Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors Second Quarter of Fiscal Year 2021 Earnings Conference Call. At this time, this call is being recorded and all participants are in a listen only mode. Following the prepared remarks, there will be a brief question and answer session. Questions will be limited to analysts and investors. Please limit yourself to one question and one follow-up.
I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.
Thanks, operator. Good morning, everyone, and thank you for joining the Academy Sports and Outdoor 2nd quarter 2021 results call today. Participating on the call are Ken Hicks, Chairman, President and CEO Michael Mullikun, Executive Vice President and CFO and Steve Lawrence, Executive Vice President and Chief Merchandising Officer. As a reminder, statements in today's earnings release and the comments made by management during this call may be considered forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our filings with the SEC.
The company undertakes no obligation to revise any forward looking statement. Today's remarks refer to certain non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in today's earnings release, which is provided on our Investor Relations website, investors. Academy.com. I will now turn the call over to Ken Hicks, CEO.
Thanks, Matt. Good morning, everyone. Let me start by saying that our thoughts and prayers go out to everyone impacted by Hurricane Ida. I'm very proud to say that thanks to the tremendous efforts of our stores, operations And supply chain team that all of our stores in the impacted area are now open. We are assisting affected team members And their families get the help they need to recover as quickly as possible and also supporting our customers and our communities.
We're working to get all of our stores in the impacted area fully stocked and staffed so that they can continue to support and serve their local community and customers. Now shifting to our 2nd quarter results. Last quarter, I said we were focused on winning the summer season, especially the major holidays. I'm very pleased to share that we achieved the highest sales weeks in the company's history for Memorial Day, Father's Day and the 4th July. This was primarily driven by our customers coming back More often, spending more and shopping more areas of the store.
The success of these events helped drive record second quarter sales of $1,800,000,000 comparable sales of 11.4% And sales growth of 44.8 percent when compared to the Q2 of 2019. Academy has now posted 8 consecutive quarters of positive comparable sales and operating profit growth dating back to the Q3 of 2019. We also achieved record gross margin of $642,500,000 driven by continued favorable product mix, Less promotional activity and fewer markdowns. Our gross margin growth more than offset Higher product and shipping cost increases and we're still providing great value to our customers. In terms of labor costs, we've made market adjustments as needed to reward and retain employees, but have also implemented changes using our labor management tools to reduce unproductive store activities, letting team members focus on serving the customer.
Overall, we ended the quarter with net earnings of $190,500,000 the highest quarterly earnings in the company's history. Our inventory position at the end of the quarter was up 24% compared to last year. There's been a lot of discussion about inventory availability and supply chain constraints. We've been working diligently with all of our vendor partners to ensure merchandise flow and allocations. Given our strong relationship with suppliers such as Nike, Adi, Das and Under Armour, we are in a position of sufficient supply right now.
And while there will be challenges, I believe we have a good line of sight on what to expect over the next few months. The team is doing an excellent job Navigating this dynamic environment and we're excited about back to school and sport and the fall and holiday season. Our consistent strong financial performance over the last 2 years demonstrates that the operational changes We implemented prior to the pandemic and the continued refinements being made to grow top line sales, improve margin and profit and enhanced customer satisfaction are working. Along with our well performing operating model, we are a leader in the Sports and outdoors category at a time when more consumer spending continues to shift to the estimated $100,000,000,000 Sports and Outdoors category. People are making lasting lifestyle changes focused on health and wellness, sharing outdoor experiences And nesting at home in their backyard oasis.
In addition, as working from home has become more prominent, customers are also shopping for more casual work attire. We believe all these trends will continue for the foreseeable future and that our broad assortment of quality and value products positions us as an excellent option for consumers to meet Given the strength of our balance sheet, our consistent financial performance And the confidence in our future, I'm excited to announce that Academy's Board of Directors has authorized a 500,000,000 Dollar share repurchase program, we are establishing a disciplined capital allocation strategy built on prioritizing the financial security of the company, reinvesting in the business for growth and returning capital to shareholders. Lastly, based on the strong Q2 sales, We're increasing our full year 2021 comparable sales and EPS guidance, once again being mindful of numerous ever changing external factors. I will now turn the call over to Michael for a review of the financials. Michael?
Thanks, Ken, and good morning, everyone. Our 2nd quarter results set company records across key financial metrics, including revenue, Gross margin, pre tax income and net earnings. I will start by reviewing our record second quarter results, then discuss our updated 2021 outlook, which we are raising based on the continued strength of our business and healthy market trends. Net sales were 1 point $8,000,000,000 with comparable sales of 11.4 percent on top of last year's 27% comp. When compared to Q2 2019, Sales increased 44.8%.
As Ken mentioned, it is our 8th consecutive quarter of positive comparable sales, of which the last 5 have been double digit increases. The growth was broad based and is the 3rd consecutive quarter that all 4 merchandise divisions that had positive comparable sales growth. The growth was driven by an increase in transactions, average unit retails and ticket size. Our differentiated value based assortment and excellent service is resonating with our customers in a time where everyone is looking to have more fun. We are pleased with the progress of our e commerce business.
