Good morning, everyone, and welcome to the Academy Sports and Outdoors Third Quarter Fiscal 2023 Results Conference Call. This call is being recorded. I would now like to turn the call over to your host, Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please proceed.

Good morning, everyone. Thank you for joining the Academy Sports and Outdoors third quarter 2023 financial results call. Participating on the call are Steve Lawrence, Chief Executive Officer; 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?

Thanks, Matt. Good morning, and thank you for joining us on our third quarter earnings call. As you saw from the results we announced earlier this morning, we had a challenging quarter with sales coming in at $1.4 billion, which was down 6.4% in total and translated into a negative 8% comp. Based on these sales, adjusted earnings per share for the third quarter was $1.38. Now, one of the key themes we saw emerge in the first half of the year carried through into Q3. The customer is clearly under pressure and is being careful about when they decide to shop and how they want to spend their money. We've also seen a continuation of the trend with customers coming in during the key shopping moments on the calendar and then retreating during the lulls. Another key theme continues to be customers looking to expand their buying power by focusing on the value offerings in our assortment such as our private brand merchandise, the promotions that we run, or in clearance events that take place at the end of each season. Similar to prior quarters this year, we also continued to see customers gravitate towards new and innovative brands and items in our stores and online. Breaking the quarter down by month, August sales were down mid-single digits. As we discussed on our Q2 call, we saw good momentum early in the month, driven by our back to school business. Once we got past Labor Day and into September, we saw a slowdown in sales that lasted the entire month, resulting in a low-double digit negative comp. We attribute the softness in September to the lack of a natural shopping event on the calendar, coupled with much warmer than average temperatures, which suppressed early sales on fall seasonal categories. This trend carried forward into early October, but we did see an uptick in sales later in the month that we believe was driven by a combination of some cooler temperatures, coupled with increased sales in our outdoor business. The end result was that we saw sales improvement versus the September trend, with October coming in at a negative mid-single digit comp. Looking at the results by division, our best performing business for Q3, sports and recreation, which ran a 2.7% decrease. Declines in fitness and bikes were partially offset by continued strength in outdoor cooking and furniture, as well as our team sports business. Our outdoor division ran down 6.9% for the quarter. But as I mentioned earlier, we saw this business pick up towards the end of October as we approached hunting season, starting to lap softer comps from last year. Our apparel and footwear businesses started out strong during back to school, but then tapered off as we moved into September. Apparel ran a 6.9% decrease for the quarter but slightly better than footwear, which was down 8.2%. We believe the primary driver of the soft business was caused by the above-average temperatures we experienced in September and early October, which tamped down demand for seasonal items. Moving to gross margin, the quarter came in at 34.5%, which was a 50 basis point erosion versus the prior year. This was primarily driven by our merchandise margin coming in 49 basis points below last year. We believe that the warmer temperatures we experienced during the quarter resulted in softer sales versus last year in the high-margin fall seasonal products. Customers instead gravitated towards the lower-margin summer clearance, which mixed our margin down. Promotional activity for the quarter was in line with our expectations. And our gross margin rate through three quarters sits at 34.7%, which is above our annual guidance, continuing to remain roughly 500 basis points above our pre-pandemic levels. Now, I'd like to give you a couple of updates on our progress against some of our long-range plan initiatives, starting with new stores. During the third quarter, we opened 5 new stores with locations in Virginia, Indiana, Missouri, and Texas. During November, we opened our final 7 stores for the year, bringing our total to 14 for 2023. November openings represent the largest number of new stores that we've ever opened in a single month, with 5 on a single weekend. This is a huge accomplishment for our company, and I want to take a moment to recognize all of our team members that helped make this possible. As we open new locations, we continue to gain insights into what factors ensure a successful launch of a new store or getting better with each grand opening. While the sample size is still small, as we analyze and learn more from our new store openings, what is becoming clearer is that stores open in legacy markets where we have high brand awareness, as a group, are on track to meet or surpass their own sales targets. What has also started to become apparent is that stores opened in newer markets outside our current footprint will need additional time and investment to build brand awareness, and therefore will likely take longer to ramp sales maturity. After we get through this year, we'll have more data on the sales ramp of the stores that opened up in 2022, as well as additional data on traffic, ticket and conversion from both the '22 and the 2023 stores will be used to refine our expectations for future store openings. As we look forward, we're excited about the pipeline that we've identified. We'll have good guidance around the number of new stores that we plan to open in 2024 during our next earnings call. Another one of our growth initiatives is to accelerate the growth of our dot-com business. While this channel has faced similar challenges that our brick and mortar customers feel this year, we've made some meaningful advancements in the third quarter that we believe will help drive growth in the future. During last quarter's earnings call, we announced our new partnership with Fanatics. While it is early days, we've dramatically expanded our offering in NCAA with this partnership, offering over twice the number of styles to our customers compared to what we started the quarter with, just in time for the holiday gift giving season. We will continue to leverage their extensive catalog and add more SKUs as we start each league's new season. Over time, our online offerings will be significantly larger, allowing us to greatly expand our reach and better service a much wider fan base. In addition to SKU growth, we've also been working hard on expanded functionality such as adding Sezzle, a new payment option that supports additional categories such as hunting. As we head into the holidays, we believe that with this expanded assortment and additional capabilities, that we're well positioned to capture the surge in demand from all the key online shopping events, including Cyber Week and Green Monday. The third initiative that I'd like to update you on is our new customer data platform. During our last call, we discussed adding this new tool to our toolbox at the end of Q2. The team has spent the last quarter fine-tuning our customer segmentation work, along with developing playbooks to help drive greater traffic and increase spend from our various customer segments. We have two main focuses in our CDP work, improving customer identification and increasing engagement, both of which will help us build a deeper connection with our customers and drive incremental sales revenue. While we've just begun to leverage some of our new capabilities for this tool, our initial marketing tests have yielded promising results. One test was to grow our addressable customer file in order to help expand the reach of our various marketing channels. During Q3, we monitored a reactivation campaign that helped us increase the number of customers reached with our emails by 25%. Another example of how we're leveraging our customer data platform was the small tests that we ran with a focus on increasing both frequency of shopping and spending with a subset of our best customers. We sent targeted offers to this group and managed to drive an incremental trip at a higher basket size. What was exciting about this use case was that we saw continued growth with this group even after the initial discount we offered lapsed. While we don't expect all the tests we're running to have a huge impact on core results, we do believe that we'll be able to start scaling these learnings and they will start moving the needle in 2024 and beyond. The final initiative I'll touch on is the work we're doing around improving our supply chain. The team has been working hard on getting ready to install and roll out our new warehouse management system, planning to go live with our Georgia distribution center in the spring of next year. This implementation is a key enabler of many of the supply chain efficiencies that we're anticipating in our long-range plan as we continue to open new stores. Now, I'd like to turn it over to Carl Ford, our CFO, who will walk you through a deeper dive of our Q3 financial performance, along with an update for 2023 guidance. Carl?

