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ASO Academy Sports and Outdoors

Participants
Matt Hodges Vice President, Investor Relations
Ken Hicks Chairman, President and Chief Executive Officer
Michael Mullican Executive Vice President and Chief Financial Officer
Steve Lawrence Executive Vice President and Chief Merchandising Officer
Michael Lasser UBS
Kate Fitzsimons Wells Fargo
Greg Melich Evercore ISI
Robert Ohmes Bank of America
Daniel Imbro Stephens Inc.
Christopher Horvers JP Morgan
Lavesh Hemnani Credit Suisse
Daniel Adam Loop Capital Markets
John Heinbockel Guggenheim
John Zolidis Quo Vadis Capital
Call transcript
Operator

Good morning, ladies and gentlemen and welcome to the Academy Sports and Outdoors Second Quarter of Fiscal Year 2021 Earnings Conference Call. At this time, this call is being recorded and all participants are in a listen-only mode. [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

Thanks, operator. Good morning, everyone and thank you for joining the Academy Sports and Outdoors second quarter 2021 results call today. Participating on the call are Ken Hicks, Chairman, President and CEO; Michael Mullican, Executive Vice President and CFO; and Steve Lawrence, Executive Vice President and Chief Merchandising Officer.

As a reminder, statements in today’s earnings release and the comments made by management during this call maybe considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our filings with the SEC. The company undertakes no obligation to revise any forward-looking statements. Today’s remarks refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in today’s earnings release, which is provided on our Investor Relations website investors.academy.com. I will now turn the call over to Ken Hicks, CEO.

Ken Hicks

Thanks, Matt. Good morning, everyone.

Let me start by saying that our thoughts and prayers go out to everyone impacted by hurricane Ida. I'm very proud to say that thanks to the tremendous efforts of our stores, operations and supply chain team, that all of our stores in the impacted area are now open.

We are assisting effective team members and their families get the help they need to recover as quickly as possible, and also supporting our customers and our communities. We're working to get all of our stores in the impacted area fully stocked and staff so that they can continue to support and serve their local community and customers.

Now shifting to our second quarter results. Last quarter, I said we were focused on winning the summer season, especially the major holidays. I'm very pleased to share that we achieved the highest sales weeks in the company's history from Memorial Day, Father's Day and the 4th of July. This was primarily driven by our customers coming back more often, spending more and shopping more areas of the store. The success of these events helped drive record second quarter sales of $1.8 billion, comparable sales of 11.4% and sales growth of 44.8% when compared to the second quarter of 2019. Academy has now posted eight consecutive quarters of positive comparable sales and operating profit growth dating back to the third quarter of 2019.

We also achieve record gross margin of $642.5 million driven by continued favorable product mix, less promotional activity, and fewer markdowns.

Our gross margin growth more than set higher product and shipping costs increases and we're still providing great value to our customers.

In terms of labor costs, we've made market adjustments as needed to reward and retain employees, but have also implemented changes using our labor management tools to reduce unproductive store activities, letting team members focus on serving the customer. Overall, we ended the quarter with net earnings of $190.5 million, the highest quarterly earnings in the company's history.

Our inventory position at the end of the quarter was up 24% compared to last year. There's been a lot of discussion about inventory availability and supply chain constraints. We've been working diligently with all of our vendor partners to ensure merchandise flow and allocations.

Given our strong relationship with suppliers, such as Nike, Adidas and Under Armour, we are in a position of efficient supply right now, and while there will be challenges, believe we have a good line of sight on what to expect over the next few months. The team is doing an excellent job navigating this dynamic environment, and we're excited about back-to-school and sport and the fall and holiday season.

Our consistent strong financial performance over the last two years demonstrates that the operational changes we implemented prior to the pandemic and the continued refinements being made to grow top line sales, improve margin and profit and enhanced customer satisfaction are working. Along with our well-performing operating model, we are leader in the sports and outdoors category at a time when more consumer spending continues to shift to the estimated $100 billion sports and outdoors category. People are making lasting lifestyle changes focused on health and wellness, sharing outdoor experiences and nesting at home in their backyard oasis.

In addition, as working from home has become more prominent, customers are also shopping for more casual work attire. We believe all these trends will continue for the foreseeable future and that our broad assortment of quality and value products positions us as an excellent option for consumers to meet all of their needs.

