Academy Sports & Outdoors, Inc. Q1 FY2023 Earnings Call

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors first quarter 2023 financial results call. Participating on the call are Ken Hicks, Executive Chairman; Steve Lawrence, Chief Executive Officer; and Michael Mullican, President and Acting Chief Financial 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.

Thank you, Matt. Good morning and thank you all for joining us today. In April, Academy announced our Board of Directors' thoughtful leadership succession plan, including my transition from President and CEO to Executive Chairman of our Board of Directors. This officially took effect on June 1, 2023. I believe now is the right time for this transition given the strong foundation we've built over the last several years and the clear growth strategy we have set forth for the future and the strong proven leadership team that is in place at Academy. Steve Lawrence, our Chief Merchandising Officer is now Chief Executive Officer and a Member of our Board of Directors; and Michael Mullican, our Chief Financial Officer, is now President of the company. The Board and I are confident that Steve and Michael will continue to work very well together to lead Academy Sports and Outdoors to new heights of operational and financial performance. They exhibited their leadership abilities through their significant contributions during the transformation of the company over the last 4 years, and we are all aligned with the Executive Committee on our vision, mission and values on the long-range plan we shared with you in April. It's been an honor and a privilege leading Academy over the past 5 years, and as I conclude my time as CEO, I want to thank the entire Academy team that have made my time here incredibly rewarding and fun. We've accomplished a lot, and I recognize it's due to the unwavering dedication of our 22,000 team members and our talented Executive Committee and our Board of Directors. I also know we've become the company we are today due to the support of you, our shareholders, who have supported and believed in Academy during our transformation into a highly profitable growth retailer. Thank you for your continued confidence and trust in Academy. I look forward to continuing my leadership role on the Board of Directors as Executive Chairman and working with Steve and the Academy leadership team to support the successful execution of Academy's strategy to achieve our vision of becoming the best sports and outdoors retailer in the country while providing fun for all as we create value for our stakeholders. I'll now turn the call over to our new CEO, Steve Lawrence. Steve?