Thank you, Steve. Good morning, everyone. We appreciate you joining the call. Let me walk you through the details of our third quarter results. Net sales were $1.4 billion, a 6.4% decline compared to the third quarter of 2022, with comparable sales of negative 8%. The decline in sales was driven by an 8.1% decline in transactions, partially offset by a slight increase in ticket size. Consistent with overall sales performance, we experienced pressure in our e-commerce channel. E-commerce sales represented 9.4% of total merchandise sales, compared to 9.5% in the prior year quarter. As Steve mentioned, our gross margin rate for the third quarter was 34.5%, compared to 35.0% last year. The margin decline was due to a 49 basis point decline in merchandise margins, driven by an increase in planned promotions and a higher mix of clearance sales. Higher overhead costs, lower vendor allowances, and a slight increase in shrink were offset with freight savings. As a company, we continue to operate at substantially higher gross margin rates than pre-pandemic, demonstrating that the operational changes made to the business over the past few years are structural. During the quarter, SG&A expenses were $345.9 million or 24.7% of net sales, an increase of 170 basis points compared to the third quarter of 2022. As consumer demand remains challenging, we are focused on optimizing profitability through expense control and investing in our future. We reduced our variable operating expenses versus last year, while more than 100% of the increase in SG&A was driven by the investments we are making in areas that support our long-term growth initiatives such as new stores, omnichannel, supply chain, and customer data. Net income for the quarter was $100 million or 7.2% of net sales, resulting in GAAP diluted earnings per share of $1.31. Adjusted diluted earnings per share were $1.38. Our balance sheet remains strong with $275 million in cash and no outstanding borrowings on our $1 billion credit facility at the end of the quarter. Our inventory balance was $1.49 billion, which was flat compared to last year in both dollars and units. On a per store basis, units declined 4%. Heading into the remainder of the holiday season, we believe that our current assortment and level of inventory is appropriate to support the business. During the third quarter, Academy generated $57.5 million in net cash from operating activities. This is a 13% increase compared to last year. We continue to execute our capital allocation strategy by self-funding our growth initiatives and returning cash to shareholders. During the quarter, we repurchased approximately 864,000 shares for $44 million and paid out $6.7 million in dividends. As of the end of the quarter, we had approximately $100 million available on the current share repurchase authorization. On November 29, 2023, the Board approved a dividend of $0.09 per share payable on January 10, 2024, to stockholders of record as of December 13, 2023. Demonstrating the commitment to our capital allocation strategy, the Board also approved a new 3-year $600 million share repurchase authorization. Together with our remaining $100 million, the company now has $700 million of share repurchase authorization available for the next 3 years. Year-to-date, the company has spent $152 million on capital expenditures. For the full year, we expect to spend between $175 million and $225 million. Shifting now to guidance. Based on our year-to-date results and current expectations for the fourth quarter, we are narrowing our fiscal 2023 net sales guidance from the previous range of $6.17 billion to $6.36 billion to $6.10 billion to $6.17 billion. This translates to a revised comparable sales range of negative 7.5% to negative 6.5%. Our full-year gross margin rate is expected to finish between 34.0% to 34.2%. GAAP income before taxes is now expected to range from $670 million to $680 million and GAAP net income between $520 million and $530 million. GAAP diluted earnings per share are now expected to be $6.70 per share to $6.85 per share, and adjusted diluted earnings per share are expected to range from $7.05 per share to $7.20 per share. We now expect to generate $300 million to $350 million of adjusted free cash flow in fiscal 2023. The earnings per share estimates are calculated on a share count of 77.3 million diluted weighted average shares outstanding for the full year and do not include any potential Q4 repurchase activity. As for providing guidance beyond fiscal 2023, we plan to give fiscal 2024 guidance in March on our year-end call.

