Good morning, ladies and gentlemen, and welcome to the Academy Sports + Outdoors Second Quarter Fiscal 2023 Results Conference Call. This call is being recorded. I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors' Second Quarter 2023 Financial Results Call. Participating on the call are Steve Lawrence, Chief Executive Officer; Michael Mullican, President; and Carl Ford, 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. I will now turn the call over to Steve Lawrence for his remarks. Steve?

Thank you, Matt. Good morning to all, and thank you for joining us for our Q2 earnings call. It's been three months since Michael and I stepped into our new roles. Over the past 90 days, we've worked hard to improve our sales trend, manage our expenses, and the current run rate of the business, and to backfill some key positions on our leadership team. I'm excited that we're able to fill all of our key roles with internal promotions, which speaks to the work the team has done over the past couple of years on building a strong internal bench and focusing on succession planning. To highlight that, I'm thrilled that Carl Ford, our new CFO, is one of these promotions, and he will be joining us on today's earnings call. Carl has been with the Academy for 4.5 years, and during that time, he's played an integral role in helping the company achieve several milestones including navigating the pandemic, achieving all the objectives in our first long-range strategy, supporting our IPO, and helping shape and create our new long-range plan. Turning to our Q2 results. For the quarter, we achieved net sales of $1.58 billion for a negative 7.5% comp. While we are not pleased with this decrease, these results were in line with our first-quarter trend and in line with the guidance we shared during our last call. What was encouraging was that unlike Q1, we saw the business decelerate as we moved through the quarter. In Q2, we saw steady improvements in both sales and margin rates with each month getting successively better. Our belief is that we can continue to build on this momentum as we progress through Q3 and into the holiday selling season in Q4. Looking at sales by division, our best-performing business during the quarter was sports & recreation, which saw a 2.7% decrease. Sporting goods equipment, outdoor cooking, and outdoor furniture all performed well during the quarter. However, the fitness equipment and bike business continue to be challenging. Apparel was the second-best performing division with a negative 3.7% decrease. We continue to see solid performance out of the men's and youth businesses as well as our licensed apparel area. NIKE continues to perform well for us along with our private label business. The women's business has remained more challenging. As we move forward, we're very focused on getting our women's active business back on track. Footwear during Q2 ran a 4.5% decrease. We continue to see strength in casual and work footwear driven by national brands such as HEYDUDE along with our private work boot and apparel brand, Brazos. The cleated business was also strong as we continue to be in a much better inventory position than where we were a year ago. Our outdoor trend for Q2 was a 12.2% decrease, which was an improvement compared to Q1 when we saw a 15% decline, but it's still well below our expectations. Better performing categories for the quarter were fishing and camping. Hunting remained the most challenged business, with continued softness in both the ammunition and firearms segments. Both of these categories continue to perform well above 2019 levels but continue to decline from the peaks that we saw during the last couple of years. As we move forward, we expect to see the declines in these categories moderate as we start to lap softer comparisons from last year. When you look across the various businesses, many of the key themes that we called out in our Q1 call carried into the second quarter. Customers continue to gravitate towards value on one end of our assortment, demonstrated by an increase in the penetration of private brand sales. At the same time, customers are also focusing on new and innovative products such as BOGG BAGS and OOFOS recovery slides which, in many cases, were not value items. Bigger ticket items with long replacement cycles continue to be challenged, along with many of the surge categories that benefited from increased demand during the pandemic. We've also seen a consistent pattern of customers aggregating their purchases during key shopping periods such as Mother's Day, Memorial Day, Father's Day, and the Fourth of July. We are continually adjusting our assortment and future buys along with our promotional efforts to align with these trends. Customers will continue to see us lean into our position as a value leader in our space by expanding our everyday value offerings while also leveraging strong promotional efforts during key shopping moments in the calendar. In regards to new brands and ideas, I'd like to highlight a couple of new initiatives launching in Q3 that will help us take advantage of the customers' appetite for newness. This past week, we announced a new partnership with L.L.Bean to become one of their key retail partners. We believe their focus on outdoor apparel and footwear with a northern sensibility is the perfect complement to our Magellan Outdoors and Columbia businesses, which tend more towards fishing and southern climates. Another new initiative is our partnership with Escalade and the American Cornhole League to become the exclusive seller of ACL boards and bags for this fall. With the strong market share we have in all things tailgating, this partnership is a perfect fit for us. Later in Q3, we'll kick off a new partnership with Fanatics to help expand our online offering and license team apparel. This business has been a strong suit for us over the years, but our offering has traditionally been anchored in the leagues and teams that live within our geographic footprint. Our new relationship will allow us to dramatically grow our assortment and service a greatly expanded number of categories, teams, and leagues moving forward. Shifting to profitability, we remain focused on proactively managing our business to deliver the best possible results for our shareholders this year while ensuring we remain on track to achieving our long-term initiatives and goals. Our gross margin for the quarter came in at 35.6%, which was a 30 basis point improvement over last year, with a 180 basis point increase over our Q1 rate. Beneath the surface, our merchandise margin stabilized, down 21 basis points versus last year, which was a market improvement over our Q1 run rate of down 110 basis points versus 2022. Carl will give you more color around our financial performance shortly. Turning to inventory. At the end of the quarter, our inventory balance was $1.3 billion, which was flat to last year in terms of dollars and down 2% in units in total. On a per-store basis, units declined 5% compared to Q2 of last year. The team has exhibited a very disciplined inventory management approach through the past couple of years, and we plan to continue to lean into this strength as we move forward. We are confident that our current inventory position is at the right level to support our business and that the content is fresh and forward-facing, which should position us well for the fall and holiday selling seasons. As we discussed in June on our Q1 call, we're taking aggressive action in proactively addressing the trends that we've seen in the business this year in order to help improve sales and profitability as we move through the remainder of the year. I want to give a quick reminder of the key actions we're taking to drive the business. First, we'll continue to highlight and focus on our position as a value leader across all customer touchpoints. Second, we're introducing new offerings in our assortments such as L.L.Bean, Fanatics, and American Cornhole Holding to capitalize on customers' desire for newness. We're also improving our advertising effectiveness with better targeted marketing that will be facilitated by our new customer data platform. We're continually enhancing our omnichannel functionality and features to improve the customer experience. Lastly, we also expect a sales boost from the new stores we opened up in 2022 along with 11 to 12 new stores opening this fall. Now I'd like to turn the call over to our new CFO, to walk you through the financials. Carl?

