Academy Sports and Outdoors, Inc.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Cabinet Sports Plus Outdoors Third Quarter 2020 Earnings Conference Call. Today is Thursday, December 10, 2020, and this call is being recorded. At this time, 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 analysis and investors. Please limit yourself to one question and one follow-up. To ask a question during a call, please press star 1. If you require any operator assistance during a call, please press star 0. And I'd like to introduce your host, Heather Davis, Senior Vice President of Accounting, Treasury, and Tax. Heather, please go ahead.

Good morning, everyone. Thank you for joining our call today. On the call with me are Ken Hicks, Chairman, President, and CEO, Michael Mulligan, Executive Vice President and Chief Financial Officer, and Steve Lawrence, Executive Vice President and Chief Marketing Officer. Before we get started, I want to go over some standard administrative matters. Our earnings release issued this morning is available in the Investor Relations section of our website at investors.academy.com. A replay of the audio webcast of this call will be archived on the Investor Relations section of our website for approximately 30 days. As a reminder, statements in today's earnings release and some of 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 today's earnings release, and in our filings with the Securities and Exchange Commission, including our final perspective dated October 1, 2020, and our most recent quarterly report on Form 10-Q. Any such forward-looking statements are based upon currently available information and our expectations, estimates, assumptions, and projections as of today, and are intended to be covered by the State Harbor provisions under the Federal Securities Laws. The company assumes no obligation to update the forward-looking statement to reflect events or circumstances that occur after the statement is made or the occurrence of unanticipated events. Today's earnings release and this call also include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release and provided in the Investor Relations section of our website. Now I'd like to turn the call over to Ken.

Thank you, Heather. Good morning, everyone, and thank you for joining us today. This is an exciting day as it is our first time hosting a quarterly earnings call as a public company. On October 2, 2020, Academy Sports and Outdoors started a new chapter as a result of the entire team's efforts from our 259 stores to the three distribution centers and our home office that support them. Over the years, we've given our customers not just great products but also great experiences, and we look forward to helping our customers have even more fun out there. We hope that you and your family are safe and healthy. I continue to be proud of our team members and their commitment to serve our customers and our communities during the COVID-19 pandemic. All academy stores, distribution centers, and the corporate office are currently open and have continued to operate within government safety recommendations and requirements, providing a safe environment for our customers and teammates. We've worked hard over the past several years to improve our competitive position as we move forward to our vision of being the best sports and outdoors retailer in the country. Our business has performed strongly during the past several quarters, beginning well before the COVID-19 pandemic. We've strategically invested in our key initiatives, including power merchandising, omnichannel, and our focus on the customer. We saw these efforts continue to pay off in the third quarter of 2020. Now moving to our financial results. As we announced earlier this morning, we had a remarkable third quarter with our fifth consecutive quarter of positive comparable sales increases. We achieved a record $1.35 billion of total net sales for the third quarter with a comparable sales increase of 16.5%. Our comp sales were driven by increases in transactions, units, and average unit retail. From a divisional perspective, sports and recreation and outdoors were our best performing businesses. The sports and recreation division had a strong double digit comp increase. Bicycles, outdoor games, outdoor cooking, and fitness equipment purchases drove our sports and recreation division. Our outdoor division also experienced a strong double digit comp increase which was propelled by increases in our fishing, camping, and hunting categories as our customers continue to participate in more outdoor activities. Comp sales for the footwear division increased mid-single digits as a result of good sales in both athletic and work footwear. We saw a low single-digit decrease in the apparel division due to the decline in licensed apparel as we anniversary the strong sales from the Astros 2019 World Series appearance, as well as the impact from a change back to school environment. Our e-commerce experience continues to drive significant revenue and profit growth, as well as deeper customer relationships. We've made our website easier to navigate, improved our content, and added new services all of which have improved the customer experience. E-commerce net sales increased 95.9% during the third quarter compared to the same period last year and achieved a 7.5% penetration to total merchandise sales compared to a 4.5% penetration for the same period last year. Our buy online, pick up in store, and curbside pickup program comprised approximately half of our overall e-commerce sales for both the quarter and the year to date. Including our ship from store, buy online, pick up in store, and in-store retail sales, our stores were involved in over 95% of our total sales for the quarter. Our third quarter sales were the result of our broad, differentiated product offerings. which lends itself well to the ongoing trends of at-home fitness, staycations, road trips, and outdoor activities like fishing, camping, hunting, and outdoor cooking and games. We offer fun for the whole family through a variety of products for many activities. Our everyday value also resonates during times of economic uncertainty. We offer customers a convenient and safe shopping experience both in-store and online. We're here for active families that love to make fun memories together, but we also show up for our communities during difficult times when fun is harder to find. We are continuing to strengthen our balance sheet. Subsequent to the third quarter in November, we reduced our debt by approximately $630 million and refinanced and extended the remaining $800 million in debt through 2027. In addition, we extended our undrawn $1 billion ABL revolving credit facility through 2025. We believe these actions, along with our continued strong performance this year, have positioned us for ongoing financial stability. Excuse me. Excuse me. The results just choked me up. Our inventory position for the third quarter have improved in almost all categories. Firearms and ammunition will continue to be challenged for the foreseeable future. However, inventory continues to