Sales were down slightly minus 0.9% for the quarter. However, when compared to the Q2 of 2019, sales increased 2 0 7%. The sales penetration rate in Q2 2020 was 8.4% Sales more than double the penetration rate in Q2 2019. Buy online, pick up in store sales 50% of e commerce sales and continues to be a very effective and profitable way for us to transact with our customers. The investments being made in omni channel such as the July launch of our mobile app, more relevant product recommendations, Enhanced ship to store capabilities and new search and checkout functionality will drive continued growth.
In fact, academy.com sales were positive for the last 7 weeks of the quarter, so the sales trajectory is encouraging. Merchandise margins were once again very strong. Similar to the Q1, margins benefited from a shift towards a normalized product sales mix, higher average unit retails and fewer markdowns. The gross margin rate expanded by 500 basis points to 35.9 percent leading to a record gross margin dollar performance of $642,500,000 a 29% increase over Q2 2020 and a 67% increase over Q2 2019. SG and A expenses were $388,000,000 or 21.7 percent of sales, which was 220 basis points higher than Q2 2020, but 360 basis points lower than Q2 2019.
Last year, due to the onset of the pandemic, We reduced certain operating expenses such as advertising and payroll compared to a more normalized run rate this quarter. This year, we also recorded one time stock compensation expenses associated with some accelerated share vesting. Excluding the non recurring expenses, SG and A expenses would have been 19.2% of sales. The record sales and margin results led to pretax income of $240,900,000 a 42.8% increase compared to $168,700,000 last year. After applying the 2nd quarter tax rate of 21%, we finished the quarter with record net income of $190,500,000 q2 diluted earnings per share were $1.99 per share compared to $2.25 per share in Q2 2020.
The decrease is due to the number of shares outstanding compared to the prior year quarter and a lower tax rate as the company was not subject to federal income tax prior to the October 2020 IPO. Pro form a adjusted net income, which excludes the impact of certain extraordinary items, increased 67.1 percent to $224,600,000 compared to $134,400,000 in Q2 2020. Pro form a diluted earnings per share were $2.34 compared to $1.81 per share last year. Looking at the balance sheet, we are in a strong financial position with $554,000,000 in cash at the end of the quarter. We remain undrawn on our ABL facility with over $850,000,000 of borrowing capacity.
In addition, after reducing our term loan by $99,000,000 this quarter and lowering our leverage ratio, our debt was upgraded by Moody's and S and P. The ending inventory balance was $1,100,000,000 This is 24% higher than Q2 2020, 3% higher than at the end of last quarter and 7% less than Q2 2019. During Q2, The company generated $170,000,000 in adjusted free cash flow. Lastly, capital expenditures are expected to be approximately $90,000,000 in fiscal 2021 as we have accelerated certain growth initiatives. At the beginning of the fiscal year, we identified 4 main sales driving opportunities.
Those opportunities were Capitalizing on the shopping velocity of new and existing customers, replenishing and growing categories where inventory was constrained throughout most of 2020, The growth of several product categories that were challenged last year, but would benefit from the reopening of the economy and improving our management of seasonal categories where demand exceeded Slide in 2020. Here's our midyear report card. First, the number of existing customers who made a purchase in a new category over the last 12 months and then purchase That category again continues to increase. 2nd, ending inventory of constraint categories has improved. For example, We are back in stock in categories like bikes and fitness equipment.
3rd, compared to the first half of twenty twenty, team sports and apparel and footwear have exceeded the company's Sales growth rate. 4th, sales in seasonal categories like watersports and outdoor furniture, where we didn't have enough supply last year, have also exceeded the company's 2nd quarter comp. We are growing the business by having the right products of stock at the right price at the right time by driving deeper engagement with existing customers and gaining market share. As a result, our stores are becoming more productive and profitable. Over the trailing 12 months, we have increased our average sales per store and sales per square foot by 20%.
EBIT for the same period grew by 125%, $3,700,000 per store compared to $1,200,000 And when compared to 2019, sales per store have increased 31% EBIT per store has grown 3 20%. On a trailing 12 month basis, 100% of our stores are profitable and accretive to earnings. Now to our updated outlook for fiscal 2021. Based on Q2 results, recent trends and the visibility we currently have into Q3 and Q4, We are raising our comparable sales forecast from up 6% to 9% to an increase of 14% to 70% for the full year. On a 2 year basis, this will represent comp growth of 30% to 33%.
GAAP diluted earnings per share are now forecasted to range from $5.45 per share to $5.80 per share based on 96,500,000 diluted weighted average shares outstanding for the full year. This EPS range does not include the impact of any potential share repurchases. This guidance accounts for various market scenarios and possible outcomes for the remainder of the year, varying from business as it is today to a challenging environment with more supply chain constraints or a much more promotional and competitive marketplace. With that, I will now turn the call over to Steve for more details around merchandising and operations. Steve?
Thanks, Michael. Now I'd like to give you a little more color around our Q2 performance. As we already mentioned, our growth trend continued and we delivered an 11.4% comp versus 2020, which was up 44.8% when you compare it against 2019. We're pleased to see the momentum in the business carry into Q2 with all 4 divisions posting increases, which was significant since we're up against our largest comp from last year at plus 27%. Looking at the results by division.
