Academy Sports and Outdoors Inc

NASDAQ:ASO

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors First Quarter Fiscal 2023 Results Conference Call. At this time, this call is being recorded. [Operator Instructions] I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

[Matt Hodges, executive]

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors first quarter 2023 financial results call. Participating on the call are Ken Hicks, Executive Chairman; Steve Lawrence, Chief Executive Officer; and Michael Mullican, President and Acting Chief Financial Officer. As a reminder, statements in today's earnings release and the comments made by management during this call may be considered forward-looking statements.

These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors.academy.com.

I will now turn the call over to Ken Hicks. Ken?

[Kenneth Hicks, executive]

Thank you, Matt. Good morning and thank you all for joining us today. In April, Academy announced our Board of Directors' thoughtful leadership succession plan, including my transition from President and CEO to Executive Chairman of our Board of Directors. This officially took effect on June 1, 2023. I believe now is the right time for this transition given the strong foundation we've built over the last several years and the clear growth strategy we have set forth for the future and the strong proven leadership team that is in place at Academy.

Steve Lawrence, our Chief Merchandising Officer is now Chief Executive Officer and a Member of our Board of Directors; and Michael Mullican, our Chief Financial Officer, is now President of the company. The Board and I are confident that Steve and Michael will continue to work very well together to lead Academy Sports and Outdoors to new heights of operational and financial performance. They exhibited their leadership abilities through their significant contributions during the transformation of the company over the last 4 years, and we are all aligned with the Executive Committee on our vision, mission and values on the long-range plan we shared with you in April.

It's been an honor and a privilege leading Academy over the past 5 years and as I conclude my time as CEO, I want to thank the entire Academy team that have made my time here incredibly rewarding and fun. We've accomplished a lot, and I recognize it's due to the unwavering dedication of our 22,000 team members and our talented Executive Committee and our Board of Directors. I also know we've become the company we are today due to the support of you, our shareholders, who have supported and believed in Academy during our transformation into a highly profitable growth retailer.

Thank you for your continued confidence and trust in Academy. I look forward to continuing my leadership role on the Board of Directors as Executive Chairman and working with Steve and the Academy leadership team to support the successful execution of Academy's strategy to achieve our vision of becoming the best sports and outdoors retailer in the country while providing fun for all as we create value for our stakeholders.

I'll now turn the call over to our new CEO, Steve Lawrence. Steve?

[Steven Lawrence, executive]

Thanks, Ken. Let me start by saying it's an honor and a privilege to succeed Ken as Academy's next CEO. He has guided the transformation of our company into a leading retailer and has laid a strong foundation for our future. I truly enjoyed working closely with Ken over the last 4.5 years, and I look forward to continuing our partnership as we both step into our new roles. I'm also excited to lead our over 22,000 dedicated team members who every day enable Academy to fill our mission, providing fun for all through our strong assortments, our outstanding value proposition and the enjoyment our customers will have as they experience sports and outdoors with the gear they picked up from Academy.

While I certainly have big shoes to fill following a legend like Ken into a role, the thing that gives me confidence is our team. They have been battle-tested over the past 4 years and have been proven capable of taking on any challenge, including the current environment. In addition to a strong team, we also have a solid balance sheet, a well-engaged customer base, a highly productive operating model and a well thought out long-range plan to help guide us as we move forward. Hopefully, you'll all agree that the future is bright for Academy.

Now I'd like to turn to our first quarter results. The first quarter presented a very challenging economic environment on a number of fronts. During our Analyst and Investor Day in early April, we reiterated that the first and second quarters will be the most challenging for us. Earlier this morning, we reported first quarter net sales of $1.38 billion, which translated into a negative 7.3% comp versus last year, but continue to be well ahead of our 2019 baseline and up 28%. To be clear, these sales results were below our expectations. We saw a softening in the business as we progressed through the quarter, with April being the weakest month.

When you break the business down, there were several factors that contributed to the sales decline. We know that our customers are contending with ongoing macroeconomic headwinds, such as higher costs on virtually everything. The customer is being more careful how and when they spend, which has resulted in fewer transactions compared to last year. As we previously called out, we're still comping up against strong results from several big ticket categories such as hunting, camping, fitness and bikes. And as expected, these categories were some of the most challenged within the quarter. Another consideration is that a large chunk of our business is meant to be enjoyed outside.

And with the unfavorable weather patterns in several of our major markets, we got off to a slower-than-anticipated start in many of the seasonal categories. On a positive front, we have some areas of the country where the weather has been more normalized, and these markets have outperformed in these seasonal categories. Looking at sales by division, our best-performing business is apparel, which was up roughly 1% versus 2022. We picked up market share here. In apparel, we benefited from having a much better assortment of spring seasonal categories, such as shorts, short sleeve tops from key national brands, such as Nike, Columbia and Carhartt.