Given the strength of our balance sheet, our consistent financial performance and the confidence in our future, I'm excited to announce that Academy's Board of Directors has authorized a $500 million share repurchase program.

We are establishing a disciplined capital allocation strategy built on prioritizing the financial security of the company, reinvesting in the business for growth and returning capital to shareholders.

Lastly, based on the strong Q2 sales, we're increasing our full year 2021 comparable sales and EPS guidance. Once again, being mindful of numerous ever-changing external factors. I will now turn the call over to Michael for review of the financials. Michael?

Michael Mullican

Thanks, Ken, and good morning, everyone.

Our second quarter results set company records across key financial metrics, including revenue, gross margin, pretax income and net earnings. I will start by reviewing our record second quarter results, then discuss our updated 2021 outlook, which we are raising based on the continued strength of our business and healthy market trends. Net sales were $1.8 billion with comparable sales of 11.4% on top of last year was 27% comp. When compared to Q2, 2019, sales increased 44.8%.

As Ken mentioned, it is our eighth consecutive quarter of positive comparable sales of which the last five have been double-digit increases. The growth was broad-based and it's the third consecutive quarter that all four merchandise divisions have had positive comparable sales growth. The growth was driven by an increase in transactions, average unit retails and ticket size.

Our differentiated value based assortment and excellent service is resonating with our customers in a time where everyone is looking to have more fun.

We are pleased with the progress that our e-commerce business. Sales were down slightly minus 0.9% for the quarter.

However, when compared to the second quarter of 2019, sales increased 207%. The sales penetration rate in Q2, 2020 was 8.4% of sales, more than double the penetration rate in Q2, 2019. Buy online, pickup in store sales exceeded 50% of e-commerce sales and continues to be a very effective and profitable way for us to transact with our customers. The investments we made in omnichannel such as the July launch of our mobile app, more relevant product recommendations, enhanced ship the store capabilities and new search and checkout functionality will drive continued growth.

In fact, Academy.com sales were positive for the last seven weeks of the quarter, so the sales trajectory is encouraging. Merchandise margins were once again very strong. Similar to the first quarter margins benefited from a shift towards a normalized product sales mix, higher average unit retails and fewer markdowns. The gross margin rate expanded by 500 basis points to 35.9%, leading to a record gross margin dollar performance of $643.5 million, a 29% increase over Q2, 2020 and a 67% increase over Q2, 2019 SG&A expenses were $388 million or 21.7% of sales, which was 220 basis points higher than Q2 2020, but 360 basis points lower than Q2, 2019. Last year, due to the onset of the pandemic, we reduced certain operating expenses such as advertising and payroll compared to a more normalized run rate this quarter. This year, we also recorded one-time stock-compensation expenses associated with some accelerated share vesting.

Excluding the non-recurring expenses, SG&A expenses would have been 19.2% of sales. The record sales and margin results led a pretax income of $240.9 million, a 42.8% increase compared to $168.7 million last year. After applying the second quarter tax rate of 21%, we finished the quarter with record net income of $190.5 million. Q2 diluted earnings per share were $1.99 per share compared to $2.25 per share in Q2, 2020. The decrease is due to the number of shares outstanding compared to the prior quarter and a lower tax rate as the company was not subject to federal income tax prior to the October, 2020 IPO. Pro forma adjusted net income, which excludes the impact of certain extraordinary items, increased 67.1% to $224.6 million compared to $134.4 million in Q2, 2020. Pro forma diluted earnings per share were $2.34 compared to $1.81 per share last year.

Looking at the balance sheet.

We are in a strong financial position with $554 million in cash at the end of the quarter. We remain undrawn on our ABL facility with over $850 million of borrowing capacity.

In addition, after reducing our term loan by $99 million this quarter and lowering our leverage ratio, our debt was upgraded by Moody's and S&P. The ending inventory balance was $1.1 billion. This is 24% higher than Q2, 2020, 3% higher than at the end of last quarter, and 7% less than Q2, 2019.

During Q2, the company generated $170 million in adjusted free cash flow.

Lastly, capital expenditures are expected to be approximately $90 million in fiscal 2021 as we have accelerated certain growth initiatives. At the beginning of the fiscal year, we identified four main sales driving opportunities. Those opportunities were capitalizing on the shopping velocity of new and existing customers, replenishing and growing categories where inventory was constrained throughout most of 2020, the growth of several product categories that were challenged last year, but would benefit from the reopening of the economy, and improving our management have seasonal categories where demand exceeded supply in 2020.