Apparel and footwear were once again our 2 strongest divisions during the quarter. Apparel sales were up 19% versus 2020 and 37% when compared to 2019. Footwear ran a 15 comp was up 27% when compared against 2019. One common theme across both of these divisions was the strength we saw in our youth apparel and footwear businesses. Both of these categories outperformed, and we believe that this demonstrates the continued strengthening of our position with young families, particularly in our newer markets.
With a more normalized back to school this year, youth businesses should continue to be a growth driver for us into Q3 and beyond. I'd also note that our businesses with key national brands such as Nike, Adidas, Under Armour, Columbia and The North Face all had strong performance, which would attribute to improving inventory positions, better content and more controlled distribution in the marketplace. Our partnerships with our key national brands are only getting stronger, which is helping us stay in stock, while also delivering new innovative offerings that our customers love. We're also excited that our private brand business outperformed the total company comp. We saw continued momentum driven by our 2 new rollouts for 21, the Magellan Outdoors Pro and Freelee, both of which continue to outpace our original plans.
We expect private brands Continue to be sales drivers for us in the back half of the year fueled by the rollout of women's freely, in plus sizes along with the launch of our first collaboration of Magellan Outdoors We've partnered with Whataburger to deliver a fun co branded limited edition capsule. As we'd expected, our licensed Sports business trended up as enthusiasm for live sporting events has started to increase. We expect this business will only get stronger as we head into the fall college and pro football Our Sports and Rec division also posted a double digit comp of plus 14% versus 2020, was up 50% versus 2019. We saw continued strength in our team sports business fueled by the return of youth sports being played across our footprint. We had solid growth in the key spring summer sports in baseball and soccer, and football started kicking in at the tail end of the quarter.
It's also good to see we sustained momentum in many of the categories such as outdoor cooking, exercise equipment and water sports, which ran positive comps despite being up against historic sales increases and volume levels from last year's COVID shutdown. In our Outdoor division, we drove a low single digit comp versus 2020 were up 59% versus 2019. The camping, coolers and shooting sports categories all had strong performance during the quarter. The one soft spot was the Fishing business, which had a decrease versus the large surge we saw last year in the second quarter, but is running up strong double digit increase versus 2019. On the margin front, we achieved a 35.9% gross profit rate during the quarter, which is up 500 basis points higher than last year.
Key factors that are driving our merchandise margin growth are: 1st of all, the work we've done around refining our allocation strategy coupled with more targeted localization effort as improved overall inventory productivity is driving higher AURs through better regular price selling. 2nd, we continue to see a less promotional marketplace. This has allowed us to scale back discounts during high traffic time periods. 3rd, the strong sell through of regular price when coupled with our markdown optimization strategy This helped reduce the amount of goods we're taking to clearance along with driving higher AURs and better margins on the clearance we do have. Turning the page to inventory, probably the biggest challenge facing us and the industry are the numerous disruptions to the supply chain.
Despite all these challenges, our inventory is improving in terms of overall level and content. We ended the quarter with our inventories up 24% to last year versus starting the quarter at plus 7% to last year. While we're still not at optimal levels across all areas, we're fully back in stock in Many of the categories have seen accelerated demand such as fitness, fishing, bikes, apparel and footwear. Other categories such as ammunition are not 100% where we'd like them to be, We have enough supply to start building back our inventory levels in stores. Looking forward, we believe we have the strategies And pipeline of inventory coupled with strong relationships with our key partners to keep receipts flowing and driving sales growth.
As we look to the back half of the year, several factors lead us to believe that we will carry our momentum forward and continue to see improvements in both sales and margin. First, consumer demand for the sports and outdoor merchandise we carry is strong and we expect this to continue for the foreseeable future. 2nd, the dotcom business is accelerating and we expect it to continue to be a tailwind for us on a long term basis. 3rd, over the last 18 months, we've demonstrated that we Overcome external challenges and build our overall inventory levels and in stocks, which should help propel the business during the back half of this year. 4th, we're improving the overall effectiveness of our marketing spend through more targeted communications, which are improving conversion rates and driving sales.
5th, several of our key brands have tightened their distribution, which continue to funnel more product, more customers into our stores. And finally, We believe that all the strategic work we've done over the past couple of years to improve allocations, drive better localization efforts and improve execution in our DCs and stores should drive sales will also help offset the cost pressures that result in the supply chain challenges that the industry is facing. Thanks for your time today. And now I'd like to turn the call back over to Ken.
Thanks, Steve. The Q3 is off to a very strong start driven by a robust Back to school and sports season as we are prepared and in stock on the most popular items including backpacks, youth apparel, Footwear and Team Sports Equipment. With the fall sports season kicking off, our licensed apparel business is also experiencing a very good start to the quarter. Academy is entering a growth phase and the team is focused on maintaining This positive momentum while retaining the gains achieved over the last year, market and consumer trends remain strong And we are in a favorable position to capitalize on a tremendous opportunity. Our goal remains the same, To be the best sports and outdoors retailer in the country, we will do this by executing our priorities, which are building a stronger omnichannel business, improving our in store and online shopping experience, continuing our power merchandising efforts, Thank you.