Thank you, Steve. Good morning, everyone. It is an honor to be selected to follow Michael as the Chief Financial Officer of Academy Sports and Outdoors. I am excited about the opportunity to lead our finance organization into what I believe has a very bright future. I have been with the company since 2019 and I am proud of the work we have done to strengthen our balance sheet and improve our operating model. Academy is not the same company as it was then and I am excited about our long-term growth initiatives and capital allocation philosophy. I will now walk you through the details of our second quarter results. Net sales were $1.58 billion, a 6.2% decline compared to the second quarter of 2022, with comparable sales of negative 7.5%. Sales were impacted by an 8.3% decline in transactions, partially offset by a 0.8% increase in ticket size. During the quarter, customers were more active during holiday periods and we saw improvements in the comp during each month of the quarter. Gross margin rate was 35.6%, an increase of 180 basis points sequentially and 30 basis points higher than last year. The improvement compared to last year was driven by 88 basis points of lower freight costs, partially offset by a 21 basis point decline in merchandise margins and 37 basis points of higher shrink. Our merchandise margins improved sequentially as we benefited from our ongoing efforts to manage inventory through system capabilities, price optimization, and localization. We saw a 42 basis-point sequential improvement in shrink driven by actions taken to detect and deter losses. We continue to be able to operate at substantially higher gross margin rates even in a challenging environment. During the quarter, SG&A expenses were $352.5 million or 22.3% of net sales, an increase of 220 basis points compared to the second quarter of 2022. This deleverage is primarily driven by investments we are making in our long-range plan. We are investing in new stores, omnichannel, IT, and digital marketing projects that support our growth initiatives. Approximately 80% of this quarter's SG&A dollar increase is related to growth investments. When compared to Q1 of this year, SG&A expenses were 230 basis points lower as a percentage of sales. As we discussed during our first-quarter call, we focused on aligning our expenses with our revised sales guidance, and the sequential improvement of our expenses as a percentage of sales reflects the hard work done across the organization to rightsize our spending. Examples of areas of the business we have focused on rightsizing include flexing store and distribution labor hours based on revised sales and inventory receipt expectations. Targeted distribution scheduling during non-peak times and scaling back on projects that are not aligned with long-term growth strategies or current year sales growth. Net income was $157.1 million or 9.9% of sales, a 130 basis point decrease from the second quarter of 2022, resulting in GAAP diluted earnings per share of $2.01, adjusted diluted earnings per share were $2.09. Moving to the balance sheet. At the end of the quarter, we had $311 million in cash and no outstanding borrowings on our $1 billion credit facility. Academy generated $191 million in net cash from operating activities during the second quarter. This is a 19% increase compared to the second quarter of last year. We deployed this cash to invest in our growth initiatives and to repurchase approximately 2 million shares for $107.3 million and pay out $6.9 million in dividends. The Board has approved a dividend of $0.09 per share payable on October 11, 2023, to stockholders of record as of September 13, 2023. Capital expenditures were $69.3 million. For the full year, we still expect to spend between $200 million and $250 million. With that, I will turn the call over to Michael to provide an update on some of our key initiatives and our full-year guidance. Michael?

