cycles look exactly like the other, but you try to draw some parallels from it. 2008, 2009, and 2010 were collectively very strong comp years for the company, and those were some tough years. This is a little bit different cycle in that consumer balance sheets are still relatively healthy. That won't last for a heck of a lot longer if inflation rates continue to rise and obviously go into recession, if that occurs, we are in a great position to pick up market share because we're the value player. I think what we've shown is our team, our customers, and our business are incredibly resilient through a variety of economic cycles.

Great. I appreciate all the color and best of luck.

Our next question comes from the line of Christopher Horvers with JPMorgan.

It's Megan Alexander on for Chris. Maybe I just wanted to follow up as well on an earlier question, that three-year trend of 30% versus 2019. Has that at all improved throughout the quarter in November and into December? You mentioned weather not being helpful. It's gotten a little bit colder. And then it does seem like there's a more normal cadence of holiday shopping this year. So I'm just trying to understand, does that get any better, especially as you move through Black Friday, which you mentioned was strong?

Yes. The 30% trend has remained fairly steady in the low to mid-30s throughout this year. We haven't experienced any significant changes. I will note that this holiday calendar requires some resilience, as we are transitioning from last year's early shopping driven by scarcity to a later purchasing pattern this year. Our current trends align with this later purchasing behavior. I expect this trend to persist for the remainder of the year. As we enter the first part of next year, the economy still faces considerable challenges. However, we should be able to maintain our performance at a higher level and continue developing the business, which will allow us to initiate growth in the near future.

Got it. That's really helpful. And then maybe a follow-up for Michael. How are you thinking about working capital and free cash flow generation for the fourth quarter? One would think based on the seasonality that cash should become a source of funds in the fourth quarter. So how should we think about a minimum cash balance as we think more about the potential for additional share repurchase in the fourth quarter?

No. Great question. I think I will have one little nitpick before I get going here. We've got a business that's been performing so well, we should generate cash in every quarter, and that hasn't been the case, I think, for a lot of other retailers and certainly us historically. But in the third quarter, which is typically not a source of cash, it was for us, while we were able to invest in the business, correct. Fourth quarter, we should improve on that and grow the cash balance, and then we'll have to make some decisions like we've been saying. There's no change to our approach. We generated enough cash. We can fund our initiatives, and we can take a portfolio approach to capital allocation either through repurchases or potentially retiring some debt if we thought that was the right thing to do given where interest rates are headed.

Great. Really helpful. Best of luck.

Our next question comes from the line of Kate Fitzsimons with Wells Fargo.

I wanted to switch gears to margins. You raised the full-year gross margin outlook. Just as we're thinking about puts and takes on the gross margin into next year, how should we think about some of the drivers between mix, supply chain, promotions, and then, Michael, just any updated views on maybe the longer-term gross margin opportunity versus that 32.5% to 33% range you've spoken to previously, just given how well the business has held on to some of its margin gains?

I'll address the first part, and then Mike will contribute later. Overall, we're satisfied with our gross margin performance and our ability to maintain the higher margins established over the last few years. We attribute much of this success to improved planning and management. However, we do anticipate a slight decline in margins compared to last year in Q4, which we have factored into our guidance. This is based on our expectation of a more promotional holiday season, which we are already witnessing, so we've included that in our projections. It's important to note that we will retain the majority of our margin gains. We believe these gains stem from several factors, including the planning and allocation strategies we've implemented for better management of goods flow. We do not face the inventory overload that many others are experiencing, so that will not pose a challenge for us. During the pandemic, our hard goods business, which has a lower margin profile, grew in proportion; as that mix normalizes more towards a 50-50 split with soft goods, it will serve as a tailwind for us. We also see improvements in the supply chain, though some disruptions remain, which could act as a headwind. As business trends move closer to pre-pandemic patterns, we expect to see an increase in promotions in the market. While these factors could pose challenges, we are confident in our ability to navigate them and will retain most of the margin gains we've achieved in recent years.