We will now open up the call for questions.
We will pause for a minute to wait for the queue to fill. And our first question is from Michael Lasser with UBS. Please proceed with your question.
Good morning. Thanks a lot for taking my question. Your gross margin is on pace to be in the mid-thirty percent range this year. That compares to 29.6 percent prior to the onset of the pandemic. Market seems to be struggling with what is the right Ongoing run rate for your gross margin, how do you respond to that?
Yes, Michael, we've been gradually Expanding our margins well before the pandemic began. As you know, we've been working on a lot of initiatives to do that. If you think about the expansion, I'd say a large part of it has been because we've been able to take AURs up smartly. Again, as we think about our products, We've talked a lot about products that were accommodation items that we had priced too low, categories like bicycles that we were the lowest price in the market, but we were providing Service that was stronger than our peers, that part of it should be pretty sticky. There will be probably some give back as more promotions enter the environment.
That being said, we still think the mix hasn't normalized. So there should be, I would say, 50 basis points, 60 basis points of improvement still to come as the mix returns back to normal. From a clearance standpoint, we don't expect to go back to the clearance levels that we had in the past. Freight Has been a headwind, as you know. That's why we've been tackling the supply chain initiatives to help offset that in the future.
I think the days of us going Back below 32, 32.5, those are well behind us. So somewhere between that 32.5 and 35 where we're at today is where we would expect to be long term.
It's very helpful. My follow-up question is you're sitting on well over $500,000,000 in Cash on your balance sheet, you just authorized a very large share repurchase program. You're setting the stage To deploy capital to open new stores in the coming quarters, how are you prioritizing this potential Point of cash flow to create value, your stock trades at a very low multiple on the earnings Growth that or the earnings guidance that you gave today, you have a lot of opportunities to create value for shareholders.
Michael, I agree with that and our priorities remain the same. 1st, to ensure the financial stability of the company, Making sure that we have the proper amount of cash to run the business. 2nd is to pursue our Substantial growth opportunities, starting with new stores, continuing our efforts in omni channel, Continuing to improve our operations with things like our the work we're beginning in our supply chain, continuing the efforts that we've got going on in our power merchandising with better systems and processes there, which have helped our margins. And we will continue to provide and ensure that we have adequate capital To support the significant growth that we have and we'll continue to have in stores, omnichannel and our operations. And then the 3rd priority is making sure that we reward and recognize our stakeholders.
The step we took today, I think, It's a big nod to that. And we will continue to be good Managers of the capital and provide for those three key priorities.
Thank you very much and good luck.
Thank you, Michael. Thanks, Michael.
And our next question is from Kate Fitzsimons with Wells Fargo. Please proceed with your question.
Yes. Hi. Thanks very much for the question and congrats on the strong results. Thank you, Kate. Michael, just one What's one point of clarification on the EPS outlook of $5.45 to $4.80 I presume this is GAAP.
Your year to date earnings are running about $0.40 above on a pro form a basis. Should we think about the updated guidance of about $585,000,000 to $620,000,000 on a pro form a basis? I'm just trying to rationalize The pro form a with the GAAP outlook.
Thank you. No, good question. The guidance update we provided is GAAP EPS.
Okay.
On a pro form a basis, yes, you'd want it you'd add the $0.40
Great, great. Thanks for the clarification. Ken, I guess just at a higher level, your business has seen really remarkable consistency versus Q1 relative to 2019 levels. I guess just when you think about the category in general and the durability on the strength of the category, Is there a view that we can continue to comp the comp when we look to 2022 and beyond? I think there is some fear that you're going to see that you're seeing a real pull forward right now in Demand, so just curious higher level how you're thinking about the ongoing durability of the category, particularly maybe as some of these lower ticket Categories start to normalize.
Thank you.
Yes. We feel very confident in the long term Durability of the business, we see people continue to come back with the Things that they started both before and during the pandemic, we are at a much higher level. We've comped the comps And headed to comp to comp to comps. And we're going to keep driving the business forward as we Stated in our script that the Q3 is off to a good start, And we're pleased with that. We have some pretty big hills ahead of us, But the customer continues to comment at some point, people have to quit asking, is this going to continue because it continues.
And I think that that's important to understand that the business that we're in and what we're doing is Really got some long legs and we've got expectations, great expectations for the future.
Yes, Kate, I would just tag on to that a little bit. We have absolutely, as an organization, leveled up operationally. The initiatives that we put in place, they made a difference before the pandemic, they made a difference during the pandemic and now we're anniversarying it in markets, frankly, that have been open largely For more than a year, consumer demand is still very, very strong. And in a world, we read about this all the time, where people are looking to Escape the rat race and live in the moment. That's what we do.
We help people do that and have fun and be able to Anticipate in a lot of these new activities. We are seeing our existing customers return more frequently. They're spending more when they return. That hasn't changed. And customers that are trying new categories that are new to the division, whether they're new or existing, they're spending more on that first visit And they are coming back more than they did in the past.
So all the trends in our business are very healthy right now. And I think we still have a lot to work on organizationally to help us capture that demand.
