Academy Sports & Outdoors, Inc. Q3 2026 earnings call

Good morning, everyone, and thank you for joining the Academy Sports & Outdoors Third Quarter 2025 Financial Results Call. Participating on today's call are Steve Lawrence, Chief Executive Officer, and Carl Ford, Chief Financial Officer. As a reminder, today's earnings release and the comments made by management during this call include 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 most recent 10-K and 10-Q 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.

This morning, we will review our financial results for the third quarter of fiscal 2025, provide an update on strategic initiatives, discuss outlook for the year, and share our updated guidance for the full year fiscal 2025. After we conclude prepared remarks, there will be time for questions. With that, I'll turn the call over to CEO Steve Lawrence. Steve.

Thanks, Dan, and good morning to everyone on the call. The third quarter played out as we expected, with consumers shopping episodically and seeking out values they look to stretch their buying power in the face of rising prices across the retail landscape. As we noted in our last call, we saw customers show up and drive positive comps during the back-to-school selling period, which for Academy stretches from mid-July to mid-August. Once we got past the kickoff to tailgating and hunting season in early September, customers pulled back on spending during the lulls in the calendar and tended to aggregate their purchases during the promotional events and natural holidays, such as our seasonal clearance event in September or in early October when we ran our Academy Deal Days over Prime Week and Columbus Day weekend.

We did see comps inflect back to positive during the tail end of the quarter when we started getting cooler temperatures in our legacy markets, which accelerated sales in our cold weather categories. This momentum carried into early November and got us off to a good start for the fourth quarter. We saw softness in the middle of the month as warmer temperatures resumed and sales in seasonal apparel slowed a little. As we expected, customers came out in force during Thanksgiving week looking for deals, and our team was well prepared with strong promotional pricing that was fueled by the inventory we pulled forward at pre-accelerated tariff pricing in Q2 and Q3. All of this resulted in our largest Black Friday weekend ever, which was on top of a record Black Friday event from last year.

That being said, we still have a lot of business ahead of us over the next four weeks. Shifting back to third quarter results, it is clear that our strategies are not only working but continue to accelerate as they take hold. A couple of proof points to support this are: first, we're in our fourth year of new store openings, and we now have 26 new stores from the 2022 through 2024 vintages in our comp base, and by this time next year, we'll have an additional 24. These stores in aggregate comp low single digits in Q1, mid-single digits in Q2, and ran a high single digit comp in Q3. Second, the foundational work we've done around improving our omnichannel experience continues to pay dividends, with growth in this channel accelerating from +10% in Q1 to 18% in Q2 to 22% in Q3.

Lastly, investments in delivering more on-trend product from both the Jordan Brand and Nike help drive high-single-digit growth in the combined brands and is helping bring in new, higher-income customers into Academy. Turning to our third quarter results, as you saw from our earnings release earlier today, sales came in at $1.38 billion, which was up 3% to last year and translated into a negative 0.9% comp. We're encouraged by the strong reaction from our customers during the back-to-school season and for our holiday assortment at the tail end of the quarter; we saw cooler temperatures across our geography. We were also pleased by the progress we made against improving average unit retails to help offset the increased tariff expense we are seeing this year. During the quarter, average unit retails steadily improved and were up mid- to high-single digits versus last year.

This improvement also helped increase our gross margin rate to 35.7%, or up 170 basis points to last year. We've been walking a bit of a tightrope this year as we work to steadily raise AURs while also maintaining our value leadership in our space, and I can assure you that we're continuously monitoring pricing relative to key competitors and are highly confident that we have the right pricing, architecture, and promotional plan in place to deliver a strong holiday season. Looking at category performance across the business, sports and rec was our strongest division, posting a 6% increase driven by solid growth in our baseball, outdoor cooking, fitness equipment, and bicycle businesses. Apparel sales grew 3%, driven by strength in key national brands such as Nike, Jordan, Carhartt, Ariat, and Burlebo, along with solid growth in our private brands such as Magellan and Freely.