Our private brands in apparel also performed well, led by Magellan Outdoors, R.O.W. and Freely, which all grew by more than 20%. These brands represent the value end of our assortment and the customer is clearly seeking out this product during the quarter. Footwear was the second best business at down 2% versus last year. We saw strength in new brands and ideas such as Nike, HEYDUDE, Birkenstock's and SKECHERS Slip-ins. Our Kids business as well as our Cleated business were also stand-outs during the quarter. The most challenging category with the Athletic Shoe business where customers voted for more casual court looks at the expense of more running inspired athletic shoes.

Sports & Recreation sales declined 3% with our Team sports and Outdoor Cooking businesses being the strongest performance year-over-year. In both cases, the teams have had success by leaning into new brands and ideas such as Blackstone and [indiscernible] and Marucci and DeMarini Bats and Baseball, resulting in market share gains in these 2 categories. The Recreation and Fitness portion of the business were the most challenged during the quarter. We attribute some of this weakness to being up against historic demand in categories such as bikes and fitness equipment. In other areas such as water sports and outdoor furniture, we believe the cooler temps and rainy weather delayed customer purchases and that these businesses should improve as we move through the second quarter.

Outdoor continue to be our weakest performing division with sales down 15%. The hunting category remains challenged as we continue to anniversary strong ammunition sales from last year. It's important to note that while running down to last year, outdoor continues to perform up 29% versus 2019 with Amelon running up roughly a 100%. We did have some bright spots in outdoor with brands such as YETI, which benefited from the strong delivery of new products and seasonal colors. As we parse the results in the first quarter, what has become clearer to customers [ affording ] for both value and newness and innovation.

In terms of value, we've seen customers gravitate towards deals with a focus on promotions and clearance with both of these buckets showing sales increases during the quarter. We also see this drive for value in the performance from our private brands, which outperformed national brands. At the same time, customers have positively responded to new ideas of brands regardless of price. There are multiple places we've seen this, such as BOGG BAGS and [indiscernible], Blackstone Griddles, the Limited Edition in Colors in YETI or in our new shoe brands such as HEYDUDE and Birkenstock.

Our plan going forward through the remainder of the year will be to push even harder on both the value and the newness fronts. Shifting to profitability; first quarter adjusted net income decreased 33% to $103 million or $1.30 per share. This decrease was partially due to a 110 basis point decline in merch margins. The decline in merch margins was similar to what we saw in Q4 was primarily driven by an increase in promotions during the quarter. This lower merch margin helped contribute to our gross margin rate coming in at 33.8% or down 170 basis points versus Q1 of 2022. Michael will give you more color around the other factors that impacted profitability shortly as well as provide more detail regarding our revised outlook for 2023.

Turning to inventory; our quarter ending inventory balance was $1.39 billion, which was a 4.7% increase compared to Q1 2022. In terms of units compared to last year, total units are up 2% but on a per store basis are down 1.4%. The slight increase in total units versus last year is primarily positioned to fund new stores and is also focused into the areas that ran low in stocks last year, such as cleats and Team Sports. The current depth and breadth of our assortment across all of our categories is healthy and fresh, and we believe we are well-positioned for the summer selling season.

Overall, I believe the team has done a good job managing the inventory and receipts over the past 4 years. Our plan as we move forward is to continue to thoughtfully manage our inventory and to make sure it aligns with the trends in the business. Looking ahead to the remainder of the year, we anticipate that the consumer will continue to remain thoughtful in their spending as they navigate the current economic environment. We have a couple of natural high-traffic time periods ahead of us in the near term, such as Father's Day and Back to School, and the results from these events will inform our decision-making as we head into the back half of the year.

We've increased our focus on positioning Academy as the everyday value leader in our space that we can help customers have fun out there at affordable price. Our inventory remains under control and beneath the surface we have a strong inventory position and seasonally appropriate products that all typically peak during the summer months. We believe that this combination of value plus strong in-stock positions us well as we move through Q2. We'll also see us continue to drive improvements in efficiencies in stores and DCs while thoughtfully managing expenses as we navigate through this challenging macroeconomic environment.

Now, I'll turn it over to Michael to walk you through our first quarter financials and updated 2023 guidance. Michael?

[Michael Mullican, executive]

Thanks, Steve. First, let me say it has been an honor to work under Ken's leadership these last 5 years. We have accomplished a lot as a team and we've had a lot of fun doing it. Ken has built a winning culture that will stay with the company for years to come and help the company drive results and achieve our long-range plan. I look forward to continuing to work with him in his new role as Executive Chairman. I am proud to step into the role of President of Academy during such a pivotal time in the company's evolution.

With my new and expanded responsibilities, I look forward to continuing to work with Steve and our talented team as we execute our long-range plan of growing sales and profits through new store openings, omni-channel expansion and increasing the productivity of existing stores and distribution centers. I'm excited to take on a greater operational role and work with the team to execute our key initiatives. Now, let's review our first quarter results. Net sales for the first quarter were $1.38 billion with comparable sales of negative 7.3%. Sales were lower than planned due to fewer transactions and smaller ticket size. Let me be clear, these results did not meet our expectations.