I will now turn the call back over to Steve for some closing remarks. As you can tell from our commentary today, the third quarter was challenging for us. That being said, we've seen the customer come out and shop during the key moments on the calendar, and there is no bigger moment than the upcoming holiday season. The team has been preparing for Q4 all year, and we're off to a solid start in November. As we expected, we saw traffic patterns return to a more normalized pre-pandemic pattern with less pull-forward of demand during the early part of the month. We've put together a strong set of promotions for Thanksgiving week. We saw strong reactions from the customer, yielding one of our biggest Black Friday events ever. While we still have a lot of business ahead of us, the success of our Thanksgiving promotion helped generate some momentum as we head into December. Looking forward into the remainder of the holiday, we have a strong promotional cadence, supported by an aggressive marketing spend, which should help us deliver outstanding value to our customers. Our inventory is in the best position we've been in over the past three years with a focus on the key giftable categories, along with new brands and innovative items customers have been voting for all year. I've been in all three of our distribution centers and many of our stores over the past quarter, and I can tell you that teams are ready and excited for customers this Christmas. With that, we will now open it up for questions.

Our first question comes from Brian Nagel with Oppenheimer.

My first question, looking at the results here over the last few quarters, maybe we talked about kind of the top line weakness. But recognizing you haven't given guidance for '24 and you plan to do so early next year, but I guess the question I have is, as we think about this comp trajectory and kind of the moving pieces, what are the puts and takes as you look at the business to get back to positive comps for the company?

I'll begin and Carl may add. As we reflected on this year, which we mentioned in our previous call, we anticipated 2022 would be a year of reset following two consecutive years of strong growth post-pandemic. We expected to return to growth this year. However, the current challenge is the pressure on our customers. We believe our strategy remains sound, but the customer situation is difficult. Our focus moving forward is on navigating the short term and ensuring we meet customer expectations. Customers are prioritizing value, and we are responding by enhancing our value offerings through our everyday value proposition, special promotions at key times, and clearance events at the end of each season. Additionally, customers are also interested in new products, so we are committed to providing a continuous stream of new brands and ideas. However, our outdoor division has been a drag on our performance, showing significant declines earlier this year, although it has started to improve as we compare against easier comp periods. Looking ahead to next year, while we are not ready to provide guidance, we believe focusing on value, newness, and long-term initiatives, such as opening new stores, increasing online growth, and improving the productivity of our current stores, will contribute to returning to positive comps. Ultimately, we cannot predict when customer conditions will improve, but our aim is to concentrate on the factors we can control.

Yes, Brian, the only thing I would add there to the initiatives that Steve walked through, there's a big comp sales waterfall embedded within them. He mentioned new stores and omnichannel. I would also say the customer data platform, we got it up and running in July. We're running a lot of tests associated with it. They're positive out of the gate. I think as we ramp our maturity, working with the tool and getting more customer data, I think that's a tailwind for a long time.

No, look, that's very helpful. Then the second question, again, I know we're dealing with a very fluid demand backdrop in a relatively short amount of time. But as you look at your business, particularly in relation to all the internal initiatives you've undertaken with merchandising, do you believe you are generally capturing market share across the board? Or are there areas where you might potentially be losing market share?

Yes. Listen, we look at market share first on a broad basis, and we look at it over a longer horizon than just a month or a quarter. When we look at it on a yearly basis, we know we're picking up a little bit of share. When we look at it on a longer-term basis, we're very happy with that. If you look at our sales versus 2019, we're still up about 25%. So broadly, we believe we picked up a lot of share over the past four years, and we're holding on to that share. Beneath the surface, there are always puts and takes here and there. But we believe we've picked up share and are holding on to it.

Our next question comes from Michael Lasser with UBS.

With your gross margin down 44 basis points, how are you looking at the need to continue to make these types of discounting and other promotional investments in order to drive the top line?