Thanks, Ken. Let me start by saying it's an honor and a privilege to succeed Ken as Academy's next CEO. He has guided the transformation of our company into a leading retailer and has laid a strong foundation for our future. I truly enjoyed working closely with Ken over the last 4.5 years, and I look forward to continuing our partnership as we both step into our new roles. I'm also excited to lead our over 22,000 dedicated team members who every day enable Academy to fill our mission, providing fun for all through our strong assortments, our outstanding value proposition and the enjoyment our customers will have as they experience sports and outdoors with the gear they picked up from Academy. While I certainly have big shoes to fill following a legend like Ken into a role, the thing that gives me confidence is our team. They have been battle-tested over the past 4 years and have been proven capable of taking on any challenge, including the current environment. In addition to a strong team, we also have a solid balance sheet, a well-engaged customer base, a highly productive operating model and a well thought out long-range plan to help guide us as we move forward. Hopefully, you'll all agree that the future is bright for Academy. Now I'd like to turn to our first quarter results. The first quarter presented a very challenging economic environment on a number of fronts. During our Analyst and Investor Day in early April, we reiterated that the first and second quarters will be the most challenging for us. Earlier this morning, we reported first quarter net sales of $1.38 billion, which translated into a negative 7.3% comp versus last year, but continue to be well ahead of our 2019 baseline and up 28%. To be clear, these sales results were below our expectations. We saw a softening in the business as we progressed through the quarter, with April being the weakest month. When you break the business down, there were several factors that contributed to the sales decline. We know that our customers are contending with ongoing macroeconomic headwinds, such as higher costs on virtually everything. The customer is being more careful how and when they spend, which has resulted in fewer transactions compared to last year. As we previously called out, we're still comping up against strong results from several big ticket categories such as hunting, camping, fitness and bikes. And as expected, these categories were some of the most challenged within the quarter. Another consideration is that a large chunk of our business is meant to be enjoyed outside. And with the unfavorable weather patterns in several of our major markets, we got off to a slower-than-anticipated start in many of the seasonal categories. On a positive front, we have some areas of the country where the weather has been more normalized, and these markets have outperformed in these seasonal categories. Looking at sales by division, our best-performing business is apparel, which was up roughly 1% versus 2022. We picked up market share here. In apparel, we benefited from having a much better assortment of spring seasonal categories, such as shorts, short sleeve tops from key national brands, such as Nike, Columbia and Carhartt. Our private brands in apparel also performed well, led by Magellan Outdoors, R.O.W. and Freely, which all grew by more than 20%. These brands represent the value end of our assortment and the customer is clearly seeking out this product during the quarter. Footwear was the second best business at down 2% versus last year. We saw strength in new brands and ideas such as Nike, HEYDUDE, Birkenstock's and SKECHERS Slip-ins. Our Kids business as well as our Cleated business were also stand-outs during the quarter. The most challenging category with the Athletic Shoe business where customers voted for more casual court looks at the expense of more running inspired athletic shoes. Sports & Recreation sales declined 3% with our Team sports and Outdoor Cooking businesses being the strongest performance year-over-year. In both cases, the teams have had success by leaning into new brands and ideas such as Blackstone, Marucci, and DeMarini Bats and Baseball, resulting in market share gains in these two categories. The Recreation and Fitness portion of the business were the most challenged during the quarter. We attribute some of this weakness to being up against historic demand in categories such as bikes and fitness equipment. In other areas such as water sports and outdoor furniture, we believe the cooler temperatures and rainy weather delayed customer purchases and that these businesses should improve as we move through the second quarter. Outdoor continue to be our weakest performing division with sales down 15%. The hunting category remains challenged as we continue to anniversary strong ammunition sales from last year. It's important to note that while running down to last year, outdoor continues to perform up 29% versus 2019 with ammunition running up roughly 100%. We did have some bright spots in outdoor with brands such as YETI, which benefited from the strong delivery of new products and seasonal colors. As we parse the results in the first quarter, what has become clearer to customers is the need for both value and newness and innovation. In terms of value, we've seen customers gravitate towards deals with a focus on promotions and clearance with both of these buckets showing sales increases during the quarter. We also see this drive for value in the performance from our private brands, which outperformed national brands. At the same time, customers have positively responded to new ideas of brands regardless of price. There are multiple places we've seen this, such as BOGG BAGS and Blackstone Griddles, the Limited Edition colors in YETI, or in our new shoe brands such as HEYDUDE and Birkenstock. Our plan going forward through the remainder of the year will be to push even harder on both the value and the newness fronts. Shifting to profitability; first quarter adjusted net income decreased 33% to $103 million or $1.30 per share. This decrease was partially due to a 110 basis point decline in merchandise margins. The decline in merchandise margins was similar to what we saw in Q4 and was primarily driven by an increase in promotions during the quarter. This lower merchandise margin helped contribute to our gross margin rate coming in at 33.8% or down 170 basis points versus Q1 of 2022. Michael will give you more color around the other factors that impacted profitability shortly as well as provide more detail regarding our revised outlook for 2023. Turning to inventory; our quarter ending inventory balance was $1.39 billion, which was a 4.7% increase compared to Q1 2022. In terms of units compared to last year, total units are up 2% but on a per store basis are down 1.4%. The slight increase in total units versus last year is primarily positioned to fund new stores and is also focused into the areas that ran low in stocks last year, such as cleats and Team Sports. The current depth and breadth of our assortment across all of our categories is healthy and fresh, and we believe we are well-positioned for the summer selling season. Overall, I believe the team has done a good job managing the inventory and receipts over the past 4 years. Our plan as we move forward is to continue to thoughtfully manage our inventory and to make sure it aligns with the trends in the business. Looking ahead to the remainder of the year, we anticipate that the consumer will continue to remain thoughtful in their spending as they navigate the current economic environment. We have a couple of natural high-traffic time periods ahead of us in the near term, such as Father's Day and Back to School, and the results from these events will inform our decision-making as we head into the back half of the year. We've increased our focus on positioning Academy as the everyday value leader in our space that we can help customers have fun out there at an affordable price. Our inventory remains under control and beneath the surface we have a strong inventory position and seasonally appropriate products that all typically peak during the summer months. We believe that this combination of value plus strong in-stock positions us well as we move through Q2. We'll also see us continue to drive improvements in efficiencies in stores and distribution centers while thoughtfully managing expenses as we navigate through this challenging macroeconomic environment. Now I'll turn it over to Michael to walk you through our first quarter financials and updated 2023 guidance.