Thanks, Carl. Good morning, everyone. I want to say congratulations to Carl on his promotion to Chief Financial Officer. He has been a core member of Academy's finance organization for the last several years. During that time, Carl has been a key driver of our financial performance. I know that Carl and his team will continue to be excellent financial stewards of the business as we move forward with our long-range plan. I'd like to take some time to update everyone on the progress of a few key initiatives that will drive the long-range growth plan we described during our Investor Day this past April. As a reminder, the key components of the growth plan are: First, to open new stores to expand the store base by 50% in existing and new markets; second, to build a more powerful omnichannel business; third, to drive our existing business by improving service and productivity in our stores, strengthening our merchandising, and attracting and engaging customers through communication, content and experiences; fourth, to leverage and scale our supply chain and to achieve these objectives by building the best team in retail. I'll start with our new store initiative, which we expect will be the largest driver of sales and profit growth over the next few years. As a reminder, all of our mature stores are profitable and collectively have sector-leading store productivity metrics. We opened 9 stores in 2022. And even though they opened in a challenging economic environment, they are, as a group, meeting expectations and already positively contributing to EBITDA. As I have said in the past, 2022 was a test-and-learn year, and we are in the very early innings of this initiative. While our current new store pro forma assumes approximately $18 million of sales in year 1, inclusive of omnichannel sales, we have learned that new market stores need time to build brand awareness and may have longer sales maturity ramps, while stores in existing markets generally come out of the gate faster. Our sample size is limited and the current economic environment is challenging but we continue to learn and refine our expectations and processes with the goal of making each new store opening better than the last one. So far, we are pleased with the learnings we have implemented. Given the positive preliminary results of the stores we opened in 2022, we are confident that we can take our unique Academy brand, concept, and business model to many new markets with great success. In the second quarter, we opened 1 store in Peoria, Illinois, which was our second store opening this year. We have 6 scheduled openings in Q3, including our first store in the Indianapolis, Indiana area, which opened last Friday. We are on track to open another 5 to 6 stores in Q4. Steve and Carl mentioned the challenging economic environment, but I want to emphasize that in spite of these challenges, we are able to fund store growth with our existing strong cash flow. As of today, we are only in 18 states, so we have a large runway for growth in front of us. In addition, with other retailers scaling back their outdoor product offerings, there are many markets that are favorable for market share gains. Our past experience has confirmed that our market research and due diligence have identified locations where stores will be successful for the long term. We launched our new customer data platform in July to drive further sales growth. This valuable tool will allow us to aggregate customer data from multiple sources within our organization, creating a comprehensive view of our customers. With this new perspective, we will have the ability to create and develop a robust customer portfolio segmented by cohorts, shopping behaviors, outdoor interests, sports fandom, and many other filters. We can use this refined customer data to proactively design highly targeted marketing campaigns tailored to specific customer behaviors and interests. We anticipate that connecting with our customers on this deeper level will drive an increase in traffic, conversion rates, and loyalty. We look forward to updating you about this exciting new capability as we further develop and refine it. Finally, a brief update on our supply chain initiatives. As we discussed at our Investor Day in April, part of our long-range plan is to generate 100 basis points of adjusted EBIT margin improvement from our supply chain. We intend to do this by increasing our unit productivity, leveraging existing distribution capacity, lowering our e-commerce fulfillment costs, decreasing lead times, and leveraging transportation costs. A major component of achieving this goal is the implementation of a new warehouse management system in partnership with Manhattan. We are on track to convert one of our distribution centers to the new system in 2024. We are also taking other steps to improve supply chain logistics and productivity by implementing consistent processes and procedures, increasing cross-stocking and multi-store deliveries, and investing in technology to improve visibility of product flow. I expect us to achieve our EBIT margin contribution goal by the end of the long-range plan. To sum it all up, based on our results, current trends, and back half expectations, we are reiterating our full-year sales and net income guidance while updating our earnings per share forecast to reflect the share repurchase activity in the second quarter. Net sales are still expected to range from $6.17 billion to $6.36 billion with comparable sales ranging from negative 7.5% to negative 4.5%. Gross margin rate between 34% and 34.4%. GAAP income before taxes is still expected to range from $675 million to $750 million and GAAP net income between $520 million and $575 million. GAAP diluted earnings per share are now expected to range from $6.65 per share to $7.35 per share. Adjusted diluted earnings per share are expected to range from $6.95 per share to $7.65 per share. The earnings per share estimates are calculated on a share count of 78.1 million diluted weighted average shares outstanding for the full year and do not include any potential future repurchase activity. Finally, we still expect to generate $400 million to $450 million of adjusted free cash flow. With that, I will now turn the call back over to Steve for his closing remarks.