From a gross margin perspective, you mentioned the decline of 44 basis points. I want to highlight some structural improvements we've implemented. We have increased by about 500 basis points since fiscal year 2019. The initiatives we've discussed regarding power merchandising have a lasting effect, and I want to outline some of them. We have exited several categories that didn't align well with sports and outdoors, such as toys, luggage, and electronics. We have introduced season codes, a systematic clearance process, and lifecycle management. We optimized our purchasing and inventory management through an enhanced open-to-buy process. We've made improvements in allocation and replenishment systems that are continually advancing. Our efforts in pricing and regular price optimization have been effective. Regarding promotions, we are managing them with a focus on our inventory strength. The 50 basis point decline was primarily due to our planned promotions and customers leaning towards the value side of our offerings, which was accounted for in our guidance. We will continue to position ourselves as an everyday value provider, promoting mainly during key shopping periods, which is also reflected in our guidance. I want to emphasize that our gross margin in the fourth quarter last year was 32.8%. The guidance range we provided reflects a slight deterioration on the low end and an improvement on the high end. We are planning for promotional activity and have some favorable conditions with supply chain costs.

My follow-up question is, as you look to next year, how much more room is there to reduce SG&A without impacting the customer experience? And how are you thinking about that in the fourth quarter?

Yes. I won't discuss next year's guidance, but I can say that our SG&A expenses in the third quarter increased by about $3 million compared to last year. This increase was largely due to our strategic investments in new stores, omnichannel initiatives, customer data, and supply chain. We are managing our variable costs effectively, which we monitor through our customer satisfaction scores, and we are quite proud of those results. Considering our long-range plan, we experienced about 200 basis points of SG&A deleverage over this period, which was offset by improvements in gross margin mainly due to the supply chain. The guidance indicates around 200 basis points of SG&A deleverage this year. Currently, the challenge is related to fixed cost deleverage in relation to sales. We remain committed to our strategic investments and are adjusting our variable costs in a positive manner. Our customers are indicating that they are still satisfied with our performance.

Our next question is from Will Gaertner with Wells Fargo.

Just wanted to touch on, first, the lower free cash flow assumption. It looks like you've cut it by $100 million, reduced CapEx by $25 million, reduced income before taxes by $38 million. Can you elaborate on that reduction?

Yes, absolutely. From a free cash flow standpoint, your $100 million at the low end is correct. The bulk of that is the reduction in the overall net sales on the low end. There are some timing things that come into play associated with year-end, and that made up the balance of it. Will, I do just want to reinforce, if you look at our Q3 cash flow from operations, we're up 13% to last year on down 6.4% sales. Year-to-date, on sales down 6%, cash flow from operations is down 2.6%. We really feel good about our cash flow as a rate of sales. On the investing side, on what we're committed to, it's new stores, it's omnichannel, it's customer data, and it's supply chain. We think done well. We will have no regrets investing into those four initiatives. So inventory management stays really good. You cannot manage your cash flow without that. We're really proud of our merchants in the open-to-buy process. But the leading causes for the decline are really sales top line in nature and then just some year-end timing stuff.

That's great. Just one more question from me. Can you elaborate on the customer data platform? What benefits are you starting to notice? What benefits do you anticipate seeing? Additionally, you mentioned the benefits for comparatives. Will this platform also enhance merchandise margins? If so, how?

Certainly, I'll take that one. In the past, our tools for understanding our customer data were rather limited. The information was scattered across various sources, making it difficult to identify if the same customer was shopping online and in-store. We implemented our new customer data platform in the second quarter, which now provides us with a comprehensive view of our customers. We've begun preliminary segmentation work, allowing us to analyze customer behavior weekly, monthly, and quarterly. We can observe shifts within segments; for instance, some cohorts may be spending less per visit, while others shop less frequently. We started experimenting with different strategies to encourage varying reactions from these groups. For example, we tested initiatives targeting some of our top customers whose spending had declined, aiming to motivate them to spend more. In another scenario, we engaged customers who were visiting less often, with the goal of prompting them to visit one additional time. Although these were small-scale tests, we observed increased sales and sustained changes in behavior even after the promotions ended. Looking ahead, we believe this tool will be invaluable across all customer segments. Regarding margins, it should enable us to implement more accurate and targeted markdowns instead of relying on broad promotions. You can expect a reduction in company-wide promotions in favor of more individualized marketing efforts tailored to customers. While we don't foresee a significant margin increase, we believe that reducing general promotions will help finance these targeted initiatives.

Our next question is from Robbie Ohmes with Bank of America.

Hi. This is Mattie Chick speaking for Robbie Ohmes. Can you share how Black Friday performed relative to your expectations? You mentioned it was one of your strongest ever. Were there any specific categories that stood out as performing well on Black Friday? Also, do you anticipate the holiday shopping to revolve around major buying events like Black Friday and Cyber Monday?