Thanks, Steve. First, let me say it has been an honor to work under Ken's leadership these last 5 years. We have accomplished a lot as a team, and we've had a lot of fun doing it. Ken has built a winning culture that will stay with the company for years to come and help the company drive results and achieve our long-range plan. I look forward to continuing to work with him in his new role as Executive Chairman. I am proud to step into the role of President of Academy during such a pivotal time in the company's evolution. With my new and expanded responsibilities, I look forward to continuing to work with Steve and our talented team as we execute our long-range plan of growing sales and profits through new store openings, omni-channel expansion and increasing the productivity of existing stores and distribution centers. I'm excited to take on a greater operational role and work with the team to execute our key initiatives. Now, let's review our first quarter results. Net sales for the first quarter were $1.38 billion with comparable sales of negative 7.3%. Sales were lower than planned due to fewer transactions and smaller ticket sizes. Let me be clear, these results did not meet our expectations. We have taken swift action to minimize the impact of this disappointing quarter. Among other things, we have been able to substantially reduce operating expenses without impacting our long-range plan or our capital allocation strategy. Our gross margin was $467.1 million with a rate of 33.8%, a 170 basis point decrease from the first quarter of last year. As Steve mentioned, the rate decline was primarily driven by lower merchandise margins from greater promotional activity but also higher shrink costs. Total losses from shrink were 76 basis points higher than the first quarter of last year. During the quarter, SG&A expenses were $340.9 million or 24.6% of net sales, an increase of 310 basis points compared to the first quarter of 2022. The increase was primarily driven by three factors: an increase in stock-based compensation, new store expenses and technology investments we are making to support our growth plans. In total, net income was $94 million or 6.8% of net sales, a 340 basis point decrease from the first quarter of 2022, resulting in GAAP diluted earnings per share of $1.19 per share. Adjusted diluted earnings per share were $1.30 per share. While we are not satisfied with these results, it is important to note that our sales and profitability remain well above pre-pandemic levels. We have made significant operational changes over the last few years and believe that we will keep the majority of the gains we have achieved. We are actively investing in areas of our business that will further enhance our long-term profitability. Turning to the balance sheet; at the end of the quarter, we had $296 million in cash and no outstanding borrowings on our $1 billion credit facility. Academy generated $52 million in net cash from operating activities during the first quarter. We utilized this cash to invest in the business and execute our capital allocation plan by repurchasing 750,000 shares for approximately $50 million. Additionally, we paid out $6.9 million in dividends. In addition, the Board recently approved a dividend of $0.09 per share payable on July 13, 2023, to stockholders of record as of June 15, 2023. One of our primary growth strategies is opening new stores, so I wanted to spend a few minutes updating you on this important initiative. We are on track to open 13 to 15 new stores in 2023 as part of our plan to open 120 to 140 stores over the next 5 years. We remain confident in our store opening plans based on the overall performance of the 2022 vintage. As a group, they are operating with an ROIC above their hurdle rate, already resulting in positive EBITDA. In the first quarter, we opened one new store in an entirely new market for us, Lafayette, Indiana. After being open for 2 months, the store's sales performance ranks among the top of all store openings we have completed in the last several years. A significant part of this new store success is driven by the implementation of several learnings from our 2022 store openings. These include more localized assortments, better preopening preparations and the extension of post-opening marketing and activities. As we have seen in other new markets, our unique concept has been well-received. We self-fund and customers are drawn to our broad assortment of top national and high-quality private brands at an everyday great value. In the second quarter, we plan to open one new store in Peoria, Illinois. The remainder of the fiscal 2023 new store openings will occur in Q3 and Q4. Now turning to our outlook for the remainder of the year; we are taking a more cautious view due to the current macroeconomic pressures on our customers. However, we are not standing by and waiting this out. We have taken several actions to help drive the business in this environment. These actions include: first, increasing our focus and strengthening our position as a value-provider in our space. We are leaning into categories that are working by emphasizing key value items at everyday value pricing. Second, managing our inventory levels; third, controlling expenses based on the revised sales expectations. We have already made cuts, and we will continue to reduce expenses to align with our new forecast. Finally, supporting our growth initiatives; these investments are worthwhile and many are already bearing fruit. We will be well-positioned for growth when the market comes out of this downturn. Based on the results of the first quarter and current business trends, we are revising our fiscal 2023 guidance as follows: net sales of $6.17 billion to $6.36 billion. Comparable sales are expected to range from negative 7.5% to negative 4.5%; gross margin rate between 34% and 34.4%; GAAP income before taxes is expected to range from $675 million to $750 million; GAAP net income between $520 million and $575 million; GAAP diluted earnings of $6.50 per share to $7.20 per share. Adjusted diluted earnings per share, which excludes certain estimated expenses such as stock compensation, are expected to range from $6.80 per share to $7.50 per share. For modeling purposes, stock-based compensation is expected to be $30 million to $35 million in fiscal 2023. The earnings per share estimates are calculated on a share count of 79.7 million diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity using our remaining $250 million repurchase authorization. Capital expenditures are forecasted to range from $200 million to $250 million. And even in this tough climate, where sales have not met expectations, we still expect to generate $400 million to $450 million of adjusted free cash flow. Fiscal 2023 is a 53-week year, which adds approximately $85 million in sales to the year.