Thanks, Michael. As we move forward, I think it's important to note that despite some short-term headwinds, Academy is a much stronger company than we were before the pandemic. Our sales and gross margin rate remain significantly above 2019 levels driven by the operational improvements made over the past few years that have structurally enhanced our earnings power. We have a strong and flexible balance sheet, a very productive four-wall operating model that is scalable and transportable, a solid team with a track record of executing and delivering results, and high customer affinity within our core markets. Longer term, we believe we have a compelling growth strategy with multiple ways to capture market share and drive growth through new store expansion into adjacent new and existing markets. We have an improving e-commerce business with significant upside, and we have the ability to continue to refine and drive more productivity out of our existing store base. Most importantly of all, this growth can be funded from the free cash flow generated by the business while also returning value to our shareholders through dividends and strategic share repurchases. In closing, I'd like to thank all of the Academy team members for their dedication and hard work in helping deliver an outstanding experience to our customers. Now let's go and have fun out there. We'll now open the call up for your questions.

Our first question comes from Daniel Imbro with Stephens.

Yes. I want to start just broadly on the consumer trends that you're seeing. We've talked in the past about Academy benefiting from a more discerning customer, maybe looking for value. Do you see any signs of that this quarter, whether it was new customers shopping the store or any trade down within the store? And then also within the quarter's kind of improvement, was any of that attributable to the new marketing plan? Or is that really going to be more impactful for the back half of the year when you think about the sales cadence?

Dan, this is Steve. I'll start with the first part, and I'm sure Michael will jump in. We definitely see the customer under stress and pressure. We see that reflected in a couple of different ways. We talked about customers gravitating toward value. We see that in terms of growth in private label, which represents the value end of our assortment. We also see them taking a bigger advantage of deals or clearance when we sell those. So there definitely is a move towards customers seeking out value. On the flip side, we also see them seeking out newness, right? We see them going after things that are new and innovative, like we talked about BOGG BAGS or OOFOS slides. That's why we're excited about some of the new brands that we're launching this fall between L.L.Bean and Fanatics and ACL. So that's definitely a trend we've seen. We've also seen the customer shop during key appointment shopping periods and aggregate their purchases there. We've also seen that once we get past those key shopping periods, they pull back a little bit, and that's really how we planned our marketing and promotions throughout Q2 and all the way through the remainder of the year. In regards to the targeted marketing from the CDP, that was really put in place late in the quarter, so we really didn't get any benefit from that. We think we'll start seeing some benefit of that in the back half of the year.

Yes. Danny, on the CDP, we've been flying a propeller plane in a dogfight holding our own against fighter jets for the past three or four years. And now we have our own fighter jet. And we're learning to fly it. Most of that benefit will start to come next year. We should see a little bit this year, but it will not be a meaningful driver of comp this year. The big benefit will come in the future.