Our footwear business grew 2%, fueled by performance running brands such as Nike, Brooks, ASICS, and New Balance, all of which drove strong comps. Sales in our outdoor business also grew 2% for the quarter, with strength in fishing, hunting gear, and firearms. We did see some softness in our ammo business as we started to lap the election run-up from last year. Once we got past the election time period in early November, while still running negative, we've seen the ammo sales trend improve. As we continue to grow top-line sales, we also remain focused on growing our market share. As you know, most of the new stores we're opening are in new or underserved markets, and virtually every dollar of sales from these new stores translates into share gains for us.

In many cases, these gains come from smaller independents who lack our scale and pricing power, or in some cases, from larger players that do not offer the value and diversity of assortment we carry. With a business as complex as ours, we have to track our relative performance across several different data sources, and similar to last quarter, all the metrics we're seeing indicate we continue to grow market share in the third quarter. The first place we focus in on is traffic data, which we get through Placer.ai. As prices continue to rise across retail and discretionary budgets get squeezed, we continue to see strong growth in foot traffic and share gains from customers in the top two income quintiles, which are households making more than $100,000 a year.

These top quintiles now represent roughly 40% of our sales, and during the quarter, we saw traffic from these cohorts grow in the high single digits. We're very happy to see that we continue to drive strong market share growth with this consumer segment, even as we started lapping the double-digit growth we experienced last year in third quarter. At the same time, we continue to hold share in the middle-income quintile, which is households making $50,000 to $100,000 a year, which represents roughly 30% of our customers. And finally, we continue to see traffic erosion in the lower-income cohorts that make less than $50,000 a year, but the pace of these declines was less than what we saw in the first half of the year.

As this trend has played out over the past year, we have, in effect, started to somewhat de-risk our customer base by giving us less exposure to lower-income consumers that are under the most amount of economic pressure. Another key data source for us is Circana, which provides market share data on roughly 60% to 70% of the categories we carry. Similar to last quarter, we were pleased to see meaningful share gains across all of our key businesses, such as apparel, footwear, sporting goods, outdoor cooking, fishing, and camping. Finally, we use government background checks for firearms purchases, or NICS checks data, as a proxy for firearms market share. Once again, we saw continued solid growth on this front, despite the softness in the ammo that I asserted earlier, with firearms share growing for over 18 consecutive months.

As we move forward into Q4, we expect these trends to continue as customers discover the value, convenience, and diversity of our assortment. We attribute a lot of the momentum we're building in the business to the solid progress we've continued to make against our long-term objectives and goals. I will now cover a couple of highlights of this from Q3. First, opening new stores remains our number one growth strategy, and during the quarter, the team successfully opened up 11 new stores. Unlike the first half of the year, most of these new locations are in our core geography, where we have high brand awareness and affinity, and are positioned in mid-sized markets with an underserved constituency. Some examples of stores we've opened up during the quarter are Palestine, Texas, Batesville, Mississippi, and Rome, Georgia.

While these towns are not household names for many of you, the customer profile in these markets closely aligns with our target consumer, and each of these stores, along with the other eight we opened up in the quarter, have been knocking it out of the park since opening and are running significantly ahead of plan. The success of these stores highlights the opportunity we have to open stores in our legacy and existing markets that are experiencing high population migration and growth, in addition to the new states and markets where we currently don't have a presence. At this point in time, we have pretty good visibility into our 2026 pipeline of stores.

We're excited to announce that we plan to open up an additional 20-25 stores next year, with a focus on opening roughly 80% of the new stores in legacy and existing markets and 20% in newer markets. As in the past, we tend to open in new markets in the first part of the year, and legacy and existing are more back half-weighted. Our second initiative is to grow our dot-com business at an accelerated pace. We continue to make progress against this goal in Q3. We grew this channel 22% for the quarter, and penetration to total sales grew by over 160 basis points to 10.4%. As we mentioned on our previous calls, we believe that our new store growth is one of the things that helps fuel our dot-com business by acting as local fulfillment hubs for customers who want the convenience of a BOPIS experience.