With that, I will turn the call over to Steve for some closing thoughts. While we have some macroeconomic challenges to manage through, we have a solid plan of action to move the business forward. It's a plan that leans into our position as a healthy, agile, value-based retailer to deliver compelling products at great prices to our customers. I have confidence this team can react and improve our sales while also managing inventory and controlling expenses. As the year progresses, we anticipate sales to improve, driven by the implementation of the following actions: first, introducing new brands and ideas in the back half of the year that will drive consumer excitement; second, increasing traffic through upgraded targeted marketing, utilizing our new customer data platform. Third, we'll start seeing additional sales contributions from our 2022 stores as well as the addition of new locations we're opening up throughout the remainder of the year; fourth, by continually enhancing our omni-channel functionality and features to improve the customer experience; and finally, by applying the lessons we've learned in Q1 towards driving sales and improving profitability in the remainder of the year. Simultaneously, we will also remain focused on investing in and delivering against our long-range plan. I believe Academy represents one of the best growth opportunities in retail today. We're positioning a $175 billion total addressable market that over the long term is expected to grow faster than GDP. We have a differentiated customer experience with a proven business model and a strong balance sheet that will allow us to self-fund all of our growth initiatives. As we laid out in our Analyst Day in early April, we plan to build on the momentum from the last few years by continuously driving improvements across all facets of business while executing against our three growth strategies. As a reminder, these are expanding the store base in existing new markets with the opening of 120 to 140 stores over the next 5 years, building a more powerful omni-channel business and driving growth from our existing stores by improving service and productivity, strengthening our merchandising assortment and attracting and engaging customers. In closing, I'd like to thank all of the Academy team members for their dedication and passion in helping deliver an outstanding experience to our customers. Now let's go have fun out there. Now we will open up the call for your questions.

The first question is coming from Brian Nagel of Oppenheimer.

First off, congratulations on your new roles. So the first question I have, just with regard to sales, I think, Michael, you talked about the weather. I mean, maybe help us understand better the weather impacts here in Q1. Maybe the difference you saw between recognizing your stores are in a relatively tight geography, but weather impacted versus non-weather-impacted markets and then maybe the improvement in the business as weather did turn more spring-like?

Yes, this is Steve. I'll address the first question. Reflecting on our journey since the pandemic, we experienced a significant surge in 2020 and 2021. Last year served as a re-baseline year, and we anticipated a return to growth this year. However, we encountered a pullback from customers early in Q1, attributed to various challenges they are facing. That said, I want to highlight that we are still performing well compared to 2019, with a 28% increase. We have maintained most of our market share gains and are even capturing more share, despite the tough conditions. In terms of the quarter's development, February was our best month with slight growth, followed by March, but then business declined into April, facing several headwinds. Specific surge categories, such as the Outdoor business, presented challenges in Q1 and early Q2, compounded by weather issues affecting seasonal categories like pools and patios. However, as we proceeded through the quarter, certain markets, like Florida, managed to avoid the weather disruptions seen in other regions and performed well. With improved weather across the country, we are seeing a recovery in those categories, giving us confidence that the business will stabilize. Looking ahead, we have several initiatives planned for this year, including the introduction of new brands in the second half and the opening of additional stores. The performance from 2022 will also influence our comparisons this year. Our customer data platform launches in late Q2 and is expected to positively impact the latter half of the year. We are actively responding to current business trends and are optimistic about improvements as the year progresses.