We have taken swift action to minimize the impact of this disappointing quarter. Among other things, we have been able to substantially reduce operating expenses without impacting our long-range plan or our capital allocation strategy. Our gross margin was $467.1 million with a rate of 33.8%, a 170 basis point decrease from the first quarter of last year. As Steve mentioned, the rate decline was primarily driven by lower merchandise margins from greater promotional activity but also higher shrink costs. Total losses from shrink were 76 basis points higher than the first quarter of last year. During the quarter, SG&A expenses were $340.9 million or 24.6% of net sales, an increase of 310 basis points compared to the first quarter of 2022.

The increase was primarily driven by 3 factors: an increase in stock-based compensation, new store expenses and technology investments we are making to support our growth plans. In total, net income was $94 million or 6.8% of net sales, a 340 basis point decrease from the first quarter of 2022, resulting in GAAP diluted earnings per share of $1.19 per share. Adjusted diluted earnings per share were $1.30 per share. While we are not satisfied with these results, it is important to note that our sales and profitability remain well above pre-pandemic levels. We have made significant operational changes over the last few years and believe that we will keep the majority of the gains we have achieved. We are actively investing in areas of our business that will further enhance our long-term profitability.

Turning to the balance sheet; at the end of the quarter, we had $296 million in cash and no outstanding borrowings on our $1 billion credit facility. Academy generated $52 million in net cash from operating activities during the first quarter. We utilized this cash to invest in the business and execute our capital allocation plan by repurchasing 750,000 shares for approximately $50 million. Additionally, we paid out $6.9 million in dividends. In addition, the Board recently approved a dividend of $0.09 per share payable on July 13, 2023, to stockholders of record as of June 15, 2023. One of our primary growth strategies is opening new stores, so I wanted to spend a few minutes updating you on this important initiative.

We are on track to open 13 to 15 new stores in 2023 as part of our plan to open 120 to 140 stores over the next 5 years. We remain confident in our store opening plans based on the overall performance of the 2022 vintage. As a group, they are operating with an ROIC above their hurdle rate, already resulting in positive EBITDA. In the first quarter, we opened one new store in an entirely new market for us, Lafayette, Indiana. After being open for 2 months, the store sales performance ranks among the top of all store openings we have completed in the last several years. A significant part of this new store success is driven by the implementation of several learnings from our 2022 store openings.

These include more localized assortments, better preopening preparations and the extension of post-opening marketing and activities. As we have seen in other new markets, our unique concept has been well-received. We self-fund and customers are drawn to our broad assortment of top national and high-quality private brands at an everyday great value. In the second quarter, we plan to open one new store in Peoria, Illinois. The remainder of the fiscal 2023 new store pings will occur in Q3 and Q4. Now turning to our outlook for the remainder of the year; we are taking a more cautious view due to the current macroeconomic pressures on our customers.

However, we are not standing by and waiting this out. We have taken several actions to help drive the business in this environment. These actions include: first, increasing our focus and strengthening our position as a value-provider in our space. We are leaning into categories that are working by emphasizing key value items at everyday value pricing. Second, managing our inventory levels; third, controlling expenses based on the revised sales expectations. We have already made cuts, and we will continue to reduce expenses to align with our new forecast.

Finally, supporting our growth initiatives; these investments are worthwhile and many are already bearing fruit. We will be well-positioned for growth when the market comes out of this downturn. Based on the results of the first quarter and current business trends, we are revising our fiscal 2023 guidance as follows: net sales of $6.17 billion to $6.36 billion. Comparable sales are expected to range from negative 7.5% to negative 4.5%; gross margin rate between 34% and 34.4%; GAAP income before taxes is expected to range from $675 million to $750 million; GAAP net income between $520 million and $575 million; GAAP diluted earnings of $6.50 per share to $7.20 per share.

Adjusted diluted earnings per share, which excludes certain estimated expenses such as stock compensation, are expected to range from $6.80 per share to $7.50 per share. For modeling purposes, stock-based compensation is expected to be $30 million to $35 million in fiscal 2023. The earnings per share estimates are calculated on a share count of 79.7 million diluted weighted average shares outstanding for the full year and do not include any potential repurchase activity using our remaining $250 million repurchase authorization. Capital expenditures are forecasted to range from $200 million to $250 million. And even in this tough climate, where sales have not met expectations, we still expect to generate $400 million to $450 million of adjusted free cash flow. Fiscal 2023 is a 53-week year, which adds approximately $85 million in sales to the year.

With that, I will turn the call over to Steve for some closing thoughts. Steve?