Super helpful. And then maybe a follow-up just on gross margins. Obviously, there was discussion from peers around maybe higher promotions. Your margins held in well. I'm curious, when you look at your competitive pricing analysis, are peers coming down to where Academy is priced? Are they actually trying to undercut you on certain items? Just any granularity on that or changing promotional backdrop? And then tied in to that, you know, the shrink improved, I think, a little bit quarter-over-quarter. What was the main driver there? Anything worth calling out there for the back half?

Yes, I'll start and answer the question on promotions, and then we'll have Carl jump in on shrink. Definitely, it's more promotional out there this year than it was a year ago at this time. We talked about in the past call how we started seeing promotions creep into the marketplace in the back half of last year and then carried forward into the first half of this year. That being said, as I just said earlier, we're definitely seeing those promotions most effective during those key shopping moments. So we're certainly leaning into that as we move forward. We did have a 20 basis point erosion in merchandise margin that came from some additional promotions. But probably the best thing that we've done to help manage through that is our inventory management. When you think about all the strong disciplines we put in place in terms of our planning and allocation, assortment planning, all those things have really helped us control inventories and control margins and not see the same erosion that maybe other people have seen.

Let me take shrink. It's a real issue. In spite of the headwinds we faced from higher shrink, as Steve said, we were able to meaningfully expand our gross margin rate compared to last year. We sequentially improved our gross margin from last quarter. We've taken many actions, many of which are confidential and frankly, clandestine in nature, and we can't talk about many of them, but they're working. One thing that we do from a process standpoint is we count our stores regularly throughout the year. And we take our high-strength store inventories early in the year, which gives us a chance to adjust and take some actions and perhaps count them again. So we have visibility into trends throughout the year. It's a difficult environment. I would tell you that good leaders adjust, and that's what we've done. I do have to take this time to thank all of the Academy team members in our stores, the folks in the blue shirts who have been so attentive in helping us manage these issues. They want to do what they do best, and that's help customers have fun. And the best way to prevent shrink is to provide great customer service in the stores. We can do that and provide more labor and more customer service because our stores are significantly more productive than our peers. Our LP department has worked very hard with law enforcement. We've got great partnerships with law enforcement, and we've been able to help intervene and take down some organized crime rings that have contributed to shrink. So last thing I'll mention here on this issue because it is a big concern. If you reflect back on many challenges facing retailers over the past few years, we'll start with the COVID pandemic. During the peak of the COVID crisis, I believe we managed that better than anybody else. We got our stores opened more quickly. We were able to help the community get back on their feet more quickly. If you look at ballooning freight costs over the past few years, we've managed that better than most others in the space. If you look back to a year ago, when many retailers were overbought and didn't manage their inventory well, we did that better than others. We're going to do the same with shrink. We have a great team. We're nimble, and we're going to manage it. We're not going to use it as an excuse to not hit our gross margin goals.

Our next question comes from the line of Greg Melich with Evercore.

First, I wanted to look at the comp. Were transaction counts getting better sequentially and did that drive the negative 7.5% comp? Or was it more average ticket?

For the quarter, traffic, which serves as a proxy for us, was down high single digits, while the average unit retail was slightly up, and units per transaction were down slightly. We did talk about how the comps successfully got better as the quarter progressed. You can see traffic improve steadily as we got less negative through the quarter.

And it sounds like given the midpoint of the guide now would have you sort of at a negative 4.5%, 5% comp in the back half. Is that where we're running now?

So we obviously don't give inter-quarter guidance, but the performance of the business continues to be within the guidance range that we've shared.

I would like to follow up on the previous point regarding shrink; the response was insightful and comprehensive. The improvements in freight or supply chain contributed positively to our gross margin. Can you provide some specific details on that? Additionally, could you share your outlook on this for the latter half of the year?

Yes, Greg, this is Carl. So freight was a tailwind of 88 basis points during the quarter, quarter-over-quarter improvement. Up 30 basis points in gross margin, the puts and takes on that were freight was a positive, 88. Merchandise was a negative 21, while shrink was a negative 37. We continue to see that as a tailwind throughout the fall.

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

Can you talk about what you're seeing in some of the key COVID-winning categories, whether it's hunting, exercise equipment, bikes and so forth? Are you seeing the bottom form in the business such that we can start to look forward to improvement in comp and then ultimately positive as you think about the out year? Or are those essentially relative to 2019? Are things stabilizing and we can start to think about the business more seasonally?