Yes. One other thing on the weather, Brian. Certainly, the sales impact, I think, was fairly significant given that we were cooler across the entire footprint for a very long duration. But from a margin standpoint, we were soft in categories that are margin-rich, particularly patio and pools and some categories where we just haven't had the sell-through to date because of the weather. Promotions kind of played out like we thought they would. But from a gross margin standpoint, missing some of the early selling season with those margin-rich seasonal categories certainly suppressed the margin. Outdoor and field really played out like we thought it would, but losing those soft goods sales, frankly a little bit softer in the pools and patio didn't help the margin.

And that makes a perfect segue to my follow-up question, which is regarding the margin. Gross margin is obviously weaker in Q1. However, the new guidance makes no changes to gross margins. Is what you just mentioned the reason for that, or is there something else at play?

Yes, that's part of it. But keep in mind we're starting from a pretty high place, several hundred basis points better than 2019. As you said, our outlook on gross margin hasn't changed. Where we sit today, we're only 20 basis points off our annual guide. The bulk of that miss, again, with some of the seasonal categories that we talked about. The other big part of the miss was in shrink. Shrink was substantially worse than we thought it would be. I think we're certainly going to need some cooperation from law enforcement here at some point. We are in control of our destiny to some degree here. We've implemented a number of tactics, 4 or 5 significant things. I really don't want to speak to those publicly because part of this game is outfoxing the bad guys. I think we're making good progress there. Some of what we've piloted is working, and so we think we'll get a benefit there in the back half of the year. The other thing that's really in play here, we anticipated a freight benefit in the back half of the year as we move through the year. We believe that, that benefit for freight in the rest of our supply chain, we understated that, and we think there's more to come there in the back half. So promotions, we've got that baked into the guide going forward. We think there's some other savings that we're going to get and I feel pretty good about ending the year in that 34% to 34.4% range that we initially guided to when we started the year.

The next question is coming from Kate McShane of Goldman Sachs.

We just wanted to ask a little bit more about your commentary around the second half top line improving from the first half. You listed a number of reasons, including new initiatives and lesson learned from Q1 as well as new brands. Just wondered if there was any more detail you could walk us through there, especially given that the comp is a little bit harder in the second half?

When examining the business performance in the first quarter, it presents a mixed picture. The soft goods segment, which includes apparel and footwear, remained stable and performed quite well. However, we experienced a decline in hard goods, specifically in our Outdoor and Sports Recreation segment, which fell by about 10%. A few factors contributed to this outcome. Customers showed a clear preference for value, evident in our everyday value pricing on private brands and promotions. Innovation also played a key role—when customers encountered new and innovative products, they were willing to pay a premium. Examples include the new bats from DeMarini and the seasonal colors from YETI, along with the introduction of the Yonder water bottle and BOGG BAGS. Additionally, improved inventory levels in categories like cleats and team sports helped address past shortages. Conversely, high-ticket items with long replacement cycles, such as treadmills and kayaks, saw less demand, especially from those who had recently purchased cardio machines. Weather-related impacts on spring and summer categories are expected to diminish as the season progresses. Furthermore, we are still facing challenges with surge categories, particularly in ammunition and firearms. Moving forward, we plan to focus on the aspects that are working, emphasizing value to reaffirm our position as a value provider. We will maintain pricing where feasible and may reduce prices in certain areas to enhance value perception. We will also continue delivering innovation and will strategically plan for businesses with longer lead times while incorporating these considerations into our forecasts.

In addition to the categories that, again, we can pivot because we've got a diverse assortment, we can lean into categories that are working. We've still been investing in the business to drive sales. I mean we've got several initiatives that are very early stage, one of which we're getting ready to really launch share in earnest, and that's our customer targeted marketing initiative. We're at a point now where we do believe that initiative will start driving value in the back half of the year, continuing to invest in omni-channel so a challenging quarter. We don't like it. Cash flow is still exceptionally strong, which has allowed us to invest and we expect to receive some benefits from those investments from a sales standpoint in the back half.

And if I could just follow up just on your view of some of the big ticket long replacement goods that you mentioned, is there any prediction when you would maybe think that category could stabilize or inflect?

I think as we get through the remainder of this year, some of the headwinds fall off a little bit. We were still up against some pretty good demand there, early part of last year. We think as we get closer to holiday, we'll see that start to level off a little bit.