Here's our midyear report card.

First, the number of existing customers who made a purchase in a new category over the last 12 months, and then purchase that category again, continues to increase.

Second, ending inventory constraints categories is improved.

For example, we are back in stock and categories like bikes and fitness equipment.

Third, compare to the first half of 2020, team sports, apparel and footwear have exceeded the company's comp sales growth rate. Fourth, sales in seasonal categories like water sports and outdoor furniture where we didn't have enough supply last year have also exceeded the company second quarter comp.

We are growing the business by having the right products to stock at the right price at the right time, by driving deeper engagement with existing customers and gaining market share.

As a result, our stores are becoming more productive and profitable.

Over the trailing 12 months, we have increased our average sales per store and sales per square foot by 20%. EBIT for the same period grew by 125%, $3.7 million per store compared to $1.2 million. And when compared to 2019, sales per store have increased 31% and EBIT per store has grown 320%. On a trailing 12-month basis, a 100% of our stores are profitable, and it created earnings.

Now to our updated outlook for fiscal 2021. Based on Q2 results, recent trends and the visibility we currently have into Q3 and Q4, we are raising our comparable sales forecast from up 6% to 9% to an increase of 14% to 70% for the full year. On a two-year basis, this would represent comp growth of 30% to 33%. GAAP diluted earnings per share are now forecasted to range from $5.45 per year to $5.80 per share based on 96.5 million diluted weighted average shares outstanding for the full year. This EPS range does not include the impact of any potential share repurchases. This guidance accounts for various market scenarios and profitable outcomes for the remainder of the year, varying from business as it is today to a challenging environment with more supply chain constraints, or a much more promotional and competitive marketplace. With that, I will now turn the call over to Steve for more details around merchandising and operations. Steve?

Steve Lawrence

Thanks, Michael.

Now, I'd like to give you a little more color around our second quarter performance.

As we already mentioned, our growth trend continued and we delivered an 11.4% comp versus 2020, which was up 44.8% when you compare it against 2019. We're pleased to see the momentum in the business carry into Q2 with all four divisions posting increases, which was significant since we're up against our largest comp last year to plus 27%.

Looking at the results by division. Apparel and footwear were once again our two strongest divisions during the quarter. Apparel sales were up 19% versus 2020 and 37% when compared to 2019. Footwear ran a 15 comp was up 27% when compared against 2019. One common theme across both of these divisions was the strength we saw in our youth apparel and footwear businesses. Both of these categories outperformed and I believe this demonstrates the continued strengthening of our position with young families, particularly in our newer markets.

With the more normalized back-to-school this year, youth businesses should continue to be a growth driver for us into Q3 and beyond. I'd also note that our businesses with key national brands, such as Nike, Adidas, Under Armour, Columbia and the North Face, all had strong performance, which would attribute to improving inventory positions, better content and more controlled distribution in the marketplace. The partnerships with our key national brands are only getting stronger, which is helping us stay in stock while also delivering new, innovative offerings that our customers love. We're also excited that our private brand business outperformed the total company comp. We saw continued momentum driven by our two new rollouts for 2021 from Magellan Outdoors Pro and Freely, both of which continue to outpace our original plans.

We expect private brands to continue to be sales drivers for us the back half of the year fueled by the rollout of women's freely and plus sizes along with the launch of our first collaboration of Magellan Outdoors who was partner with Whataburger to deliver a fun, co-branded limited edition capsule.

As we expected our licensed sports business trended up as enthusiasm for live sporting events started to increase.

We expect this business only we get stronger as we head into the fall college and pro football seasons.

Our sports and rec division also posted a double-digit comp at plus 14% versus 2020 and was up 50% versus 2019. We saw continued strength in our team sports business fueled by the return of youth sports being played across our footprint. We had solid growth in the key spring, summer sports and baseball and soccer and football started kicking in at the tail end of the quarter. It is also good to see we sustain momentum in many of the categories, such as upper cooking, exercise equipment and water sports, which ran positive comps, despite being up against historic sales increases the volume levels from last year's COVID shutdown. In our outdoor division, we drove a low single digit comp versus 2020, and we're up 59% versus 2019. The camping coolers and shooting sports categories all had strong performance during the quarter. The one soft spot was the finishing business. We try to decrease versus a large surge we saw last year in the second quarter, but is running up strong double-digit increase versus 2019.