Yes. So I'm not going to get too granular in terms of category performance. What I will tell you, and I said this in the prepared remarks, is what this year feels like is kind of a return to kind of pre-pandemic shopping patterns. We saw the customer, as we came in October and early November, moderate spending and wait for the discounts. And then, as I said on the call, the event was one of our best events we've ever run. So that can give you a sense of how good it was. That being said, there's still a lot of time before Christmas. And so, we're excited about the momentum that came out of that event and that we've seen continue into the early part of this week. But it's way too early to make the call. We still have about three weeks before Christmas. And as you know, this year, there's one extra day between Thanksgiving and Christmas. That gives us one extra weekend. And so, we do expect at some point, there will be a little bit of a lull that creeps in after we get past this week. And we expect that last week to be really strong. So, yes, we think that the behavior we've seen happen all year of the customer aggregating their shopping around these key moments will continue. Fortunately, we've got the biggest moment of the year ahead of us, and I think we've really prepared ourselves for this. Our inventory is in the best shape it's been in all year. We've really been thoughtful about how we've constructed our promotional cadence and our marketing cadence. And I think we're really well prepared to have a great holiday season and to take advantage of the customer who's willing to be out there and shop.

That's helpful. And I just also wanted to ask a question on the hunting business. What were the trends you saw in 3Q? Are you seeing any stock up or surge behavior? And do you expect the hunt and ammo momentum to continue through 4Q?

Yes, we discussed this briefly in the prepared remarks. The hunting business has faced some challenges. In the first half of the year, it was down in the mid-teens, but it showed improvement in Q3, performing in the mid-to-high single digits. This suggests a better trend compared to the first half. As the quarter progressed, performance improved, particularly in the major categories of firearms and ammunition. It seems we are moving past some softer comparable periods. We previously mentioned various surge activities from last year and during the pandemic, and now it looks like we are overcoming those challenges, with the business starting to normalize. We remain optimistic that this sector will stabilize moving forward.

Mattie, one thing I'd add there is, it was a little bit warmer than average. And so, that hunter that likes to get outside and mess with his lease prep activities and get ready for deer season didn't see that amplification. And now that it's gotten a little cooler here, we're starting to see that turn on a little more.

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

Just wanted to get an update on some of the product newness. I know you guys have been excited about some of the new products that have come in recently and have been expanded like the OOFOS recovery sandals and Bogg Bags and Birkenstocks and Shadow Systems. So I just wanted to see if you have any update there.

Well, you listed a couple of them, Anthony. Thank you. Certainly, what we've seen this year, and we talked a little bit about it that the customer is gravitating towards newness. So the categories you talked about are all categories that we were well positioned in for this holiday. We've seen them continue into holiday. Other areas, we talked about our outdoor grilling business being really strong. There's certainly a trend being fueled there by Blackstone and that flat grilling. That continues to be a great category for us. We talked in our last call about the addition of L.L.Bean, so we're really excited about that and the addition to that to our assortments for this holiday. And when you think about it, that product is really strong in kind of fall, heavier weight products, so the weather is getting right for that right now just in time. So we're excited about that. But, yes, generally, across the board, newness is working for us. You called out several of the brands, and there are also other brands out there that are also working.

Got it. And just one quick follow-up on newness. Any update in terms of potentially getting on for the footwear business?

At this point, it is not in our plans in the next year. We continue to talk to them and work with them on getting access to those brands. But at this point, it's not on our roadmap. That being said, we've got a lineup with the best brands in footwear. We've got a premier position with Nike, who's our biggest brand across the total company, as well as in footwear. Strong businesses with brands like Adidas and Under Armour, new brands like Birkenstock that you mentioned. HEYDUDE doing really well for us. Crocs doing really well for us. Brooks doing really well for us. So our goal and what we're focused on is winning with the brands that we have and being very successful with those.

Our next question comes from Chris Horvers with JPMorgan.

So my question is on the strength that you saw at the end of October and quarter-to-date. I guess, how much of that do you think was helped by the Rangers-Astros World Series? Is that something that we need to contemplate as we look to the back half of 2024? And as you think about the guidance for the fourth quarter, can you share anything about what's going on quarter-to-date? It seems like you're bracketing about a down 6%. Are you trending in line with that? Are you expecting that extra day and that late surge to get you to that level? Anything there would be really helpful.

Yes, I'll answer the second part first. The performance we've seen quarter-to-date is embedded in the guidance that we gave. And I'll refer you back to the commentary I gave you around November and Black Friday, and you can make inferences from that. In terms of the Astros versus Rangers, believe it or not, it actually was more of a negative to us than a positive to us. If you look at our store count and what the Astros mean as a percentage of our business and license relative to the Rangers, the Rangers business is smaller. So lapping the Astros World Series last year with the Rangers was actually a negative to our sales trend early in the month.

Got it. And as you think about the hunting business, it's really been such an indicator of the overall trend in the business. You think about the start of rifle season for deer in November 1 in Texas, obviously a big event. Carl, you talked about some shift in the weather. As you peel back what you saw over, let's say, the past 2 months, how confident are you that that business is actually bottoming? Because it's sort of easy to focus on, like, hey, here's what just happened when it got cold, and the season started and blamed the weather earlier. Like I guess, what's your degree of confidence and how is that different from the last time you spoke to us in August?