We are not adopting a victory mindset. There are several large categories that are performing well. I believe we are gaining significant market share in outdoor cooking. When we thoughtfully merchandise a category, present it effectively, and provide good value, customers will respond positively. We need to learn from that category and apply those lessons to our other areas, as there is much we can do to make progress in high-ticket items.

We are noticing that some big-ticket categories are starting to recover, particularly paddle marine, which seems to be stabilizing. As the season progresses, customers are returning to purchase that product.

The next question is coming from Robbie Ohmes of Bank of America.

First, I want to congratulate Ken, Steve, and Michael on their new roles. It's impressive what you all have accomplished as a team since the IPO. I have two questions. First, can we discuss Q2 in more detail? It seems like the April comparisons were likely worse than a decline of 7%. As we approach Q2, should we anticipate that same-store sales in the second quarter could drop more than what was experienced in the first quarter? Any additional insights about the second quarter compared to the latter half of the year would be appreciated. I also have a follow-up question.

Yes, I'll start, and I'm sure we'll kind of chime in. Certainly, we stay away from giving it a quarter color guidance. That being said, we definitely saw a deceleration in the business as we guide into that April time period. That certainly continued into May, and that's reflected in the guidance that we've given of down 7.5% to down 4.5%. But as we talked about, as we got into the summer and see the weather and temperature shift, we see some of the seasonal headwinds dying off. And then we see some of those other initiatives we talked about, such as the CDP, the new brand initiatives, the new store initiatives and launches that we have out there starting to level off. And then obviously, some of the surge activity, I don't want to oversell this, but we were still up against some pretty big surges in a couple of categories last year and the first half of the year. But once we get past Q2, those start to fall off a little bit.

We think we've got a plan Robbie. At the high end of the guide, it would assume that things get a little bit better at the low end would assume the consumer continues to soften. I think we've hit a point now we've got a good read on the forecast. In April, the deceleration was so rapid, honestly, we couldn't adjust our expenses appropriately. And we've been able to do that now comparing again for the back half of the year.

Got you. Can you provide more details about the introduction of new brands? Are there specific categories we should focus on?

Yes, we are keeping a bit of that under wraps for now. We plan to make the announcement during our next Q2 earnings call. We aim to share news closer to the customer-facing date since they often expect new items to appear in stores right away. We will provide more details as we approach that time. However, we have some exciting additions, mainly in apparel and footwear, coming in the latter half of the year.

I'm going to squeeze in one more real quick. Nike.

That's an interesting one. We talked a lot about over the last couple of years the vendors taking control of distribution and that being a tailwind for us. I mean, certainly, we still believe that, that's true. That being said, I don't think we're terribly surprised that Nike decided to go back into Macy's. Candidly, they're on-mall, all of our locations are off-mall. So we really don't see it impacting our business as much as maybe other mall-based retailers.

The next question is coming from Michael Lasser of UBS.

So we can pair Academy's results from Q1 really for the last several quarters. And even if we account for differences in business mix and compared to some of your larger competitors, it would seem like Academy is losing market share. Why is that the case? And if it's different assortment or different customer mix, what can Academy do to address those factors that are driving underperformance?

We track market share across multiple categories using data from Circana, previously known as NPD, along with other resources. We are definitely gaining market share across nearly all categories. To clarify, we are not losing market share. Our business mix is approximately 54% hard goods and 46% soft goods, which differs from some competitors who are more heavily focused on soft goods, including apparel and footwear. These have been the stronger segments. However, we believe that having a diversified product range that includes outdoor and sports recreational customers will ultimately benefit us in the long run. We aim to succeed through this diversified approach rather than concentrating too heavily on just one or two categories.

My follow-up question is on what have you assumed for promotions and shrink for the back half of the year understanding that you're going to get a freight benefit that is going to offset that? But if you need to step up the promotions in order to improve sales, doesn't that get worse before it gets better and shrink that tends to have a longer tail associated with it as well.

I'd say from a promotions perspective, I think we've got a pretty good beat on the level of promotion in the marketplace. If you go back and look at our Q4 commentary, we talked about our merchandise margins being down about 100 basis points during that time period, primarily because of the additional promotions that have added back in. Our Q1 merchandise margin was down about 110 basis points, so very much in line with that. We've got a couple of quarters now where we've seen kind of what the lay of the land is promotionally. I would say it's more promotional than where it was a year ago, certainly not back to where it was prior to the pandemic. And I think we've got that appropriately planned for baked into the guidance that we shared today. In terms of shrink, Michael, do you have any thoughts on that?