Great. Thanks. Best of luck for the back half.
Thank you.
And our next question is from Greg Mellett with Evercore ISI. Please proceed with your question.
Hi, thanks. I had two questions. I wanted to start on SG and A. Thanks for calling out the non recurring part of it. I just wanted to see should we get back to a clean point of if we can comp high single digits We're showing leverage or is there something unique about the year over years in the back half that we should be aware of?
No, no. If we get to the Low single digit comp will continue to lever. That's certainly what we're planning to do. Good sales help you do that. We plan on having good sales.
And we work very hard to make sure that we manage the expenses and so that we're capable of leveraging At quite frankly, whatever sales level we're at.
Perfect. And then the second question was On the capital allocation, so with the $500,000,000 buyback, I mean, it looks like your free cash flow is still is probably around that number, but I think the authorization is good for 3 years. If we continue at this rate, will it take 3 years to use that? Or what's your thought process in terms of allocating that capital to either Building more cash, opening stores or executing the buyback?
We are not defining What the terms are of the $500,000,000 buyback at this point? We also do foresee continued expansion in the growth. We're opening 8 to 10 stores next year as we stated. We plan on those stores being successful. We're working very hard to ensure that they are successful and That will give us the opportunity to continue to grow there.
We will continue to invest in the omnichannel field and we will Continue to work to improve our operations. So, the good news is that we are able to do all three of our priorities, Ensure our financial security provide for the significant growth, you've heard me say before, I don't think there's another retailer that has the omni channel, the organic, the operational And new store growth opportunities that we have and then recognize that We can support our investors at the same time.
That's great. Congrats and good luck.
Thank you very much, Greg. Have a good day.
Our next question is from Robbie Ohmes with Bank of America. Please proceed with your question.
Hey, good morning. Congrats on another great quarter. I was hoping that you could maybe Ken or And or Michael, can you just remind us on the profitability e commerce business and where that is today maybe versus 2019? And Ken, you're mentioning focusing on omni channel initiatives. Can you give some more detail on where you think you can take omni channel for Academy Sports from here And what we should be looking for, your term?
Yes. With regard to the profitability, our omnichannel It is profitable and not quite as profitable as the stores, but it is approaching that level. Our ability to serve our customers both Through shipping to their home, but also buy online, pick up in store has allowed us to Have a profitable dotcom business. We couldn't have the increase that we've had over the last 2 years of over 200% in omni channel with the increase in profitability if it wasn't profitable and we continue to work to make it profitable. And so that's important.
The second thing I think to this second part of your question, we are doing a lot of Thanks with our omni channel. We've talked about improving search, payment capabilities. We've added new payment Our capabilities and we'll continue to add things like that. We introduced a new app within the past month That's gotten off to a very good start. We will provide capabilities on the app that will, I think it more customers to use it and be supportive of our customers.
We are using New technology to communicate with our dotcom customers. We are going to Continue to improve our customer database between the stores and omni channel. So we still have a lot of work We were late to the game in omni channel and we will look To the customers to decide how big it should be, we haven't said it's got to be this percentage, but I would Envision omnichannel is probably going to be over the next year or 2, 15%, 20% of our business And the penetration will continue to grow. We doubled the penetration of our dotcom this year over 2019 And we will continue to see that improve. But one of the things we're working hard or 2 of the things we're working hard to do, one is Ensure that it's connected with all of our customers to include our store customers and that it's a profitable business and we aren't just trying to grow it to grow it.
That sounds great. Thanks so much, Ken.
That was a mouthful. Hopefully, I got all your points covered. Thanks, Robbie.
And our next question is from Daniel Imbro with Stephens Inc. Please proceed with your question.
Yes. Good morning, guys. Thanks for taking our questions. Ken, I want to start on the unit growth side. I think you talked about that in Remarks obviously with capital here being able to start accelerating that.
I think last year you guys cited some really attractive unit economics with smaller format stores. How replicable do you think those kind of returns will be? And how do you envision the role, maybe the small format, maybe infill market? The more expansionary markets, how are you viewing that as we get into next year?
2 things. One, that's an important point that Michael likes to Having me call out is that all of our stores are profitable on a 12 month trailing basis. And So
all of
the formats that we've had in time. We have opened a 40,000 square foot store. We see that as an opportunity as we look to fill in markets to go into some of the Urban areas that we're backfilling to take advantage of existing locations that we may take over. So we know that's profitable and it is as profitable as our larger store. We like the larger format more Simply because it delivers more volume.
So our preference is the largest store where we can, but where we see an opportunity to open a store, we will open That we do have that capability to have a very productive 40,000 square foot store in there as well as Our standard store that's a little over 60,000 square feet.
Yes, Daniel, we're pleased with the 40,000 square But I would like to remind everybody that the larger 60,000 square foot, 63,000 square foot format still has best in class productivity on a sales per square foot basis On a profitability per square foot basis, back to Robbie's earlier question about omni channel, the best way to grow our omni channel is to grow our fleet, Because 75% of our e commerce businesses is fulfilled from the store. We're only in 16 states that leaves 30 plus states that have a chance to experience the Academy magic as we look to grow and bring our winning model outside of our current
And many of those states by the way that we are in, we only have 1 or 2 stores. So, We have within our own market some excellent fill in opportunities, but there are It's a big country and we know there's a lot of people that want and deserve Academy Sports and Outdoors.