Okay. First, welcome back. Good to have you on the call again. I want to tell you that look, Steve answered that one pretty well. I don't have a lot to add. Merchandise margins have been the hero as we continue to harvest the fruit from the initiatives and the groundwork we laid many, many years ago and continue to do that. One thing that I would say, shrink has been a little higher than planned. There has been a lot of organized crime in retail. We're experiencing that along with everybody else. We're working with our law enforcement partners who are great partners in part because they really like the stuff that we sell, and they love to shop in our stores. So we think that we have an opportunity to improve that going forward. As far as the long-term algorithm, I'd stick with what you have, largely because we want to preserve flexibility if we need to become more promotional. We want to preserve that flexibility.

Two adds, Kate. One is, we want to continue our value proposition. And so we do not want to forfeit growth for margins. So we will work to maintain that value proposition that we've worked very hard to get and the customer views us within the market. The other thing, I think that is different when we talk about promotions, I think when we talk about seeing more, but it is more rational and thoughtful for a couple of reasons. One, people are in a better position and can afford to be more thoughtful about the promotions they had and had the ones back in that make the most sense to drive traffic. And two, what the vendors have done, some of the key vendors have done over the past several years, and it's not just in apparel, but it's in other places and how they've cut back on their distribution and our positioning as a favored retailer for them have helped to maintain some of the sensibility in the market and also support some of the margin improvements that we've seen in addition to the operational and process improvements that we put in place.

One more thing to add. Just as a reminder, we are just embarking on a multi-year initiative to improve the efficiency and the effectiveness of our supply chain. And that work is really getting underway. So I think from a market perspective, hopefully, the environment normalizes from a logistics and supply chain perspective. But we have things to work on, and our initiatives should provide a margin benefit in the out years. But I think for now, you've got a good number to work with that we've provided in the past, and I think that's a good one to run with.

Great. I'll let others kick it up in the queue, but happy holidays.

Our next question comes from the line of Robby Ohmes with Bank of America.

I have a couple of quick follow-up questions. Regarding the guidance, how are you anticipating transaction expectations for the fourth quarter? Will they be similar to the third quarter? Does the fact that hunting is not as much of a drag in the third quarter enhance visibility for the fourth quarter? Additionally, you mentioned promotions potentially returning, but transactions have been down. It's typically challenging to improve or maintain gross margins in such conditions. What are the risks associated with promotions coming back, and how might that impact your gross margin expectations?

Yes, I'll start and then let Steve address the second part. Our transaction rates have decreased. This is partly due to the current consumer environment, but it’s also significantly influenced by the actions we took last year, specifically the limitations we imposed on ammunition purchases. While we sold a considerable amount, we restricted how many customers could buy, resulting in many customers coming in multiple times a day and lining up regularly. Currently, we are not seeing that behavior because we’ve lifted those restrictions, making it more challenging to compare transaction numbers year-to-year. The limits we previously enforced created artificially high transaction levels, which we no longer have.

Yes. And to the point on promotions, I think Ken was alluding to it. When you go back and you look at some of the promotions that we used to run pre the current management team being here, I mean they were, in some cases, irrational promotions. I think you've heard us talk about those over time where we'd be selling something like a big bulky item like a trampoline close to cost and then on top of that, providing free shipping. They just didn't make a lot of sense. And so I think one of the things that's happened over the past couple of years is not only for us but for the whole industry is the promotional landscape has kind of been benign, it's allowed us to clear the decks and really allowed us to be thoughtful about where and when and how we're layering in those promotions. You also have a lot of the vendors out there having much better control over their maps. So I think that kind of keeps them in check. I think it's the combination of us having rational promotions that we're not up against that. We don't feel compelled to anniversary that drove top line, but maybe not bottom line, coupled with better control over distribution out there. I think those two things allow us to know that we're going to see more promotions certainly this year than we did last year, but that we're still going to be able to hold on to a majority of the margin gains.

Could you provide an update on the average transaction size? Are customers purchasing more items per basket or opting for larger ticket items? Additionally, have vendors increased prices on similar products, leading to inflation in specific categories like fleece, which could impact same-store sales?

Robby, I would just say that we generally don't give the basket detail. I'll give you a little bit of color. Last year, if you remember, we were up against a tremendous surge in demand for ammunition, and that drove a lot of units. And so there's a little bit of noise kind of internally, but that will provide you a little color about our basket.

We are seeing some AUR increases just based on cost increases that we've seen out there.

Our next question comes from the line of Anthony Chukumba with Loop Capital Markets.