Yes. Shrink, we assume, frankly, will remain about the same. I mean we're taking actions to improve that. We've taken most of our inventories for the year, and there won't be a lot that will move the needle there one way or the other.

The next question is coming from Christopher Horvers of JPMorgan.

So a couple of questions on the margin front. So you talked about reacting as the business slowed and cutting expenses. I guess where are you finding those expense cuts considering that you are ramping up new store openings and as well as executing supply chain initiatives?

This team has experienced many cycles in retail, and it's time to be more cautious. We've recognized some challenges ahead, and we think we can manage our expenses better than expected. We’ve identified areas in our business that are not essential and have successfully reduced those. Looking ahead, we feel confident about lowering expenses significantly. For example, we are reducing task labor in stores and being more strategic with our remodels, where we have found some efficiencies. There are always opportunities for improvement, and we’ve managed to find those while still investing in the business. Our cash flow remains strong. However, this year is shaping up to require us to eliminate non-essential expenses, and we've taken that step.

I just want to reiterate, we're very focused on managing through the short-term environment, right? I mean it's bumpy out there. We're going to be very thoughtful how we manage expenses. At the same time, we're going to lean into and protect the long-range investments that we need to make to support our growth strategies. So its equal parts, controlling the controllables right now, making sure we're sober about the environment we're operating in, but at the same time, continue to invest in the business for the long term.

Got it. Can you discuss the advertising strategy for the second half of the year? What changes are being implemented? Are you planning to eliminate circulars in favor of more direct mail? What is enabling this shift? What will be different from your current approach compared to what you expect to implement in the second half?

We have made significant cuts and there are not many promotional materials left to adjust for reinvestment. The major development for us is the implementation of a new customer data platform. Previously, our customer data was stored across various databases that didn’t communicate efficiently. It wasn’t in real-time, which complicated our marketing efforts. We see this as a great opportunity and have invested in the technology that will be operational by the end of Q2. As a result, we will be much more agile in retargeting customers based on their browsing habits and sending better-triggered emails for cart abandonment. We will also enhance our ability to create detailed customer profiles and segment our lists. This new approach will allow us to move away from our previous broad messaging tactics through email and mass media, enabling us to better target our communications based on customer shopping behaviors.

And again, some of those investments will help us on the expense side, too. I mean flowing inventory better with better utilization of our trucks, RFID in our stores to help with inventory. So there's a lot, both on the sales and the expense side. Again, the guidance contemplates a number of different scenarios and feel pretty feel comfortable with where we sit today based on what we're seeing. And the ability to pivot early in the year is certainly helpful to that.

Yes. I mean we never want to see a business slowdown, but as Michael and I were talking the other day, the fact that this happened in Q1 gives us time to react and make sure that we get everything lined up for the remainder of the year.

The next question is coming from Greg Melich of Evercore ISI.

My first question is on the ticket decline and the transaction count declines. Is that went through the quarter presumably it was both traffic and average ticket size that went down? And was it all promotions that hit ticket or was there deflation or do items come out of the basket?

So if you look at kind of the way the transactions broke down over the course of the quarter, traffic transactions were our biggest challenge. If you look at AUR, UPT, they're more flattish. In terms of the overall basket decline, it's more a reflection of the big ticket pullback in some of those long lead time big ticket categories and selling more lower-priced AUR apparel, footwear, things like that.

On the transaction side, I think it's the softness of the consumer, coupled with some of the surge activity we had that extended into the first quarter last year on ammunition.

The next question is coming from Daniel Imbro of Stephens Inc.

I want to start on the supply chain, Michael, we talked a little bit about inventory, but as you look at it today, is there anywhere inventory is heavy or given the sales underperformance, is there anywhere the inventories may be too light? And then we look at the West Coast, some of the port delays that have cropped up over the last 7 days, does that present a new risk to the supply chain and in-stock levels as we get into the back half of the year or how does that impact your business today?