[Steven Lawrence, executive]

While we have some macroeconomic challenges to manage through, we have a solid plan of action to move the business forward. It's a plan that leans into our position as a healthy, agile, value-based retailer to deliver compelling products at great prices to our customers. I have confidence this team can react and improve our sales while also managing inventory and controlling expenses. As the year progresses, we anticipate sales to improve, driven by the implementation of the following actions: first, introducing new brands and ideas in the back half of the year that will drive consumer excitement; second, increasing traffic through upgraded targeted marketing, utilizing our new customer data platform.

Third, we'll start seeing additional sales contributions from our 2022 stores as well as the addition of new locations we're opening up throughout the remainder of the year; fourth, by continually enhancing our omni-channel functionality and features to improve the customer experience; and finally, by applying the lessons we've learned in Q1 towards driving sales and improving profitability in the remainder of the year. Simultaneously, we will also remain focused on investing in and delivering against our long-range plan. I believe Academy represents one of the best growth opportunities in retail today.

We're positioning a $175 billion total addressable market that over the long term is expected to grow faster than GDP. We have a differentiated customer experience with a proven business model and a strong balance sheet that will allow us to self-fund all of our growth initiatives. As we laid out in our Analyst Day in early April, we plan to build on the momentum from the last few years by continuously driving improvements across all facets of business while executing against our 3 growth strategies.

As a reminder, these are expanding the store base in existing new markets with the opening of 120 to 140 stores over the next 5 years, building a more powerful omni-channel business and driving growth from our existing stores by improving service and productivity, strengthening our merchandising assortment and attracting and engaging customers. In closing, I'd like to thank all of the Academy team members for their dedication and passion in helping deliver an outstanding experience to our customers. Now let's go have fun out there.

Now we will open up the call for your questions.

[Operator]

[Operator Instructions] The first question is coming from Brian Nagel of Oppenheimer.

[Brian Nagel, analyst]

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

[Steven Lawrence, executive]

Yes, this is Steve. I'll jump in and tackle the first question. So when you think back kind of where we've been versus the pandemic, right? We had a big surge 2020, 2021. Last year, we saw as a re-baseline year. This year, we thought we would start to see movement back towards growth. But obviously, we've seen a pullback in early Q1 from the customer. I think it's well-documented out there in terms of some of the issues that the customer is facing out there. So that being said, one of the things I want to make sure that I emphasize first, number one, we're still tracking well ahead of where we were in 2019.

We're up about 28%. So we continue to hold on to most market share gains. And we are picking up market share even in the tough time period. But when you look at kind of how the quarter evolved, it -- progressively February was the best quarter we were actually up slightly in February. March was second best and then business trailed off as we got in April. We saw a couple of headwinds emerge. First, we had certainly some headwinds from some of the surge categories. We talked a lot about the Outdoor business being challenging. That was something that we're still up against in Q1 and a little bit in Q2.

We certainly saw weather be a bit of a factor in some of the seasonal categories we talked about, you think about pools, patio, things like that. That was a little more challenging for us. As we got deeper into the quarter, and we talked about on the call, some of the Florida market, for example, didn't have some of the weather challenges that we saw in part of the central part of our geography. Those categories performed actually very well as they didn't really experience some of the weather challenges. So as we've seen weather open up across the country we've seen some of those categories come back. So that gives us confidence that we're going to see the business start to stabilize.

And as we look forward, we talked about initiatives we have coming this year. We've got new brands coming in the back half of the year. We've got our new stores coming online. Certainly, the vintage from 2022 starts to fit into our comps in the year along with the 12 to 14 additional new stores that we opened up this year. We've got our customer data platform that is kicking off in the late part of Q2, which should impact the back half of the year. And then we're reacting to what we're seeing happen in the business right now and applying that to the future. So while weather and some of the things play in our favor, we're confident as the progression of the year, we think the business is going to improve.

[Michael Mullican, executive]

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

[Brian Nagel, analyst]

And that makes actually a perfect segue to my follow-up question, which is on the margin. So obviously, gross margin is weaker here in Q1. The new guidance though makes no changes to gross margins. So is that the -- is what you just said there, the reason for that, Michael, is there some other -- something else at play?

[Michael Mullican, executive]

Yes, that's part of it. But keep in mind we're starting from a pretty high place, several hundred basis points better than 2019. As you said, our outlook on gross margin hasn't changed. Where we sit today, we're only 20 basis points off our annual guide. The bulk of that miss, again, with some of the seasonal categories that we talked about. The other big part of the miss was in shrink. Shrink was substantially worse than we thought it would be. I think we're certainly going to need some cooperation from law enforcement here at some point. We are in control of our destiny to some degree here. We've implemented a number of tactics, 4 or 5 significant things. I really don't want to speak to those publicly because part of this game is outfoxing the bad guys.

I think we're making good progress there. Some of what we've piloted is working, and so we think we'll get a benefit there in the back half of the year. The other thing that's really in play here, we anticipated a freight benefit in the back half of the year as we move through the year. We believe that, that benefit for freight in the rest of our supply chain, we understated that, and we think there's more to come there in the back half. So promotions, we've got that baked into the guide going forward. We think there's some other savings that we're going to get and I feel pretty good about ending the year in that 34% to 34.4% range that we initially guided to when we started the year.