Great. Thanks for all that color. And then one follow-up on the gross margin outlook. That was a helpful answer to Michael's question earlier. But when you talk about the drivers of gross margin, merchandise is obviously strong today.
I didn't hear a ton of discussion around the supply Chain initiatives, distribution initiatives we talked about, Michael. Are those still on to come? And can you provide any more color on what Maybe the lowest hanging fruit is on that supply chain side and what it could mean for earnings or margin?
Well, I'll
take I guess the middle part of the question about the gross margin, we do have significant continued opportunity with The planning and allocation initiatives that we put in place, markdown optimization, those are all learning systems That we'll continue to learn and develop more localization that we're working very hard so that each store has The right assortment for it, whether it's a that's a store that in outdoor grilling, it's a smoking or gas For pellet, predominant market, whether it's a store that the work boots are important and are those work boots More factory and service or more for the oilfield. And so we are really working hard through our systems Tailor that assortment for each of our stores, which will improve the margin and reduce the markdowns. And So those initiatives are underway and continue to work. The supply chain initiative literally just starting, but there's some There is some low hanging fruit that we're looking at, and I'll let Michael talk about some of those things that we're looking to deliver. But it too is a longer term initiative that will continue to deliver over time.
Yes. I think of the gross margin builder as really 3 categories. The first is mix normalization and probably 50 basis points, 60 basis points to come there. All the inventory stuff that Ken talked about, plus clearance, better localization, getting the right product in the right place at the right time, that's The initiative that Steve and team have led, and we're still probably middle innings there. And then last one is the supply chain that you mentioned.
We are just beginning to take that on. That is a multiyear project that will frankly deliver benefits throughout that time. I haven't quantified them yet, but there's some low hanging fruit that will realize the benefit this year. Based on the combination
of the combination. Based on the combination of the we're Touching less, better cross
docking, more multi stop delivery. It's not the sexy Like rolling out maybe a new private label brand, but it's the stuff that sticks to your ribs and really matters from a profitability standpoint.
Which by the way you mentioned another is we continue To develop our private label brands, we introduced
the
Freelee, which has done very well, Magellan Pro in our outdoor area and in apparel has done well. And new ideas, It was just a side comment in Steve's presentation about What we did was Whataburger, but we had over 1,000,000 hits and the number of people we sold out that merchandise in a week. Those type of ideas that drive traffic, improve profitability and support a strong Private label business that doesn't take away from the important brands that we have, but adds to the things Academy can provide its customers. So
we'll walk it back from where we're
at today, that 35% and change. If you say the environment becomes more promotional and we give up 200 basis points, Maybe $250,000,000 We still have, I think $50,000,000 to gain from a mix standpoint. I still think there's probably $50,000,000 $60,000,000 who knows what it is on the supply chain. So Ultimately, I think as we mature, we'll be in a pretty good spot.
Great. It's all really helpful color. Thanks so much and good luck guys.
Thanks, Jane.
And our next question is from Chris Horvers with JPMorgan. Please proceed with your question.
Thanks. Good morning, everybody. Michael, can you provide a little bit of color on the cadence of the Back half of the year, obviously implying about an 8.5% comp at the midpoint. Can you talk about How you're thinking about 3Q versus 4Q to the extent that you can on the top line? And then also on the margin front, you're And about an 8% EBIT margin in the back half, that seems pretty low and pretty conservative.
Any cadence color there? And when are you assuming perhaps promotion comes back into the mix?
I'll let I'll give a couple of brief comments and I'll flip it over to Steve. I'd say, look, we are looking at it relatively conservatively. There's still a lot of the year left to go. There's just as much uncertainty today as there was 3 months ago, 6 months ago. We're up against 2 months for quarters in the back half of last year.
The supply chain is challenged. The labor pool has been tough And it looks like Covet is going to be with us for a while. That being said, business is still very strong today. And I'll let Steve talk about Some of the other questions there.
Yes. So from a cadence perspective, what we're seeing right now is it's more normalized cadence. Last year, We saw back to school move out in our markets at least 30 to 45 days. This year, it's moved back. So, us, kind of the hard part back to school is that Late July, early August time period, as Ken already mentioned, we're off to a really strong start there.
We have a more normalized calendar the rest of the way through. We do expect a lot of the tailwinds that we've seen so far to continue through. One of which is we brought up scarcity to supply and the supply chain. That's going to remain a challenge for us and everybody going forward for the foreseeable future. One of the things we're pretty excited about is, if you heard talk about our inventory.
We started the quarter with inventory up about 7% to last year. We ended the quarter with inventory up about 24% to last year. So What we've demonstrated is we've been operating in this kind of dysfunctional supply chain world for 12 to 18 months now and I think we're operating pretty well It's that we've got good pipeline of inventory, strong visibility of what's coming in. We're doing a good job of prioritizing that. We think we're going to be in really good position for holiday.