On the margin front, we achieved the 35.9% gross profit rate in the quarter, which is up 500 basis points higher than last year. Key factors that are driving our merchandise margin growth are: first of all, the work we've done around refining our allocation strategy coupled with more targeted localization effort has improved overall inventory productivity is driving higher AURs through better regular price knowing.

Second, we continue to see a less promotional marketplace. This has allowed us to scale back discounts during high traffic time periods.

Third, the strong sell through at regular price when coupled with our markdown optimization strategy has helped reduce the amount of goods we're taking the clearance along with driving higher AURs and better margins on the clearance we do have.

Turning the page to inventory, probably the biggest challenge facing us and the industry are the numerous disruptions to the supply chain. Despite all these challenges, our inventory is improving in terms of overall level and content. We ended the quarter with our inventory is up 24% to last year versus starting the quarter at plus 7% last year.

While we're still not at optimal levels across all areas, we're fully back in stock, and many of the categories that have seen accelerated demand, such as fitness, fishing, bikes, apparel, and footwear. Other categories such as ammunition are not a hundred percent where we'd like them to be.

We have enough supply to start building back our inventory levels in stores.

Looking forward, we believe we have the strategies and pipeline of inventory coupled with strong relationships with our key partners to keep receipts flowing and driving sales growth.

As we look to the back half of the year, several factors lead us to believe that we'll carry that momentum forward and continue to see improvements in both sales and margin.

First, consumer demand for the sports and outdoor merchandise we carry strong and we expect this to continue for the foreseeable future.

Second, the.com business is accelerating and we expect it to continue to be a tailwind for us on a long-term basis.

Third, over the last 18 months, we've demonstrated that we can overcome external challenges and build our overall in the trade levels and in stocks, which should help held the business kind of the back half of this year. Fourth, we're improving the overall effectiveness of our marketing spend through more targeted communications, which improving conversion rates and driving sales. Fifth, several of our key brands and time their distribution, which continue to follow more product, more customers into our stores. And finally, we believe that all the strategic work we've done over the past couple of years to improve allocations, better localization efforts and improve execution, their DCs and the stores should drive sales will also help offset the cost pressures that result the supply chain challenges that the industry is facing. Thanks for your time today. And I'd like to turn the call back over to Ken.

Ken Hicks

Thanks, Steve.

The third quarter is off to a very strong start, driven by a robust back-to-school and sports season, as we are prepared and in-stock on the most popular items, including backpacks, use apparel, footwear, and team sports equipment.

With the fall sports season, kicking off, our licensed apparel business is also experiencing a very good start to the quarter. Academy is entering a growth phase and the team has focused on maintaining this positive momentum, while retaining the gains achieved over the last year. Market and consumer trends remain strong and we are in a favorable position to capitalize on a tremendous opportunity.

Our goal remains the same to be the best sports and outdoors retailer in the country.

We will do this by executing our priorities, which are building a stronger our omnichannel business, improving our in-store and online shopping experience, continuing our power merchandising efforts, increasing our targeted marketing, strengthening our supply chain and preparing for future store growth. Thank you.

We will now open up the call for questions.

Operator

The company will now open the call up for your questions. [Operator Instructions] And our first question is from Michael Lasser with UBS. Please proceed with your question.

Michael Lasser

Good morning. Thanks a lot for taking my question.

Your gross margin is on pace to be in the mid-30% range this year, that compares to 29.6% prior to the onset of the pandemic. Market seems to be struggling with, what is the right ongoing run rate for your gross margin? How do you respond to that?

Michael Mullican

Yeah. Michael, we've been gradually expanding our margins well before the pandemic began.

As you know we've been working on a lot of initiatives to do that.

If you think about the expansion, I'd say, a large part of it has been because we've been able to take AURs up smartly. Again, as we think about our products -- we we've talked a lot about products that were accommodation items that we had priced too low categories, like bicycles where we were the lowest price in the market, but we were providing service that was stronger than our peers. That part of it is it should be pretty sticky. There will be probably some give back as more promotions enter the environment. That being said, we still think that the mix hasn't normalized.

So there should be, I would say 50, 60 basis points of improvement still to come as the mix returns back to normal. From a clearance standpoint, we don't expect to go back to the clearance levels that we had in the past. Freight has been a headwind, as you know, that's why we've been tackling the supply chain initiatives help offset that in the future.