[Operator]

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

[Katharine McShane, analyst]

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

[Steven Lawrence, executive]

Yes, sure. When you kind of dig down beneath the surface and you look at how the business performed in the first quarter as kind of a tale of 2 cities. If you look at the soft goods side of the business, apparel footwear, I call that flattish, it performed relatively well. Where we dropped was more on the hard goods side of the business, that would be our Outdoor and Sports Rec correct business, down roughly 10%. There were a couple of things that kind of emerged, what work -- valued customer definitely gravitated towards the value of assortment that could be reflected in a couple of different ways.

That could be in our everyday value pricing that we have on our private brands. That could be in the clearance bucket or the promotional bucket of sales that we track. Customers clearly reacted to values. Second was newness and innovation. It's almost -- irregardless of price -- the customer saw something new that was innovative that they wanted, they pay up for it. We saw that. I mentioned some of the bats from DeMarini emerging on the call. You think about YETI where we had some really good seasonal colors or a new launch there called the Yonder, which is a plastic water bottle, customer voted for that or the BOGG BAGS you mentioned. Or the third one was improved in stocks.

We had some categories like cleats, team sports last year that really were challenged us not having enough inventory. So those businesses all work based off of some of the improvements there. What didn't work, big ticket, long replacement cycle goods. So you think about treadmills or kayaks where if you bought a cardio machine over the past couple of years, I went to the market to buy a new one. We talked about the spring/summer seasonal categories being impacted by weather. We think that will start to go away as we get deeper into the summer. And then obviously, the surge categories as we mentioned, we're still up against a little bit of that, particularly in Amelon Firearms.

So as we progress forward, we're going to lean into those things that work. We're going to lean into value and ensure that we solidify our position as a value provider in our space. We'll do that through marketing through our everyday value pricing. We're definitely holding price on those items and categories where we can. And in some cases, we're rolling back prices to make sure we can deliver value and then making sure we get credit for that in marketing. We continue to deliver newness and innovation. And then on the other end of it, making sure we plan those businesses accordingly, those long lead-time replacement cycle businesses, we've got planned down and have that built into our forecast as we move forward.

[Michael Mullican, executive]

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

[Katharine McShane, analyst]

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

[Steven Lawrence, executive]

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

[Michael Mullican, executive]

But we're not taking a victor mentality here. We have a lot of big-ticket categories that are working. I think we're taking meaningful share in outdoor cooking. And when you have a category that you merchandise thoughtfully and you present it well and you offer good value, customers are still -- will still accept it. We've got to take learnings from that category and apply in which we're doing, but there's a lot we can do there to drive the needle in big tickets.

[Kenneth Hicks, executive]

And we also are seeing some categories -- the big tickets that are starting to come back, like paddle marine is -- appears to be leveling off. And as it gets more seasonal, that customer is coming out and buying that product.

[Operator]

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

[Robert Ohmes, analyst]

First, Ken, Steve, Michael, I haven't had a chance to congratulate all 3 of you on your new roles. So I think it's great and congrats on what you guys have done together as a team since the IPO. I have 2 questions. The first question is can we talk about 2Q a little bit, maybe a little more color. I think the -- it sounds like the April comps had to have been worse than minus 7%. So heading into 2Q, should we be -- and given that a lot of the initiatives hit in the back half, should we be thinking that same-store sales in the second quarter could be down more than what you guys saw in the first quarter? And any other thoughts about back half versus 2Q would be helpful. And then I have a follow-up.

[Steven Lawrence, executive]

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

[Michael Mullican, executive]

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

[Robert Ohmes, analyst]

Got you. And then can you maybe give us a little more color on -- you mentioned introduction of new brands, plural -- like anything you can call out here, even categories that we should be thinking about?

[Steven Lawrence, executive]

Yes, we tease that a little bit. We're going to hold off and probably announce that during our next -- our Q2 earnings call. We always try to announce those closer in certainly from a customer-facing perspective, they pick up on the news sometimes and expect it to be in the store immediately. So we'll give you more color on that as we get closer in. But a couple of things we've got coming are primarily apparel and footwear during the back half of the year.

[Robert Ohmes, analyst]

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

[Steven Lawrence, executive]

Exciting though, I will tell you that.

[Robert Ohmes, analyst]

Nike, reopening Macy's, how do you guys think about that?

[Steven Lawrence, executive]

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

[Operator]

The next question is coming from Michael Lasser of UBS.

[Michael Lasser, analyst]

So we can pair Academy's results from 1Q really for the last several quarters. And even if we account for differences in business mix and compared to some of your larger competitors, it would seem like Academy is losing market share. Why is that the case? And if it's different assortment or different customer mix, what can Academy do to address those factors that are driving underperformance?