Yes. On a key year-over-year basis, when you look at those bigger businesses and big ticket categories, some of the surge categories you talked about, they're still challenged. I mean our fitness business continues to be particularly challenging. The hunting business you've talked about continues to be challenged as well. However, as we progress through this year, the difficult comparisons lessen, and we're counting on some improvement as we move through the year. But returning to the latter part of your question, when you look at these businesses versus 2019, they're still performing really, really well. For example, the hunting business is still up in the mid-40s compared to '19. If you take a category beneath the surface, like ammunition, it's still up about 96% versus where it was in '19. So it's certainly falling back a little bit from the activity we've seen in the last two years but is still maintaining a really healthy spread versus pre-pandemic levels. I think once we see the business start to stabilize, which I do believe is happening, that's when we'll begin to transition back towards that growth from a total company perspective.

So I guess just focusing on that. So in these categories broadly, do you feel more confident today than a quarter ago that we're seeing the bottom form and you have better visibility as you look forward?

They are becoming more predictable for us. We are getting much closer to being able to forecast those businesses. They are still running negative, though; I don't want to mislead you on that. They are running negative. But I believe as we progress further into the year, the headwinds will diminish somewhat. That's what we are counting on as part of our guidance.

Chris, one other thing. I think if we look long term and again, we're focused on the long term, we're more differentiated in this space than we were a few years ago. I think there are fewer competitors, and some of the largest competitors have really backed away from this space. So short-term, definitely, as Steve said, we're still running down in some of those categories. It is stabilizing. But long-term, we've got a great opportunity to pick up meaningful share and new customers as we lean into this category.

Yes, a lot of the categories that you're talking about have major cross-shop across the company. And ultimately, even though we are fighting through some short-term challenges, we believe the diversified assortment, the complementary nature of the businesses and how they cross-shop is the right place for us to be. We're a sports and outdoor retailer. And candidly, as more people pull back from the outdoor space, we become perhaps the only player in this area with a large footprint.

Got it. And then my follow-up question is any help here on the back half in terms of cadence from a top-line and gross margin perspective as we think about the models?

Yes. No, I think our guidance remains consistent with the annual projection of down 7.5% to down 4.5%. The flexibility or the variability in that is related to consumer health. We're going to continue to lean into value. We're going to continue to lean into newness. It's completely related to consumer health. And on the margin guidance from 34.4% down to 34.0%, we feel comfortable with that. We've consistently delivered that over the past two years. It's up 500 basis points since pre-COVID, and all of those business disciplines that Steve described of what we've been doing since 2019, especially around merchandise planning and allocation, systems enhancements, planning and buy execution, and markdown lifecycle management are now being implemented on a daily basis.

Our next question comes from the line of Kate McShane with Goldman Sachs.

This is Emily Ghosh on for Kate. We wondered how you were thinking about the overall health of the marketplace currently and into the second half of the year. It sounds like there are some areas where there's heavier inventory and we wondered how that might impact Academy.

Yes. I mean, certainly, we've talked about how we're very comfortable with our inventory position. We also know that competition sometimes has issues out there, and those problems can become our problems as they liquidate product. That being said, some of the headwinds you're talking about include increased promotions, the heavy inventories you mentioned, and customers are under pressure. The credit card debts are higher than they've been, and inflation is real. However, when you think about some of the other tailwinds we have, we've got our everyday value positioning that is kind of core and fundamental to who we are. I think customers will continue to gravitate toward value. We've got strong offerings of new brands and a really robust private label business that customers resonate with. So, we feel like the guidance we provided is thoughtful and encompasses both an upside and downside scenario. We're just going to read the situation and react as we go along, as we have all year.

Yes. And going back a year ago, there were a number of retailers who weren't happy with their inventory positions at that time, and we were able to hold our own based on the strength of our inventory management. Reiterating what Steve said, our units are down 5% on a per-store basis. We believe we've really leaned into our inventory management efforts and have been consistently doing it.

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

This is Alex Perry on for Robby. Just first, could you give us some more color on how back-to-school is shaping up? Has the July momentum that you've seen sort of continued? And then I think the high end implies a same-store acceleration in the back half. Is that based on the trends you're currently seeing? And then what are sort of the buckets that are driving acceleration in the back half? And then I think you're lapping an Astros win as well. Can you just remind us how much of a headwind that could be to same-store sales if that's not repeated?