I think the days of us going back below 32, 32.5 those are well behind us.

So, somewhere between that 32.5 and 35.5 we're at today is where we would expect to be a long-term.

Michael Lasser

It's very helpful. My follow-up question is you're sitting on well over $0.5 billion in cash in your balance sheet, you just authorized a very large share purchase program.

You're setting the stage to deploy capital to open new stores in the coming quarters. How are you prioritizing this potential deployment of cash flow to create value your stock trades at a very low multiple on the earnings growth that -- or the earnings guidance that you gave today? You just need to have a lot of opportunities to create value for shareholders.

Ken Hicks

Michael, I agree with that and our priorities remain the same first to ensure the financial stability of the company, making sure that we have the proper amount of cash to run the business.

Second is to pursue our substantial growth opportunities, starting with new stores, continuing our efforts in omnichannel, continuing to improve our operations with things like our -- the work we're beginning in our supply chain, continuing the efforts that we've got going on in our power merchandising with better systems and processes there, which have helped our margins. And we will continue to provide and ensure that we have adequate capital to support the significant growth that we have and we'll continue to have in stores omnichannel and our operations. And then the third priority is making sure that we reward and recognize our stakeholders. The step we took today, I think, is a big nod to that. And we will continue to be good managers of the capital and provide for those three key are priorities.

Michael Lasser

Thank you very much and good luck.

Ken Hicks

Thank you, Michael.

Michael Mullican

Thanks, Michael.

Operator

And our next question is from Kate Fitzsimons with Wells Fargo. Please proceed with your question.

Kate Fitzsimons

Yes. Hi. Thanks very much for the question and congrats on the strong results.

Ken Hicks

Thank you, Kate.

Kate Fitzsimons

Michael, just one, what's the one point of clarification on the EPS outlook of $5.45 to $4.80. I presume this is GAAP.

Your year-to-date earnings are running about $0.40 above on a pro forma basis.

So, we think about the updated guidance as about $5.85 to $6.20 on a pro forma basis. I'm just trying to rationalize the pro forma with the GAAP outlook. Thank you.

Michael Mullican

Good question. The guidance or update we provided is GAAP EPS.

Kate Fitzsimons

Okay.

Michael Mullican

So, on pro forma basis, yes, you'd want to -- you'd to add the $0.40.

Kate Fitzsimons

Great. Great. Thanks for the clarification. Ken, I guess on a higher level, your business has seen really remarkable consistency versus Q1 relative to 2019 levels. I guess just when you think about the category in general and the durability on the strength of the category, is there a view that we can continue to comp the comp when we look to 2022 and beyond? I think there is some fear that you're going to see that you're seeing a real pullforward right now in demand.

So, just curious higher level, how you're thinking about the ongoing durability of the category, particularly maybe as some of these lower tickets categories start to normalize. Thank you.

Ken Hicks

Yeah. We feel very confident in the long-term durability of the business. We see people continue to come back with the things that they started both before and during the pandemic.

We are at a much higher level. We've comped the comps and headed to comps the comps, comps. And we're going to keep driving the business forward.

As we stated in our script that the third quarter is off to a good start. And we're pleased with that.

We have some pretty big hurdles ahead of us, but the customer continues to accommodate. At some point people have to quit asking, is this going to continue because it continues. And I think that that's important to understand that the business that we're in and what we're doing is, is really got some long legs and we've got expectations, great expectations for the future.

Michael Mullican

Sure. Yeah. Kate, I would just tag onto that a little bit.

We have absolutely, as an organization, leveled up operationally. And the initiatives that we put in place, they made a difference before the pandemic. They made a difference during the pandemic and now we're anniversary it. And markets, frankly, that have been open largely for more than a year, consumer demand is still very, very strong. And in the world we read about this all the time, where people are looking to escape the rat race and live in the moment. That's what we do. We help people do that and have fun and be able to participate in a lot of these new activities.

We are seeing our existing customers return more frequently. They're spending more when they return that hasn't changed. And customers that are trying new categories that are new to the division, whether they're new or existing, they're spending more on that first visit and they are coming back more than they did in the past.

So, all of the trends in our business are very healthy right now. And I think we still have a lot to work on organizationally to help us capture that demand.

Kate Fitzsimons

Great. Thanks. Best of luck for the back half.