[Steven Lawrence, executive]

Well, I'll start with kind of the question itself. We actually do track market share across multiple categories. We work with Circana, which is firmly known as NPD, that's where we get a lot of our market share data. But we look at other resources as well. And definitively, we are picking up market share in broad-based across almost every category. So I'll start with -- we're not losing market share. When you look at our mix of business, depending upon who you compare us to, we have a different mix of business, right?

We're about 54% hard goods, 46% soft goods versus some of our competition is much more weighted towards the soft goods side of the business, the apparel footwear piece of the business or the team sports piece of the business. Those certainly have been the healthier pieces of our business as well. So one of the things we believe, though, is having a diversified assortment, having the outdoor customer, having the sports and rec customer, they all complement each other. And that longer term, we're going to win by having a diversified assortment versus doubling down to be overly focused in one or 2 categories.

[Michael Lasser, analyst]

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

[Steven Lawrence, executive]

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

[Michael Mullican, executive]

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

[Operator]

The next question is coming from Christopher Horvers of JPMorgan.

[Christopher Horvers, analyst]

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

[Steven Lawrence, executive]

Well, look, there are -- this is a team that's been through a lot of cycles in retail, and it's time to tighten the belt. [indiscernible] came out of his hole. He saw his shadow, and he told us winter is going to be a little bit longer than we thought. And I think we've got a lot of experience managing where we need to. There's a lot of nice to haves in our business, and we've been able to trim those nice to haves.

And I think as we look forward, we feel pretty good about coming in here a lot lower than we thought from an expense standpoint. Things like pulling back task labor in stores. There's still opportunity to do that, fewer planogram resets -- skinnying up and being more thoughtful around how we do our remodels, we found some opportunities there. You always have things you can do. And we've been able to get there through that, still invest in the business. Again, cash flow is still very strong. But this is a year now. The way it's shaping up, it does nice to haves. You have to cut them out, and that's what we've done.

[Kenneth Hicks, executive]

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

[Christopher Horvers, analyst]

Got it. And then on the advertising side for the back half of the year, like I guess what's turning on? Can you maybe talk about what that -- what exactly that is? I'm assuming are you eliminating circulars and starting to send more direct mails and marking down that way? What's enabling that? Like what turns on and what's different from what you're doing now versus what you anticipate being able to do in the back half?

[Steven Lawrence, executive]

Yes. I'll tell you that -- we pull back a lot. There's not a lot of circulars left out there to cut to reinvest candidly. There's a few, but not many. Really, the big unlock for us is we're putting in place a new customer data platform. In the past, our customer data had lived in multiple databases that didn't speak very well to each other. It wasn't real-time, and it made it very tricky for us to target market to our consumer. So we recognize this as an opportunity for us. We've invested in putting in place that technology that will come online at the tail end of Q2.

And I think you're going to see us much more nimble in terms of how we can retarget customers based off of our browsing behavior, triggered -- better triggered e-mails based off card [indiscernible]. You're going to see us be able to be much more nimble in terms of creating customer profiles and lists, file segmentation. There's a lot of unlocks we get with is that we just candidly didn't have before. A lot of our messaging was pretty broad blasted out there, via e-mail, via broadcast media, and I think you're going to see a lot more targeted based off customer shopping patterns.

[Kenneth Hicks, executive]

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

[Steven Lawrence, executive]

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

[Operator]

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

[Gregory Melich, analyst]

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

[Steven Lawrence, executive]

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

[Michael Mullican, executive]

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

[Gregory Melich, analyst]

Got it. And then second, as a follow-up on SG&A. I know you're taking cost action. I want to make sure I have it right here. SG&A dollars were up 8% in the first quarter. If I look at your guide, it looks like SG&A dollars would be up slightly, but that includes the extra week this year. Is that -- am I backing into that right?

[Michael Mullican, executive]

Yes. From a dollar standpoint, they were higher in the quarter. Advertising was up, new store growth, fueled some of that. The phenomenon that we're seeing is our open rate corporately is lower from a job standpoint. So that's why the dollars were higher in the quarter. Again, we've got a lot of times the pivot in the back half. And from a rate standpoint, we're going to come in on rate for the back half of the year based on the guide. So again, flexing down those variable expenses we've got time to adjust that along with some of the other takeouts that I discussed in the prior question.

[Operator]

The next question is coming from Simeon Gutman of Morgan Stanley.

[Jacquelyn Sussman, analyst]

This is Jackie on for Simeon. I guess just first on the top line, how are each merchandising category holding up versus 2019, especially those more durables categories such as fitness equipment? I guess piggybacking off of that -- just with sales coming in lower this year, does that impact how you guys are thinking about next year kind of inflecting off of this new baseline?