Yes. I think what I would tell you is this business is cyclical. It always has been, and it is sometimes driven by external events and impacted by those, maybe more so than some of the other businesses we had. What we shared with you in the last call, which we also believe we're seeing right now is what gives us confidence that it's starting to kind of level out a little bit is that the volume is becoming fairly predictable on a weekly basis. If you go back, there were huge spikes in the last year, driven by external events. And as we got through this year, ammo on a weekly basis has settled into a pretty normal cadence. The firearms business has settled into a pretty normal cadence. So really, the negative comps we're experiencing weren't as much about the fluctuation in this year's business as in the fluctuation in last year's business. As we get into Q4 and beyond, that starts to level out quite a bit, and that's what gives us confidence that it's stabilizing. That being said, it's going to have ups and downs, right? It's like any business that's driven by some external factors, but the kind of the noise in the last year is starting to die down a little bit.

Our next question comes from Oliver Wintermantel with Evercore ISI.

I have a question regarding the new and legacy markets you mentioned in your prepared remarks. Could you elaborate on what you've learned about the timing of store openings until they reach maturity? Additionally, could you provide some insights on four-wall EBITDA?

Yes, I'll tackle the first part. I'll let Carl tackle the second. So we're now two years into our new store openings. We opened up 9 stores last year, 14 this year. I would tell you, last year, a lot of the stores were weighted more heavily to new markets, and we tested a lot of different ideas. We were testing how we do in a more urban, dense population versus a more suburban population. We were testing some different new markets. This year, we applied a lot of those learnings that we had from last year to this year's new stores. When you look at the two years of vintages that we're seeing, and we called this out on the call, the stores that are within kind of our core geography or footprint, where we've had existing stores for a while, get off to a much faster start, and they're beating or surpassing the plans that we put out there. On the flip side, as we go into a newer market, maybe in the Northern Midwest, in Indiana or maybe even Illinois, starting out a little bit slower. But when we go back and we look at historical ramps, and one of the things that's also a little tricky is some of the new stores opened from '15 and prior have some effect of the pandemic in them, right, in the later years. So we're trying to go back and look at ramps before that to see what that curve looks like. You're seeing those probably have a slower ramp. And so, we wanted to call that out just to give you guys some color around that. And certainly, as we get into 2024 and give guidance, we'll give you, hopefully, a better idea of how we're seeing these new stores ramp and give you a little better guidance around that.

Yes. I'll discuss the EBITDA. Similar to what Steve mentioned, in our markets with high brand awareness, EBITDA rates are higher even in the first year compared to markets where brand awareness is lower. We needed to invest more in marketing to familiarize local customers with us. As we noted, positive EBITDA as a cohort in the first year reflects our commitment to a ROIC hurdle of 20%. We've gained substantial insights from FY '22. I'll repeat some points we discussed, including testing new strategies, entering two new states, and completing our first retrofits as a company. We have a history of build-to-suits even before Steve and I joined, but we experimented with new approaches and learned a lot. I believe we're reaping the benefits of those lessons in FY '23, and we'll provide more updates in March.

Yes. To Carl's point, one of the things I left out at the end is we're actually seeing the '23 vintage get off to a faster start too because we applied those learnings. So what's really interesting is some of these newer markets actually over Black Friday were some of our best markets. So, that gives us a lot of confidence that people are trying the brand who maybe hadn't tried it before, and that is starting to break through a little bit.

I have a follow-up question regarding the previous discussion about reducing CapEx to between $175 million and $225 million. It seems that the pace of store openings in the fourth quarter will remain consistent. Does this reduction in CapEx indicate anything about the cadence of store openings for next year?

No, not at all. This is primarily related to when we adjusted our guidance, including any discretionary expense or capital we decided to exclude. We've maintained efficiency. I want to reinforce our commitment to the four initiatives we discussed: new stores, omnichannel, customer data, and supply chain. The reduction in capital expenditures is not related to these efforts. As we approach the end of the year, I am prepared to adjust our guidance range, similar to what we did for the top line and EPS, which is simply coming in a bit lower.

Our next question comes from Daniel Imbro with Stephens.

This is Joe Enderlin on for Daniel. Just kind of piggybacking on the last question there, could you give any additional color on what early learnings you're taking from the 2022 vintage to the 2023 one that you think are driving the most improvement within those stores?

Yes. I would say there's several. Carl hit on one. We went in with a marketing plan in terms of how we're looking at the new stores that were both in heritage and new markets. And there's probably more distortion that we need to make. We can probably spend a little bit less in the heritage markets, a little bit more in the new markets to drive a little more brand awareness. The last two vintages have been more back half loaded. We're seeing stronger performance in stores that open up in spring. So we think moving more into the first half of the year is the right thing to do. So you're going to see us start slowly moving to have a better balance across the years, having a better balance between new markets and existing markets, having a better improved localization strategy. I think we've done a lot of work over the past four or five years in terms of being smarter about our localization strategy. But even as we're opening up some of these new markets, we're having even more learnings. We opened a store in Florida, and we gave it our best assortment of saltwater fishing, and we thought we were giving it an A+ assortment. Then, as we're down in the market, looking at it, found that we probably need to do even more than we're doing. So now we built an A++ assortment, and then we're going to use that to apply to all the Florida stores that we opened on the Gulf Coast going forward. So it's an iterative process. We're taking the learnings from each one and applying it to the next. It's broad-based across merchandising, across marketing, across operations, across how we inventory the store. I can just tell you that each one is getting better and better, and that's our expectation as we move forward.