Ken Hicks

Thank you.

Operator

And our next question is from Greg Melich with Evercore ISI. Please proceed with your question.

Greg Melich

Hi. Thanks. I have two questions. I wanted to start on SG&A. Thanks for calling out the non-recurring part of it.

Just want to see, should we get back to a clean point of if we can compile single digits were showing leverage, or is there something unique about the year-over-year is in the back half that we should be aware?

Michael Mullican

No, no. If we get it up low single digit comp, we will continue to lever, that's certainly what we're planning to do. Good sales hope to do that. We plan on having good sales.

Ken Hicks

And we worked very hard to make sure that we manage the expenses.

And so that we're capable of leveraging at, quite frankly, whatever sales level we're at.

Greg Melich

Perfect. And then the second question was on the capital allocation.

So with the $500 million buyback, I mean, it looks like your free cash flow is still -- it's probably around that number, but I think the authorization is good for three years. If we continue at this rate, will it take three years to use that, or what's your thought process in terms of allocating that capital to either building more cash, opening stores, or executing the buyback?

Ken Hicks

We are not defining what the terms are of the $500 million buyback at this point.

We also do foresee a continued expansion in the growth. We're opening eight to 10 stores next year, as we stated. We plan on those stores being successful. We're working very hard to ensure that they are successful and that will give us the opportunity to continue to grow there.

We will continue to invest in the omnichannel field, and we will continue to work to improve our operations.

So, the good news is that we are able to do all three of our priorities, ensure our financial security provide for the significant growth.

You've heard me say before, I don't think there's another retailer that has the omnichannel, the organic, the operational and new store growth opportunities that we have, and then, recognize that we can support our investors at the same time.

Greg Melich

That's great. Congrats and good luck.

Ken Hicks

Thank you very much, Greg. Have a good day.

Operator

And our next question is from Robbie Ohmes of Bank of America. Please proceed with your question.

Robert Ohmes

Hey, good morning. Congrats on another great quarter. I was hoping that you could -- maybe Ken or -- and/or Michael, can you just remind us on the profitability e-commerce business and where that is today maybe versus 2019. And Ken, you're mentioning focusing on omnichannel initiatives, can you give some more detail on where you think you can take omnichannel for Academy Sports from here? And what we should looking for your term?

Ken Hicks

Yeah. With regard to the profitability, our omnichannel is profitable and not quite as profitable as the stores, but it is approaching that level.

Our ability to serve our customers both through shipping to their home, but also buy online, pickup in store has allowed us to have a profitable dotcom business. We couldn't have the increase that we've had over the last two years of over 200% in omnichannel with the increase in profitability, if it wasn't profitable and we continue to work to make it profitable.

And so that's important.

The second thing I think to this -- second part of your question, we are doing a lot of things with our omnichannel. We've talked about improving search payment capabilities. We've added new payment capabilities, and we'll continue to add things like that. We introduced a new app within the past month. That's gotten off to a very good start.

We will provide capabilities on the app that will, I think it -- more customers to use it and be supportive of our customers.

We are using new technology to communicate with our dotcom customers, where we are going to continue to improve our customer database between the stores and omnichannel.

So, we still have a lot of work left. We were late to the game in omnichannel, and we will look to the customers to decide how big it should be. I -- we haven't said it's got to be this percentage, but I would envision omnichannel is probably going to be over the next year or two of 15%, 20% of our business. And the penetration will continue to go -- grow. We doubled the penetration of our dotcom this year over 2019. And we will continue to see that improve. But one of the things we're working hard or two of the things we're working hard to do. One is ensure that it's connected with all of our customers to include our store customers. And that it's a profitable business and we aren't just trying to grow it to grow it.

Robert Ohmes

That sounds great. Thanks so much, Ken.

Ken Hicks

That was a mouthful. Hopefully I hit all your points, Robbie. Thanks, Robbie.

Operator

And our next question is from Daniel Imbro with Stephens Inc. Please proceed with your question.

Daniel Imbro

Yeah. Good morning guys. Thanks for taking our questions. Ken, want to start on the unit growth side.

I think you talked about that in your remarks, obviously with capital here, being able to start accelerating that.

I think last year, you guys cited some really attractive unit economics with smaller format stores. How replicable do you think those kinds of returns will be? And how do you envision the role, maybe the small format, maybe infill market. Is it more expansionary markets? How are you viewing that as we get into next year?