[Steven Lawrence, executive]

So I'll start with, on average, we're up about 28% versus '19. That's pretty much in line with where we were Q4 and pretty much in line with where we were Q3 candidly. Across the business, most of them are sticking pretty -- most of the business is sticking pretty close to that. Apparel is up 27%. Sports and Rec is up a little more than that 36%, Outdoor is up 29%. So on average, they're all kind of covering in around that same benchmark. We talked about on the call, category like ammos actually up over 100% versus '19 so some of the categories are even much higher than that.

There's been a couple of categories a little softer versus '19 -- fishing, maybe not as many people sticking with fishing as a hobby that they picked up during the time period, still tracking closer to '19, it's not below '19, but that would be one place where we've seen a little bit of fall off. As you think about 2024, we need to get through 2023 first before we give any sort of thoughts around 2024.

[Jacquelyn Sussman, analyst]

Understood. And I guess just a quick follow-up. Are you guys seeing any signs of trade down within your good, better and best mix?

[Steven Lawrence, executive]

Yes. We talked about customer gravitating towards value, the places we saw that most impacted was private label or private brands were actually better performing than our national brand business. We assume a little bit of that is trade down. We saw customers gravitating more towards clearance, more towards promotions. We had weeks where we run the same promotion as we did a year ago, and more customers took advantage of this year. So we took that as a flight to value. So certainly seen that. But as I mentioned, we also, on the other end of it, saw customers gravitating to newness and innovation. And so that's really what we're focused on as we move forward is delivering against both of those things, making sure that we've got the value out there the customer wants and make sure we're delivering newness and innovation. What the customer is not voting for is paying more for the same that they had last year.

[Operator]

The next question is coming from Kate Fitzsimons of Wells Fargo.

[Kate Fitzsimons, analyst]

Congratulations, everyone, on the elevations of your role. I guess my question, just on footage growth, right? You guys alluded to 13 to 15 stores this year. You sound very confident in that 120 to 140 stores in the next few years pacing. And I hear that you're pleased with the 2022 vintages. This year is obviously shaking out a little tougher than what you would have hoped. What are the KPIs that you're evaluating or just how are you looking at the path for footage growth looking out to 2024, 2025, 2026, just with the pacing, right? To the extent that this year maybe remains tougher, should we think maybe 13% to 15% again next year? Just with the acceleration implied, I just want to know kind of your philosophy around footage just given what you're seeing in the business today? And then I have one follow-up.

[Steven Lawrence, executive]

Yes. I think the important thing to keep in mind is we plan to fund all of this growth from cash flow from our operations. And the cash flow is still incredibly strong. It's incredibly strong compared to our peers. And the 2022 vintage, I'd say, on average, about 8 months old, it's already accretive to cash flow. And so this is clearly an investment that we should continue to drive. We're very pleased with the progress of the new store program. As we mentioned, it was a test and learn year, and we paced it out specifically for this reason. We wanted to set a few stores up early and learn from them, build the capability.

The next group of stores was really to challenge us with new formats and new layouts and new markets. And this is a year to apply those learnings. You apply them with a few stores to make sure they're working, which we've done. In the initial read on Lafayette, and we'll find that with [indiscernible] here very soon. Lafayette was one of the better store openings we've ever had, which is in a brand-new market for us and so in a very tough environment. So we're very encouraged with it. And again, we're looking at the ROIC, the ramp of the stores. And we think this is the right thing to do. We're very, very bullish on our new store opening program.

[Kate Fitzsimons, analyst]

And when we look at the '22 vintage from a ROIC perspective [indiscernible].

[Steven Lawrence, executive]

Okay. Very helpful. I guess piggybacking off that, Michael, obviously, you alluded to the cash flow several times. From a buyback perspective, you guys bought back stock here in Q1. But I'd say at a lesser pace than what we have seen. I certainly can appreciate that with all the volatility. But can you just speak to your appetite on buybacks go forward just given the reset expectations on the top line this year?

[Michael Mullican, executive]

Yes, again, I'd say our philosophy hasn't changed on that. Our first priority is to maintain a strong balance sheet. We will be cautious in this environment. At the same time, we want to be nimble and flexible. We do have a capital structure that I think can withstand a variety of economic cycles. Again, funding growth is important to the extent that we feel comfortable and have some cash left over, we'll return it to shareholders. We've done that consistently. The first quarter is, in general, it's not where we generate a ton of our cash. And we returned to what we generated and felt comfortable with in the first quarter. We obviously thought stock was a great value where it was, and we think that buybacks will remain an important part of our capital allocation policy going forward.

[Operator]

The next question is coming from Anthony Chukumba of Loop Capital.

[Anthony Chukumba, analyst]

So first question, you talked about the headwinds that you saw in the first quarter. We know that U.S. income tax returns were down -- refunds were down about 10% this year. Do you think that was a headwind at all?