I'm glad to hear my equipment is functioning well. I attempted to join an earlier call, but my question wasn’t addressed, which led me to wonder if there was a problem on my end. Setting that aside, I have a question regarding your new store openings. I understand it's still early, but these are the first new stores you've opened in quite some time. I wanted to know if you have any initial insights on how those stores are performing compared to your expectations.

First off, Anthony, if you couldn't ask a question on the last call, we'll let you ask us two. So you can ask us two. We're happy. Yes, new stores. I would say this year was really about capability building in testing and learning. We have all nine stores opened this year. We tried different formats, different markets. We did urban stores, we did takeover spaces, we did traditional build-to-suits, and we tested a lot and we learned a lot. We're happy with the performance as a whole overall. There's always things when you're testing and learning that you want to do differently and do better, and we'll apply those learnings next year. So we opened four new stores in Q3, and two more in Q4. We haven't announced our targets for next year, but it will be more than we did this year.

One important point, Anthony, is that as Michael mentioned, we are satisfied with our overall performance, and we have several strong performers. While there is a particular store we hope to improve, it serves as a valuable learning experience. What is truly gratifying for us is the success we have seen in some of the new markets we've entered, whether they are adjacent or entirely new. We are happy with our ability to establish a presence in areas where we may not be widely known. For instance, one of the latest stores we opened in Barboursville, West Virginia, is not just a new market but also a new state for us. I must say, witnessing a line around the block in the snow has been thrilling. If you've kept up with us on social media, you've probably seen some of that excitement. This indicates the potential for growth not only in that specific market but also in the surrounding region, which has plenty of opportunities for expansion in the Mid-Atlantic area.

Got it. Very helpful. And then as a second question to make up for the fact that I wasn't able to ask any questions on the earlier call. So yes, just a real quick one. You mentioned supply chain and some of the improvements you're going to be making there. Michael, if I recall correctly, when we had last spoken, you said that you thought that the warehouse management system would be installed in 2023. I just wanted to confirm if that was still the case or what your thought was there?

That's going to be multi-year, but yes, I think towards the end of 2023, we'll start to bring that online.

Okay. Very helpful.

We will phase that in across all of our DCs, so we're not doing anything all at once. But we'll start at the end of '23 and then roll it out to other distribution facilities.

Our next question comes from the line of Brian Nagel with Oppenheimer.

This is Andrew Chazen filling in for Brian Nagel. I have two quick questions. One relates to short-term trends and the other is more about the long-term outlook. Can you highlight any specific trends for Black Friday and Cyber Monday, particularly regarding brick-and-mortar traffic compared to pre-COVID levels? Also, in terms of long-term considerations, have your thoughts on the growth strategy for ASO shifted in light of the pandemic dynamics?

I'll take the first part and let Michael handle the second. One thing we've noticed this Christmas season, starting in early November and continuing into Black Friday week, is a return to shopping patterns seen before the pandemic. What I mean by this is that, prior to the pandemic, customers generally waited until Black Friday week to begin their shopping. In the last two years, we observed an acceleration of demand early in the month, especially in larger ticket categories where supply was limited. This year, however, that trend has reversed, resulting in softer demand for big-ticket items early in the month. During Black Friday week, we also noticed that, in the past couple of years, people preferred to avoid large crowds on Black Friday itself and tended to shop earlier in the week. This year, we saw a shift back to the weekend being more significant, which was the largest sales day in our company's history. Overall, the main observation is that early shopping has reverted back to focusing more on soft goods, and customers are returning to shopping on the key days as they did pre-pandemic. We believe this will also lead to an increase in big-ticket sales closer to those key shopping days, similar to trends we saw before the pandemic.

One thing we noticed was that customers were willing to make significant purchases for the right items. Black Friday was not solely driven by apparel; while we performed well in that category, our big ticket items also did exceptionally well during the event, including categories like outdoor cooking and sports that Michael mentioned.

Where we had great value.

With respect to the long-term growth algorithm, no changes there. I mean we're still planning low single-digit comp growth overall throughout the long-range plan. Total sales growth of high single digits, EBITDA growth at high single digits, and net income growth in the high teens. We will do that for the addition of 80 to 100 new stores investing in our dot-com business, which is on a real growth run here, continuing to grow at double digits quarter-over-quarter, and improving our existing operations.

Our last question comes from the line of John Zodolis with Quo Vadis.