Ken Hicks

Well, two things. One, that's an important point that Michael likes to, have me call out is that all of our stores are profitable on a 12-month trailing basis.

And so all of the formats that we've had in time, we have opened a 40,000 square foot store. We see that as an opportunity as we look to fill in markets to go into some of the urban areas that we're backfilling to we take advantage of existing locations that we may take over.

So, we know that's profitable and it is as profitable as our larger store. We like the larger format more simply because it delivers more volume.

So our preference is the larger store where we can, but where we see an opportunity to open a store, we will open. That -- we do have that capability to have a very productive 40,000 square foot store in there, as well as our standard store that's a little over 60,000 square feet.

Michael Mullican

Yeah. Daniel, we're pleased with a 40,000 square foot format, but I would like to remind everybody that the larger 60, 62, 63,000 square foot format still at best-in-class productivity on a sales per square foot basis on a profitability per square foot basis. And back to Robbie's earlier question about omnichannel, the best way to grow our omnichannel is to grow our fleet, because 75% of our e-commerce businesses is fulfilled from the store. We're only in 16 states that leaves, 30 plus states that have a chance to experience the Academy magic as we look to grow and bring our winning model outside of our current footprint.

Ken Hicks

And many as other states, by the way, that we're in, we only have one or two stores.

So, we have within our own market some excellent fill-in opportunities, but there are -- it's a big country and we know there's a lot of people that want and preserve Academy Sports and Outdoors.

Daniel Imbro

Great. Thanks. Thanks for all that color. And then one follow-up on the gross margin outlook. That was a helpful answer to Michael's question earlier. But when you talk about the drivers of gross margin, merchandise is obviously strong today. I didn't hear a ton of discussion around the supply chain initiatives, distribution initiatives. We talked about Michael. Are those still on the comp? And can you provide any more color on what -- maybe the lowest hanging fruit is on that supply chain side and what it could mean for earnings or margin?

Ken Hicks

Well, I'll take the -- I guess the middle part of the question about the gross margin. We do have significant continued opportunity with the planning and allocation initiatives that we've put in place, markdown optimization. Those are all learning systems that we'll continue to learn and develop more localization that we're working very hard so that each store has the right assortment for it, whether it's -- that's a store that in outdoor grilling, it's a smoking or gas or pellet predominant market, whether it's a store that the work boots are important and -- are those work boots more factory, and service or more for the oil field.

And so, we are really working hard through our systems to tailor that assortment for each of our stores, which will improve the margin and reduce the markdowns.

And so, those initiatives are underway and continue to work. The supply chain initiative, literally just starting, but there's some -- there is some low hanging fruit that we're looking at. And I'll let Michael talk about some of those things that we're looking to deliver. But it's it too, as a longer term initiative that we'll continue to deliver over time.

Michael Mullican

Yeah.

I think that the gross margin builders really three categories.

The first is mixed normalization, again, probably 50, 60 basis points to come there, all the inventory stuff that Ken talked about, plus clearance, better localization, getting the right product in the right place at the right time. That's the initiative that Steve and team have led. We're still probably middle innings there. And the last, it's a supply chain that you mentioned. We're just beginning to take that on. And that is a multiyear project that will frankly deliver benefits throughout that time. I haven't quantified them yet, but there's some low hanging fruit that we'll realize some benefit this year, but …

Ken Hicks

… optimization that we're touching, touching last …

Michael Mullican

… more multi-stop delivery. It's not the sexy stuff like rolling out maybe a new private label brand, but it's the stuff that sticks to your ribs and really matters from a profitability standpoint.

Ken Hicks

Which by the way you mentioned another is, we continue to develop. And our private label brands, we introduced the Freely, which has done very well, Magellan Pro in our outdoor area, and in apparel has done well. And new ideas, it was just a side comment and Steve's presentation about what we did with Whataburger, but we had over a million hits and the number of people we sold out that merchandise in a week, those type of ideas that drive traffic, improve profitability and support a strong private label business that doesn't take away from the important brands that we have that adds to the things Academy can provide its customers.

Michael Mullican

So we'll walk it back from where we're at today. That's 35 and change, if you say the environment becomes more promotional and we give up 200 basis points, maybe 250, we still have, I think, 50 to gain from a mix standpoint. I still think there's probably 50, 60 -- who knows what it is on the supply chain.