Michael and I will probably tag team this one. So certainly, I would say we're back in stock broadly across virtually every category. So that's not a problem that we certainly faced over the last couple of years. There are a couple of places where the seasonal slowdown that we saw early on, we're watching those pretty closely. In most cases, though, it's not inventory that goes bad, it's inventory that we can keep and flow out as we need to. Think about water sports, things like that. We saw some of those categories almost year around in some of our geographies. In terms of the impact of the West Coast and the supply chain, I'll tell you with all the disruption over the past couple of years, I think we, along with everybody, have gotten pretty diversified in terms of the number of ports we bring goods into, etcetera. So we haven't seen really any impact to that.

Yes, nobody appreciates the disruptions on the West Coast. However, in terms of competition, we hold a significant advantage during these disruptions. Our reliance on the West Coast is minimal. While the whole industry might feel the effects, we primarily operate through the Port of Galveston on the East Coast, so any impact on us is indirect and less severe compared to others. Additionally, regarding inventory, as mentioned by Steve in his remarks, we are actually seeing a decrease in inventory on a unit basis per store compared to last year, and there are no significant shortages.

I appreciate that color. And then not to belabor the point, but to follow up on SG&A guidance, Michael, you mentioned you've changed the nice to haves. But can you maybe quantify just what the cost savings are from these changes in the outlook? And as you look at the outlook, you talked about the dollar growth, but does that incorporate just the changes you've made so far or does that assume you continue to find more costs to take out to hit that guidance through the year? Just trying to get a sense of how aggressive or conservative that cost outlook could be?

Yes, we have identified that. We wouldn't include it in the guidance if it wasn't recognized, and we will maintain that position. However, our experienced team is capable of adapting as needed. From a rate perspective, I believe we will align with our initial projection for the year, expecting a lower sales outlook, and that will be our stance for today.

We're showing time for one last question. Today's final question is coming from Seth Basham of Wedbush Securities.

My question is around gross merchandise margins. If you could provide some more color as to the moving pieces in the quarter. You mentioned that overall were down 110 basis points and shrink with a 76 basis point headwind. How much was promos, how much was freight to offset and any other moving pieces?

We don't analyze it at such a detailed level. A few factors influenced it. We noted that promotions as a category of sales saw an increase for the quarter, and clearance sales also rose slightly. However, both of these contributed to a decrease in margin. This definitely had an impact on us. Freight is not included in our merchandise margin; it is accounted for separately. Nevertheless, it does affect our gross profit as we compute it.

Well, yes, but we planned it that way. I'd say to our plan, promos have played out the way we thought they would where merchandise margin was a little off of the way we planned it was due to the mix down, fewer seasonal sales from the outdoor pools and water sports and rec and some of the soft goods.

The other thing to remember is that we are primarily an everyday value-based retailer. Promotions and clearance account for, on average, less than 25% of our business, so 75% is from a stable baseline of everyday value pricing.

At this time, I'd like to turn the floor back over to Mr. Hicks for closing comments.

I'll begin, and then I'll turn it over to Ken. I want to emphasize that we are certainly not pleased with the results. The beginning of the year has proven to be more challenging than we expected, but we are staying proactive. We are responding to the current situation and are focused on addressing the short term to ensure we meet our goals as outlined in the guidance we provided today for the remainder of the year. At the same time, we will not lose sight of our long-term objectives. We have a long-term strategy we believe in and an operating model that our customers appreciate, which we think is scalable and adaptable. Our aim is to expand Academy into as many towns as possible while maintaining our long-term focus. With that, I would like Ken to share a few closing remarks for this call.

Thanks, Steve. It's a challenging quarter for transitioning leadership, but we have a capable and experienced team with a clear plan and strong foundation to move forward. Our strategy focuses on growing the company primarily through the opening of new stores, especially in new markets and areas that can generate additional volume without competing with our current locations. This will also expand Academy's reach. We anticipate strengthening our omni-channel business through targeted investments that enhance the shopping experience and ensure our existing stores continue to support the company’s foundation. I believe our team is prepared for the challenges ahead, and I am excited to collaborate with them in our new roles. I want to express my gratitude to all Academy team members for their dedication and hard work in positioning us where we are today and for providing excellent service to our customers. I also appreciate our investors for their confidence in us as we pursue our mission to be the leading sports and outdoors retailer in the country. Thank you all, and I wish everyone well.

Thank you, guys.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your phone lines at this time or log off the webcast and enjoy the rest of your day.