And what we think may happen this holiday is somewhere we saw last holiday where there is a scarcity of supply out there in the marketplace and hopefully that means people buy earlier At full price, which should hopefully mitigate need to promote as we get deeper into the holiday.
Yes, a couple of important points. The guidance that we provided contemplates all of these risks. We have the goods to achieve the sales targets that we've provided. We've got a diverse vendor base, which actually helps us offset some of the inventory challenges. Our vendor base is much more diverse than others.
So As it sits today, we feel very comfortable with the guidance that we provided. If we're able to kind of manage through the challenges in the way we have in the past, we certainly think we can exceed it.
Yes. As you look at it, we plan and those of you who know me for a long time know, We plan for all the contingencies that can occur. We're overcoming a hurricane that impacted one of our major markets. We've got all of those stores open. The team has done just a phenomenal job there.
We but The area is impacted for a while and there are some costs as we recover. We've got the continuation of COVID. We have The uncertainty of the consumer, we have the supply chain challenges, all of those have been figured in. And what we've demonstrated and hopefully that you saw with this past quarter and the quarter before that is through all these challenges, We have been able to continue to perform strongly. But that said, we're going to make sure that we've got the contingencies planned And we're able to capture the opportunity as we go forward.
And I feel confident that with the team that we have here, We will be able to continue to deliver good results.
And then I guess as a follow-up point to that, you held your 2 year CAGR Very strongly here in the Q2 versus what you did in the Q1. I mean that's pretty outstanding. Even in this consumer environment, you're not seeing that from a lot of retailers. And like Steve mentioned, you're a good portion of the way through back to school. So is it fair to assume That you're not seeing any impact from Delta and that so far 2 year trends have remained relatively constant?
I got a lot of grief last time to my comment where I said the quarter started off The same level that we've been performing at and the people, what does that mean? And But it's true again, but we've got challenges. And I think that we will continue to see Strong growth. Well, these numbers and at some point, we all have to come back to earth a little bit And everybody is spoiled by these huge growth numbers. That said, we continue to see good growth for the company.
We are off to a good start this quarter. And we've as Steve said, we've got the inventory and are positioned well for the back half. There are some things that could come up, but we feel confident and Probably the biggest thing is the consumer continues to say, we like What you have, we want what you have and we want to shop at Academy and buy from you.
Thanks very much. Best of luck.
Okay. Thanks. Thanks, Chris.
And our next question is from lavesh empanati with Credit Suisse. Please proceed with your question.
Hi, thanks for taking my question and congrats on the strong quarter. I just had one long term question. So if I look at just the unit growth outlook, right, for 2022, 8 to 10 stores, considering the business is showing strong growth, I mean, there are structural changes in the consumer lifestyle trends that you highlighted, the strong free cash flow position. I mean, is there a possibility that you could accelerate Stroke, I mean stronger than the 8% to 10% that you called out to activate those share gains?
I think, Lalish, that for Next year, 8% to 10% probably is a good number because of the capability. Beyond that, We have the financial wherewithal, we've got the market opportunities And we are developing the organizational capability to expand beyond that and Add more stores, but we want to do it right and we will grow what is appropriate. But the 8 to 10 number Is I think a good number for next year. Beyond that, it could be higher.
Yes. The only thing I'd add just to make sure everybody It's clear, we could add up to 100 stores without having to expand our distribution network. So there's plenty of capacity to grow with our existing network. When it costs you $3,000,000 to build a store and you can see the EBITDA we're delivering, 100% of our fleet is profitable, you should build more stores. And so as As Ken said, we're going to put the infrastructure in place and evaluate after 2022 what that can imply.
Yes. And so we won't be Have to wait and delay to build a distribution center first one. And the second thing I think that's important, this is another point that Michael has made in the past is One of our requirements is the stores in their 1st year are cash flow positive. So we don't want As we expand, it will not be a drain on our ability to continue expanding.
Got it. Thank you for the color.
Thank you. Thank you.
And our next question is from Daniel Adams with Loop Capital Markets. Please proceed with your question.
Hi, everyone. Thanks for taking the question. Just one for me on capital allocation. I'm curious as to what the thought process was behind the buyback versus a dividend. And Just given the balance sheet strength and strong free cash flow generation, do you see yourself as a dividend yielding company, say, 1 year from now?
Thanks.
We will continue to explore what we think is best for The company and for our investors right now, given where the stock quite frankly is valued, a buyback makes the most sense. And we will evaluate all the options to make sure that we are And giving our shareholders the adequate return.
Thanks, Ken. That makes a lot of sense. Thank you, Daniel. Congrats, Gus.
And our next question is from John Heinbockel with Guggenheim. Please proceed with your question.
Hey, Ken, maybe when you
step back and look The you've improved the strategic capabilities of the business in a lot of different areas. What other than supply chain, which we've talked about, What areas would you still like to work on? And when I think about use of capital, you You think about strategic M and A, are there capabilities that you don't have that might be interesting going down that path or You pretty much have what you need right now.