There is a lot to unpack in that question, so we'll do our best to address it. As we've mentioned previously, we don’t provide inter-quarter guidance. However, our back-to-school season begins earlier than many others, starting in the second half of July. We’ve already indicated that July was our strongest month during this quarter. Many of the positive trends we observed at the end of July have continued into August, particularly in key back-to-school categories such as youth apparel, footwear, backpacks, and hydration products. Nonetheless, we still have a significant portion of the quarter remaining. We’ve discussed how we’ve seen customer shopping behavior during these important shopping periods. After the back-to-school rush, we prepare for the tailgating and hunting seasons, followed by a quieter period in the later part of the quarter leading up to the holiday shopping season. We've incorporated that into our forecast. Regarding the Astros, we are competing against their recent win, but I wouldn’t count them out just yet. Currently, we are tied for first place, and we also have the Rangers and Brazos still in the competition. This is one of the exciting aspects of the licensing business; there are always developments to consider. While we try to exclude these events from our forecasts, we recognize that if one of those teams makes it to the World Series and wins, it could positively affect our projections.

And Alex, one more thing on the licensing business. We're not oddsmakers, and we don't take the field and play the game. We do like when the local teams win, but we don't really plan for that based on strong seasons they may have. So anything that benefits us becomes a bonus to the forecast.

And then back to the remainder of your question: the things we've talked about on the call that give us a belief that business is on track to meet our forecast, include our focus on value, leaning into the newness, and our new store initiatives where we've got somewhere between 14-15 stores opening this year. We should have another 11-12 opened in the back half of the year. That's going to be a tailwind for us. We start to anniversary some of the new store openings from last year, which will start falling into the comparisons. So there are a multitude of factors that give us confidence that our forecast is solid for the back half of the year.

I just want to clarify that the forecast we put out does indeed include 13 to 14 total new stores this year.

Ladies and gentlemen, we have time for one more question, which will come from the line of Simeon Gutman with Morgan Stanley.

This is Jackie on for Simeon. Just looking forward, what is the right kind of comp level that you would need to drive leverage in the business? Should we expect there to be some degree of deleverage in the model over time as you open new stores and ramp up your growth investments? Or how should we think about that?

Yes, from a long-range plan standpoint, we modeled in low single-digit comps and 100 basis points of expense deleverage into it. We do have some things that offset that in the supply chain space. And we've seen nothing that suggests otherwise. If you look at SG&A, for example, in the near term, the current quarter was up $13 million year-over-year. That investment is really in long-range strategic priorities. Our free cash flow, which Michael spoke to, was $190 million in cash flow from operations during the quarter. That's actually up $30 million year-over-year compared to last year, representing a 19% increase in a tough environment when you've got a down 7.5% comp. We're generating cash flow, making us feel like we have permission to continue to invest in these strategic priorities.

Great. Just one follow-up.

If I can squeeze in a quick follow-up. I know you guys don't guide Q3 and Q4 gross margin, but given that Q2 gross margin kind of came in line with normal seasonality versus Q1, should we think about whether Q3 and Q4 from a margin cadence should mirror seasonality as well?

I'll take it. I'm just going to reiterate the expected 34% to 34.4%. The three factors that will move it are the same three you saw this quarter: merchandise margin, shrink, and freight. From a merchandise margin standpoint, our units are down 5%. We're feeling pretty good from a sales-to-inventory perspective. We feel like from a promotional standpoint, we'll manage that well, especially during key periods, which worked for us in Q2. We began to lap some issues from last year regarding shrink, but I'm not expecting the environment to magically change. We're doing the things that we believe will help prevent and deter shrink, which is positively impacting our performance. Lastly, freight will continue to be a tailwind into the fall. Those are the three factors in play. We're not going to provide guidance on Q3 and Q4 specifically, but we feel confident in our management capabilities in those areas.

I just want to close and reiterate that we believe Academy represents a compelling growth opportunity in the retail space for investors. We have one of the most compelling growth opportunities out there. I want to ensure you realize that our team is focused on two fronts: navigating through the short-term headwinds while the customers are under pressure, and also executing on our long-range plan to set ourselves up for future success. So with that, I want to thank everyone for joining the call and to thank our Academy associates. Wishing everyone a good Labor Day weekend. Thank you.

Thank you.

Ladies and gentlemen, the call has now concluded. Thank you for your participation. You may now disconnect.