I have two questions, but I'll just stick with one here since it's the last one. You mentioned that you had...

You can ask two.

Okay, thank you. All right. So here's my two questions then. First question is on average unit sales. So for the full year, we're looking at just under, I believe, $25 million per average store, and that's down from a little over $26 million in the previous year. And so the first question is for the new units that are coming on, what do you expect those to annualize in their first year?

We underwrite them on average of around $16 million at year one sales, end of year one sales. We do expect them to be EBITDA accretive after year one Again, some of these just opened, but the first four collectively as a whole were more accretive to earnings even just a few months into the year opening.

Then obviously, they ramp up on the day rate basis.

Yes, significantly higher than a typical store.

We will keep an eye on that. The second question relates to the pandemic-related categories you mentioned. Although some of these categories have seen a slight decline, they remain significantly above pre-COVID levels, particularly ammunition, which is still up triple digits. A more cautious perspective might indicate that while these categories are performing relatively well, we haven't yet seen a return to traditional demand levels. As we head into next year, especially if the consumer environment becomes less favorable, we might experience further downward pressure. While we can't predict future outcomes, my question is how you are positioned to manage inventory in case this happens.

Well, I think we've demonstrated that over the past several years, to be honest with you. We certainly build contingency plans into our buying process. We have trigger dates that we activate depending upon where we see demand happening. We have great partnerships with our vendor partners. And I think on both sides of it, as inventory was scarce and we had to chase it, I think we definitely outperformed a lot of our competitors in terms of getting supply of goods, which I think was reflected in the sales trend that we drove in '20 and '21. And I think this year, as the supply chain has gotten a lot better, and actually, a lot of them just caught up, some people have been caught the other way with inventory ballooning for them. And I don't think we've seen that happen. So I think we've got a very nimble team, who's got good partnerships and relationships, a strong planning and allocation basis, strong open-to-buy management. And that's really allowed us to manage on both sides of it. So I don't see that changing if we see a slowdown next year. But what I would say is one of the things that gives us confidence, and I think Michael hit on this, is these search categories, we track them. You mentioned several of them, we talked about ammunition being one, or fitness being another, or cooking or things like that, they're all stabilizing at these higher levels. In a lot of cases, higher than the 30% trend that the company performed at. We're seeing the volumes stabilize at those levels. So that's another thing we're looking at, not just the trend versus last year, but the average weekly volume, the average monthly volume. And so that's giving us confidence that this is kind of the new baseline that we're building off of because they've been maintaining at those consistent levels for multiple quarters in a row.

There are two important points regarding this category and our inventory. First, as Steve pointed out, we have clearly shown that we can manage our inventory effectively, potentially better than many others in the industry. In cases where a pessimistic outlook might suggest a decline in demand, our inventory remains stable. It is not seasonal and does not become undesirable like seasonal apparel inventory. Secondly, even if we anticipate challenges in demand within these categories, we should not encounter a loss in market share. Many competitors have stepped back and are not supporting these categories as they once did, which means we have the opportunity to gain market share despite any demand challenges. Additionally, our inventory will stay strong as it is not influenced by fashion trends or seasonality.

Yes. My point is that they are not in a difficult position. One important aspect is that the team has shown their capability to manage inventory effectively across different scenarios, preventing us from facing inventory issues like some other retailers have. We are carefully managing our inventory levels on both the up and downside. Moreover, we've managed to maintain these higher levels despite some categories experiencing declines; our market share continues to improve in many of those areas. This success can be attributed to competitors retracting and the value and assortment we provide. Our team has excelled over the last couple of years, putting us in a strong position with our diverse brand assortments. This gives us confidence looking ahead. We acknowledge that we are entering tough times and that the beginning of next year will present challenges for retail and the overall economy. However, we are poised for growth through our current stores, online presence, and expansion into new markets. We feel optimistic about our future at Academy.

And happy holidays to everyone and your families.

Okay. That was our last question. We're ending right on time, and I appreciate everybody's participation on the call. Thank you very much. Appreciate everybody's support of the company. I want to thank all of our team members but also our investors and the people who are interested in Academy. We feel, as I said, we've got a great future. I want to wish everybody the happiest of holidays and a terrific, terrific new year. So happy holidays, and thank you. Goodbye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.