Thanks, Steve. Net sales for the third quarter were approximately $1.4 billion, up 3%, with a comp decrease of 0.9%. As Steve noted, our strategic initiatives are working. New store sales comp continues to grow. Our e-commerce channel had a positive comp of approximately 22%, which is our third quarter of consecutive double-digit comp. Nike and Jordan Brand are resonating, and our technology investments like RFID are bearing fruit. Breaking down the comp, transactions were down 4.1% while ticket was up 3.3%. Sales were just below the midpoint of our fall guidance during the quarter as we navigated a warm October and a challenging consumer environment. And as Steve noted, the trends through November and early December are tracking in line with expectations as consumers seek out value. The strategy is working, and the underlying business is performing well.

If you look at the two-year stack on a comp sales basis, we have improved 370 basis points from Q1 to Q3, which included lapping two Texas teams in the World Series. Gross margin came in at 35.7%, up 170 basis points to last year. The expansion was driven by 130 basis points of merchandise margin inclusive of tariffs and a 30 basis point improvement in freight as we had a reduction in spend due to lapping port strike issues last year that did not recur this year. Additionally, we saw a 20 basis point improvement in shrink as our inventory management and investments in RFID began to take hold. SG&A came in at 28.4% of sales for the third quarter, an increase of approximately $28 million, or 120 basis points.

The increase was driven by our initiatives totaling 160 basis points, comprised of 150 basis points of new store growth and 10 basis points of technology investments. All of the SG&A deleverage relates to our growth initiatives. If you strip out the costs attributable to those initiatives, all other costs would have leveraged by 40 basis points. The acceleration in new store growth from 2022 to 2025 has had an outsized impact on SG&A growth, but as we move into 2026, the number of new stores will be similar to 2025. Looking ahead to the fourth quarter, we expect SG&A to be flat to slightly down as we lap accelerated store openings from the prior year. If you recall, we opened five stores in Q4 2024, and we have opened five stores in Q4 2025.

Operating income grew 9.7% to approximately $100 million, and diluted earnings per share grew over 14%, coming in at $1.05, and adjusted earnings per share grew over 16% to $1.14. Our inventory has continued to improve as we move through the year, and on a per-store basis, units were down 0.3% to last year. This compares to up 4.6% in Q2. We have also seen good sell-through in the product we pulled forward earlier in the year, and we feel good about the composition of our inventory as we finish out holiday and the fourth quarter. We ended the quarter with approximately $290 million in cash and maintained strong liquidity with an undrawn $1 billion revolver. Our 8% increase in stores since Q3 of last year is completely funded from cash flow from operations.

During the third quarter, free cash flow was negative $9 million as a result of payments attributable to tariffs. In the first two quarters, we pulled forward inventory to minimize duties, and those payables came due in Q3. I'm extremely proud of the team and the way they managed through this unprecedented environment. Turning to capital allocation, we remain committed to balanced and disciplined deployment. During the third quarter, we paid approximately $8.7 million in dividends and invested approximately $54 million in strategic initiatives, including new store openings and omnichannel infrastructure. We did not repurchase any of our shares during the quarter, instead choosing to allocate capital to manage inventory. These decisions have allowed us to appropriately manage our inventory position and risk during this period of heightened uncertainty. Our capital allocation philosophy has not changed.

We have over $530 million remaining on our current repurchase authorization and plan to begin repurchases again in the fourth quarter. Moving to guidance, based on the results through the third quarter and the expectations for the remainder of fiscal 2025, we are narrowing both the low end of our comp sales guidance from negative 3% to negative 2% and the high end from plus 1% to flat, with the comp range for the year now being between negative 2% and flat. Additionally, we are raising the low end of our gross margin guidance from 34.0% to 34.3%, with a new range of 34.3% to 34.5%. To close, our strategic initiatives are working and continue to accelerate. New stores are now comping high single digits. E-commerce grew double digits for the third quarter in a row.

Jordan and Nike grew high single digits and have shown incremental growth each quarter since their launch and expansion. We continue to see consumers in the upper income cohorts trade into Academy as they seek out value. I'm extremely optimistic about the future of Academy as we continue to grow. I'll now turn the call over to the operator for questions.