Got it. That's helpful. Just as a follow-up, warmer fall weather seemed to influence sales across the industry. Does this influence how you look at the sales opportunity in Q4 at all? Do you think that initial deferral of cold weather items in Q3 could be made up in Q4 to any extent?

Yes, the main question is how cold it will get and how long it will last. We're pleased that our inventories are well-managed. Overall, it seems the industry is in a better position now than it was last year at this time. We noticed a slight increase in promotions during Black Friday, but they are still manageable and lower than pre-pandemic levels. We anticipate more promotions in our forecasts moving ahead, but we’re not relying on a significant recovery of missed business. Additionally, we don’t expect to face any substantial inventory issues.

Yes. And the only thing I would add there is that supply chain normalization, it might not be between Q3 and Q4, but it might be intra-quarter where parents might have been buying a holiday gift and they bought it early because they were worried about it being there. I think the consumer is confident that at least looking at our inventory position, we're going to be in stock more frequently. And so, I think some of that stuff that may have occurred in the third quarter and yesteryear, a parent or someone will have more confidence buying that closer in.

I think when you look at our business, candidly, Q3 is usually a wildcard, right? In our geography, it can be warm, occasionally get a cold snap in October. It helps out a little bit. Generally, our geography gets colder in Q4, and it's been fairly consistent year-over-year, and that's when we sell the bulk of our seasonal products. And so, I think we're going to see that same pattern hold true this year.

Our next question comes from Simeon Gutman with Morgan Stanley.

This is Jackie Sussman on for Simeon. Just on the 34.5% gross margin for the quarter, I think you mentioned in your prepared remarks, shrink. How are you handling shrink relative to prior quarters? How has it evolved throughout the quarter? Are things getting sequentially better? And anything to call out in terms of Q4-to-date on that would be really helpful.

Yes, Jackie, that's an important question. Shrink was a significant topic during the second quarter, and we still view it as a challenge. Our shrink rate increased by 12 basis points compared to last year in the third quarter. When I mentioned the reduction in some of the positive impacts from freight, shrink is part of that. We've been conducting physical inventory year-round, and we started noticing shrink issues in the third quarter last year, where shrink increased by 36 basis points. This 12 basis point rise is in addition to that. While it's an improvement over the second quarter and much better than the first quarter's trend, I believe our quicker response this time has contributed to this progress. We're implementing various measures without going into excessive detail. We have invested in our team and in internal analytics to better identify patterns swiftly, both internally and externally. We've conducted several technology tests and subsequent rollouts starting in the third quarter of last year, which assist in both prevention and detection. We have established strong partnerships with local law enforcement, providing them with tools they appreciate to combat shrink-related issues. From a federal perspective, there was limited participation in addressing local organized crime rings during the COVID period. However, I feel positive about our current initiatives. We have led discussions and had notable success, as evidenced by one of the organized retail crime busts we reported in the Houston area. Ultimately, we aim to avoid locking up all of our products, as we don't want customers to have a negative experience. We continue to test and learn; for instance, we've conducted trials on baseball equipment that proved effective. We placed a customer call button near where we use peg locks for high-end items like the A2000 gloves and certain bats. This segment of our business is performing very well, and we want to ensure that this inventory is accessible for customers. That summarizes the range of actions we are taking. However, it's important to note that this issue affects the retail sector as a whole, and our shrink rate was up 12 basis points this quarter.

Yes. I'll just emphasize one point that I think was embedded in what Carl said. Probably one of the best things that we can do to help combat this, because he's right, it is a problem that everybody is facing, is to staff our stores and make sure we've got people there who are helping out the customers, who are around. And that's something we've been committed to, and I think that's been a help as we've been navigating some of these shrink trends that people have been fighting against.

Got it. Super helpful. And speaking of staffing stores, as you start the holiday season, are you seeing just any pressure on wages or labor hours? How are we thinking about that in terms of potential SG&A spend in the quarter relative to your pre-COVID trends?

Yes. Certainly, if you look at our hourly wages versus pre-COVID, pre-pandemic, they're up for everybody. We feel like we've done a really good job of keeping pace, if not maybe doing a little better in terms of the increases. We're not having any trouble getting help candidly. We've got a really good energized team of people that are out there. We feel like we're appropriately staffed. But yes, definitely, wages are up versus where they were pre-pandemic.

Our next question comes from Seth Basham with Wedbush Securities.

This is Nathan Friedman on for Seth. I think you mentioned that your average ticket was trending higher year-over-year in this quarter. And I know that you mentioned being more promotional and having some higher clearance. But just curious what kind of trends you're seeing. Is there any evidence of trade-down within your categories? Any color here would be appreciated.