flow in all of our divisions during the quarter, allowing us to experience strong sales. We've been working collaboratively as a preferred retailer with all of our business partners, including our merchandise vendors and logistics partners, to improve our in-stop positions and merchandise flow. While our third quarter performance was strong, we continued to work on our key opportunities that paved the way for the future. In our e-commerce environment, We've launched ship to store in advance of the holiday season and continue to focus on search and checkout optimization opportunities. In stores, we'll focus on leveraging our systematic capabilities to further align team member schedules and responsibilities with the customer's traffic patterns. In the supply chain, we continue to focus on distribution center and logistics efficiencies by enhancing processes and systems optimization. In marketing, we continue to improve our targeted marketing capabilities to better communicate with our customers in a personalized fashion. In merchandising, our focus remains on continued advancements in our replenishment and allocation systems as well as product placement within our store environments. With respect to our future outlook, due to the high level of uncertainty created by numerous external factors, including the pandemic, we will not be providing guidance at this time. Before I turn it over to Michael, I would like to thank all of our team members in our stores, distribution centers, and home office for all their hard work and dedication during this challenging year, which helped us to achieve these strong results. Now I'll turn it over to Michael to review our financial results in more detail. Michael? Thanks, Ken, and good morning, everyone. Overall net sales for the third quarter were $1.35 billion, which is an increase of 17.8% compared to the same period a year ago. As Ken mentioned, comparable sales for the third quarter increased 16.5%. The gross margin rate was 32.7% of net sales, which is 110 basis points higher than the third quarter of 2019. It's 110 basis point increase was driven by strategic merchandising actions, such as lower markdown rates and lower clearance volumes, but partially offset by a sales increase in hardline categories, which generally carry lower merchandise margin rates, but do have a higher ticket. Just to be the dot, increased 64.1% to a record third quarter performance of 145.7 million, up from 88.8 million in the third quarter of 2019. In the third quarter, SG&A was $359 million for 26.6% of net sales, which is 40 basis points lower than the third quarter of last year. SG&A included approximately $32 million in non-cash and extraordinary items associated with our October IPO. Excluding these charges, SG&A for the third quarter would have been $326.8 million for 24.2% of net sales, a 280 basis point improvement from the prior year. Now, looking at our bottom line, net income increased 109% to $59.6 million, or $0.74 per diluted share, versus net income of $28.6 million, or $0.38 per diluted share, in the third quarter of 2019. Pro forma adjusted net income, which excludes the impact of certain extraordinary items, was $73.7 million, or $0.91 per diluted share in the third quarter. This was an increase of 188% from $25.6 million, or $0.34 per diluted share, in the third quarter of 2019. The increase in free cash flow for the third quarter was driven primarily by net income and the vendor term changes we implemented in the first quarter of 2020. As a result, our adjusted free cash flow was an inflow of $83.7 million compared with an outflow of $30 million the same period a year ago. On the balance sheet, we entered the third quarter with $869.7 million in cash and cash equivalents and no borrowings under our billion-dollar ABL credit facility. Out of $21.1 million in letters of credit, our available liquidity, including cash, was $1.7 billion at quarter end, which is $730 million higher from the end of the third quarter of 2019. Most of the proceeds received in connection with our IPO in October are reflected in the quarter end balance sheet. However, subsequent to the third quarter, on November 3rd, 2020, the company issued and sold an additional 1.8 million shares pursuant to the underwriter's over-allotment option, resulting in approximately $22.1 million of further net proceeds. Also, as Ken mentioned, subsequent to the third quarter, on November 6th, 2020, we completed a debt refinance transaction, where we issued $400 million of senior secured notes and admitted to a new $400 million term line facility, both of which mature in 2027. We utilized the net proceeds from the notes in the new term loan as well as cash on hand to repay in full our $1.4 billion term loan facility, reducing our overall net debt by approximately $630 million. In addition, we extended our billion-dollar ADL facility through 2025. Our merchandise inventory at the end of the third quarter was $1.1 billion, which was $249 million, or 19% lower than at the end of the third quarter of 2019. This reduction in inventory represents a significant sell-through of inventory to support our exceptional sales growth of 18.3% year-to-date and move us towards a better ongoing inventory position with fresher inventory. While our current inventory position reflects the challenges of staying in stock in certain key categories that have been in high demand during the pandemic, we believe that our inventory has positioned well in those categories and that we're in a good position to make improvements into the future as our supply chain continues to improve to support our sales velocity. Net capital expenditures for property and equipment were $8.1 million in the third quarter of 2020, compared to $20.8 million in the third quarter of last year, with the decline driven by no new stores and fewer store remodels. Moving on to year-to-date results. Net sales increased $632.4 million, or 18.3%, to $4.1 billion, which included a 16.1% increase in year-to-date 2020 comparable sales. Year-to-date net income increased 112.3% to $217.2 million or $2.82 per diluted share from net income of $102.3 million or $1.37 per diluted share in the prior year. Year-to-date pro forma adjusted net income was $208.6 million, up 257.6% from year-to-date 2019. This resulted in pro forma adjusted earnings per diluted share of $2.70 compared to $0.78 per diluted share for the year-to-date 2019. Our 2020 year-to-date adjusted free cash flow increased significantly to $843.4 million compared to $42.2 million last year. To conclude, we are pleased with our strong performance during the third quarter, excited about our accomplishments, and proud of how our team members have been nothing short of inspiring during these challenging conditions. I would like to reiterate Ken's thanks to our extraordinary team members for helping us achieve strong sales and earnings results. This concludes our prepared remarks. We are very optimistic about our future as our key initiatives continue to drive strong results. We look forward to sharing our progress with you again next quarter. Now, we'll take your questions.