I think as you talk about things that we need to improve on, we've got continued opportunities In our merchandising, we have a lot of work to continue in our marketing. We have Opportunities to, as you said, improve our supply chain. Omnichannel, we talked about Improving our stores and our the service and what we're doing in our stores. So we've got a lot of things that we can do better. This is a company that Fortunately, it has no shortage of opportunities for improvement.
With regard to the capability, because we have the opportunities for growth, I don't think we have to take a risk in looking outside the company for opportunities or trying to Think of what's a new idea that might work, that may or may not work. We've got within our bone structure, The capability to grow, to carry that extra weight, if you will, and still be just as fast and nimble As we were as opposed to having to take the risk and cost of spending money outside. And that is something that I think is very important as you look at a company is, are they growing things that you're pretty sure of that They know how to do versus is it going to work or isn't it going to work.
Okay. Then maybe as a follow-up to that, right, you talk about Building a national brand, what I mean and it's a long way out, but you think about adjustments to how you go to market in the South, Northeast, West Coast, how do you think about maybe this is more for Steve, but how do you think about merchandising adjustments As you move to the northern part of the country or is that that's a pretty easy transition to make?
It's something that quite frankly We've learned, we're learning. We've got stores in Missouri and Illinois, which is Weather is different than Texas and Florida. And we that gets to the point I made earlier about the localization. Lacrosse in North Carolina, they have different sports. They have different cooking.
They have different seasons for apparel. And we Those are things that when I talk about learning and merchandising, we're learning and that localization, I think, will really help us As we go into new markets and understand what's important in a new market and it's not something that, Jeez, this is foreign to us. It's a way that we operate.
Yes, I'd say that was a mistake we made in the past when we went into new markets And why they underperformed was and we talked about this I think with a lot of different conversations where we try to take what worked in Texas We're not doing that anymore. So that's a new muscle from a localization, from an assortment perspective that we've learned to exercise. Back to Michael's point earlier, if 100 stores were in the future, most of those would fit within our existing DC structure. So that keeps us Still somewhat in the southern part of the geography of the United States. I think if we start pushing into the north, yes, we're going to have to add in some of the winter sports Like hockey, maybe skiing at some point, but that's well into the future.
I think what's more important is understanding all the local nuances, whether it's in cooking, Whether they're grillers using smokers, whether it's propane, whether it's deep frying turkeys, it's all those other nuances when the back to school timing is, But I think we've gotten a lot better at in terms of how to execute it together.
One of the most localized things that we do is fishing.
And Probably the most localized.
The most localized because of bait and one market is very different and that's something We've got a great team there and it's helping us apply that thought process to other parts of the store.
Thank you.
Thanks, John. Thanks.
And ladies and gentlemen, we do have time for only one more question. And that last question would go to John Zilaris with Qualitus Capital, please proceed with your question.
Hi, good morning. Many questions have been answered, but I do have one question And about the reasons you cited for confidence that Trends on the top line and gross margin will continue. I think a lot of us understand the demand side of the equation, but a little bit More difficult to quantify and drill down on are some of the things that you mentioned, for example, distribution strategies of key vendors.
I think we'll probably all take a chance at answering parts of that question. But Now back to growth drivers, I mean, we already mentioned you brought up strong consumer demand. So that's clearly a tailwind for us. We brought up dotcom. Our dotcom business It is accelerating.
Traditionally, we've been under penetrated there. We obviously, as we were coming through the first half of the year and anniversarying some of the COVID surges, That business was flattening out a little bit, but it's back to growth for us. That's going to be a traffic and sales driver for us in the future. The improving inventory levels and content we already talked about. We touched on marketing.
We are shifting our marketing spend From a more traditional print broadcast to much more digital targeted and talking to customer on a 1 on 1 basis, that It's going to make us much more efficient and a better retailer. You talked about the underlying strategies that we have from a merchandising perspective that really we put in place pre COVID that we're fueling the Now the better allocation, the better localization, the better assortments, regular price markdown optimization. And then you brought up the controlled distribution. That is definitely something that is happening in the market where vendors are controlling the distribution better. That's helping us in a couple of different ways.
It's It's funneling more customers into our stores. It's protecting and making those brands more important. It's pleasing, it's allowing us and a lot of retailers I think on some of the promotionality that undifferentiated retailers were leading into as a way to drive those brands going forward. All those things we think in addition to the consumer demand behind our category are drivers growth for us.
Yes. You think, John, Literally the thousands of outlets that have been cut by several of the larger vendors, Those customers didn't all of a sudden dislike that brand and they're looking to find it and we're one of the key places Where they in our markets, where they can find it and they know they can get a real good selection of it.
And our partnerships are there just getting stronger. I mean a lot of there's been a lot of noise around Zendesk moving to more of a digital space, but when you think about how much volume is still done in brick and mortar stores and they really value the customers We reached that they can't reach. We see that continuing to just strengthen our relationship with our key partners going forward.
Thanks, guys, and good luck.
Thank you very much, John. Thank you, everybody. We appreciate your interest and participation. We Hope that you have a better understanding of the opportunities. And we you've heard on the call, we're all excited about What we're doing and where we're going and we've got a great team working on it.
And thank you for your support. Have a great day.
And this concludes today's conference and you may disconnect your lines at this time. Thank you for
your participation.