I'll start with the question about trade-down. We didn't notice any trade-down this quarter, which is different from what we observed last quarter when we thought there was a bit of movement from lower-end consumers to lower-end retailers due to trip consolidation. Also, we haven't seen trade-down from other retailers to us, so I don't believe we're losing customers, nor are we gaining any through trade-down. That said, one factor aiding us is our successful expansion of the better and best segments of our product range over the past few years. This allows customers to trade down within our store. For instance, if a customer doesn't want to pay $300 or $400 for a Marucci bat, we provide them with alternative options instead of them having to visit another retailer. We think this is beneficial. Regarding average unit retail, our main challenge has been lower traffic. The average ticket remained relatively flat, with a slight increase for the quarter. We are still experiencing year-over-year AUR growth and expect this trend to continue, albeit at low-single digits. We anticipate this will carry into Q4, and we have accounted for the effects of increased promotional activity in our guidance.

My second question is about the supply chain and vendor allowances that offset 12 basis points of shrink this quarter. Does this indicate that the benefits from your supply chain might be diminishing as you face tougher comparisons? Is that correct? Also, how are you viewing the dynamics in the fourth quarter concerning supply chain and the more challenging merchandise margin comparisons?

Yes, it's a good question, Nathan. In the first and second quarters, our freight benefit was around 90 basis points for each quarter, and we will provide more details in our 10-Q. In the third quarter, it's approximately an 80 basis point benefit for us, so there's a slight decrease there. We didn't really start to see the freight benefits until the first quarter of this year. We expect to see positive contributions from freight in our fourth-quarter forecast. However, starting in the third quarter, there's been a 10 basis point drop, moving from 90 basis points in the first and second quarters down to 80 in the third quarter. It remains a benefit, but it's starting to decrease. The full impact of freight savings didn’t become apparent until the first quarter of this year.

We have time for one more question. Our next question comes from Cristina Fernandez with Telsey Group.

I wanted to see if you can clarify on the sales guidance, you kept the comp range within the prior range but lowered the total sales outlook. So is that performance of new stores, the timing or the 53rd week? Can you clarify why that's lower?

It was primarily a reflection of what we're seeing happening with the new store openings. We've lost some sales where they slid out a week or two here or there. So that certainly impacts a little bit. Also, what we discussed on the call in terms of the performance of kind of the legacy heritage markets, new stores versus kind of the newer markets, so that's the combination of those two things which drove that delta.

But Cristina, I noticed some early reports comparing our fourth quarter this year to the fourth quarter last year. I'm sure you're all aware this is a 53rd week fourth quarter with 14 weeks of sales in it, which has always been reflected in our guidance. However, some initial assessments I reviewed indicated differences when compared to last year's fourth quarter. I want to remind you that we have a 53rd week.

Yes. And then the second question I had, with the sales coming a little bit lower, how are you thinking about inventory for the year? And related to that, with the consumer shifting more to value, does it make you change the buys you have, leaning more towards that lower-price and lower-ticket assortments, focusing more on clearance activity? Any color there on inventory and buy would be helpful.

Yes. I would say, one of the strengths that we've shown, I think, over the past four years is strong inventory management discipline. I think that's continued through the past quarter. Inventories are flat on a total basis, down about 4% on a store-per-store basis from a unit perspective. So we feel like the inventory is in a good position on a year-over-year basis. But we also feel like the content beneath the surface is much better than where it was a year ago in stocks, or the highest it's been since the pandemic started. So we don't anticipate any sort of overhang of inventory coming out of the holiday. In terms of how we're structuring our buys, yes, the customer is gravitating towards value. We see that expressed several different ways. We talk a little bit about sometimes the private label mix. Private label business was a little better than some of our national brand business, which we infer as a flight to value there. So certainly, that's a growth initiative. We've talked about how over time, we want to grow that business from around 20% or 21% of the business to 25%. You'll see us continue to lean into that and grow that business. You'll see us continue to lean into our everyday value proposition and really highlight those and feature those in marketing. And you'll see us use promotions around the key must-win shopping moments on the calendar to make sure that we're driving traffic into our store and winning that driveway decision. And then at the end of the seasons, clearance is another way to deliver value. So all those things are parts of our playbook. We're definitely leaning into them at the appropriate time to deliver value to the customer. We think our position as a value leader in the space gives us a really good position to be in as the customer is under pressure. Okay. So, that was our last question. I just want to say from a recap perspective, our approach over the remainder of the year is going to take the appropriate actions to navigate the short-term softness in customer demand with really a focus on delivering new and innovative products, offering compelling value in order to help our customers stretch their holiday budgets, while also thoughtfully managing expenses and inventories. On a longer-term basis, we believe we've got a unique concept that resonates with active young families. We believe our model is scalable and transportable, and we're going to continue to make investments in our future growth so we can enable more people to have fun out there by shopping Academy. In closing, I want to thank all 22,000 of our Academy associates for all the hard work and effort they put in and will still put in this holiday. Our employees are a key ingredient of our secret sauce. And I know that every one of our team members is going to give it their best during Q4 and in the future. So, thanks for joining us today, and have a great holiday, everybody.

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