[Steven Lawrence, executive]

Yes, I was going to say, we didn't lean into what all we thought the headwinds -- contribute to those headwinds. But certainly, tax refund is probably one of them, customer -- consumer debts at an all-time high. Credit card balances are pretty high out there. So there's a lot of different things, I think, playing into it. And you got to remember also the threat of the debt ceiling, which they just saw. So certainly, I think those all played in the psyche. It's hard to parse out the weighting of which one impacted it the most, but that was part of it for sure.

[Anthony Chukumba, analyst]

Got it. Got it. Understood. And then just a follow-up and it's kind of a continuation on your last -- on the last question that you received. With your updated guidance, if I take the midpoint of the free cash flow, that's more than 10% of your current market cap. So let me, I guess, ask a question in a different way. I mean does your reduced guidance make you any less likely to buy back stock over the remainder of the year? I guess, yes, that's basically my follow-up.

[Michael Mullican, executive]

Anthony, to your point, the business generates a lot of cash. We're going to execute the strategy to the extent we've got cash to return, we will do that. We're going to make prioritized stability and being nimble. We're going to fuel our investments, which we can do. And after that, if we have something to return, we'll do that. All the dividends, yes. And just one more thing on the stores that I think it's lost in the story. We don't want to do this, but we can run profitable stores in the $11 million range. I don't have any stores in the $11 million range. They're all well above that. So this business even in a challenging environment can generate a lot of cash in your point. I think we've got a demonstrated history of returning it, and we're going to continue to do that.

[Operator]

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

[Daniel Imbro, analyst]

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

[Steven Lawrence, executive]

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

[Michael Mullican, executive]

Yes. I don't think anybody likes the disruptions on the West Coast. But I think vis-a-vis competition, we maintain a substantial competitive advantage when there are disruptions in the West Coast. We don't bring in a lot through the West Coast. Now the entire industry can get impacted, but we do a lot through Port of Galveston on the East Coast, and we may have some indirect impact, but not a direct impact -- as a direct impact as others. One more thing on the inventory, I believe Steve put it in his prepared remarks, on a unit basis per store we're actually down in inventory compared to LY with no significant holes.

[Daniel Imbro, analyst]

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

[Michael Mullican, executive]

Yes. I think we've identified that. We wouldn't put it in the guidance if we didn't identify it, and we'll leave it there. But we're not -- again, we've got a very seasoned team that's been through a number of these cycles and can pivot where necessary. And from a rate perspective, I believe, will come in where we thought we'd start the year on a lower sales outlook, and that's where we'll leave that one for today.

[Operator]

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

[Seth Basham, analyst]

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

[Steven Lawrence, executive]

So we don't break it down to that granular level. A couple of things that impacted it. We mentioned, if you look at the promotions as a bucket of sales, they were an increase for the quarter. Clearance sales were up a little bit too. Both of those mix is down from a margin perspective. So that definitely impacted us. Freight doesn't find its way into our merch margin. That's below the line there. So -- but it certainly is in our gross profit as we calculate it.

[Seth Basham, analyst]

Okay. To be clear, promos were larger in terms of the headwind to merch margins than [ shrink list ]?

[Michael Mullican, executive]

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

[Steven Lawrence, executive]

The other thing you've got to remember also is that -- we're primarily in everyday value-based retailer. Promotions and clearance make up, on average, less than 25% of our business so 75% of its stable baseline of everyday value price.

[Operator]

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

[Steven Lawrence, executive]

I'll start, and then I'll pass it over to Ken. I just wanted to reiterate, we're certainly not satisfied with the results. The start of the year has been a little more challenging than we anticipated, but we're on the balls of our feet. We're reacting to what's going on. So we're laser-focused on navigating the short term and making sure that we deliver against all of our goals in this guidance that we put out today for the remainder of the year.

And then simultaneously, we're not going to take our eye off the ball in terms of the long term. We've got a long-range strategy that we believe in. We've got a model that -- an operating model that the customers like that we think is scalable and transportable and our goal is to bring Academy to as many towns as we can. So we're going to stay focused on the long term at the same time. With that, I want to give Ken the chance to do a couple of closing remarks on this call.

[Kenneth Hicks, executive]

Thanks, Steve. And it's a tough quarter to pass the baton on. But that said this is a very experienced strong team with a clear plan and a solid foundation to move forward. Our strategy is to grow the company primarily through the growth of new stores, which -- most of which will be in new markets and new areas that will provide volume for us and will not cannibalize our existing markets and will provide the opportunity for us to increase the breadth of Academy's purview. We also see our omni-channel business strengthening with investments in it to make it easier to shop and better to target our consumers and working to make sure that the existing stores continue to contribute to the foundation and strength of the company.

I believe that the team we have here is up to the challenge. I look forward to working with them in our new role. I want to thank all of the Academy team members for all they've done to put us in the position where we are and the great job that they're doing and taking care of our customers. And also thank our investors for having confidence in us as we go forward and pursue our mission and our vision of being the best sports and outdoors retailer in the country. But I want to thank everybody and wish you all well.

[Steven Lawrence, executive]

Thank you, guys.

[Operator]

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