So, ultimately, I think, as we mature, we'll be in a pretty good spot.

Daniel Imbro

Great. That’s all really helpful color. Thanks so much and good luck guys.

Ken Hicks

Thanks Daniel.

Operator

And our next question is from Chris Horvers with JP Morgan. Please proceed with your question.

Christopher Horvers

Thanks. Good morning everybody. Michael, can you provide a little bit of color on the cadence of the back half of the year, obviously implying about an 8.5% comp at the midpoint? Can you talk about how you were thinking about 3Q versus 4Q to the extent that you can on the top line? And then also on the margin front, you're implying about an 8% EBIT margin in the back half, that seems pretty low and pretty conservative.

So, any cadence color there. And when are you assuming perhaps promotion comes back into the mix?

Michael Mullican

I'll let -- I'll give a couple of brief comments and I'll flip it over to Steve. I'd say, look, we are looking at a relatively conservative leader, still a lot of the year left to go. There's just as much uncertainty today as there was three months ago, six months ago. We're up against two monster quarters in the back half of last year, the supply chain has challenged. The labor pool has been tough and it looks like COVID is going to be with us for a while. That being said, business is still very strong today. And I'll let Steve talk about some of the other questions there.

Steve Lawrence

Yeah.

So, from a cadence perspective, what -- we're seeing right now is it's more normalized cadence last year. We saw back-to-school move out in our markets at least 30 to 45 days. This year it's moved back.

So us it’s kind of hard about back-to-school at late July, early August time period.

As Ken already mention we're off to a really strong start there.

We have a more normalized calendar, the rest of the way through. We do expect a lot of the tailwinds that we've seen so far to continue through, one of which is, we brought up the scarcity of supply and the supply chain that that's going to remain a challenge for us and everybody going forward for the foreseeable future.

One of the things we're pretty excited about is, if you heard us talk about our inventory, we started the quarter with inventory up about 7% last year, we ended the quarter with inventory up about 24% to last year.

So, what we've demonstrated is we've been operating in this kind of dysfunctional supply chain world for 12 to 18 months now. And I think we're operating pretty well against that. We've got good pipeline of inventory, strong disability what's coming in. We're doing a good job of prioritizing that. And we think we're going to be in really good position for holiday. And what we think may happen this holiday summer -- what we saw last holiday where there is a scarcity of supply out there in the marketplace. And hopefully that means people buy earlier at full price, which should hopefully mitigate need to promote as we get deeper into holiday.

Michael Mullican

Yeah. A couple of important points. The guidance that we've provided contemplates all of these risks.

We have the goods to achieve the sales targets that we provided, and we've got a diverse vendor base, which actually helps us offset some of the inventory challenges.

Our vendor base is much more diverse than others.

So, as we sit today, we feel very comfortable with the guidance that we provided. If we're able to kind of manage through the challenges and the way we have in the past, we certainly think we can exceed it.

Ken Hicks

Yeah.

As you look at -- we plan and those of you who know me for a long time, we plan for all the contingencies that can occur. We're overcoming a hurricane that impacted one of our major markets. We've got all of those stores open. The team has done just a phenomenal job there. We -- but the areas impacted for a while and there are some costs as we recover. We've got the continuation of COVID.

We have the uncertainty of the consumer.

We have the supply chain challenges.

All of those have been figured in and what we've demonstrated and hopefully that you saw with this past quarter and the quarter before that is through all these challenges, we have been able to continue to perform strongly. But that said, we're going to make sure that we've got the contingencies plan and we're able to capture the opportunity as we go forward. And I feel confident that with the team that we have here, we will be able to continue to deliver good results.

Christopher Horvers

And then I guess as a follow- up point to that is you held your two-year CAGR very strongly here in the second quarter versus what you did in the first quarter. That's pretty outstanding. Even in this consumer environment, you're not seeing that from a lot of retailers. And like Steve mentioned, you're a good portion of the way through back-to-school.

So I -- is it fair to assume that you're not seeing any impact from Delta and that so far to your trends have remained relatively constant?

Ken Hicks

I got a lot of grief last time for my comment where I said, the quarter started off, there was the same level that we've been performing at and the people -- what does that mean? And -- but it's true again. But we've challenges. And I think that we will continue to see strong growth. These numbers, and at some point we all have to come back to earth a little bit. And everybody has -- is spoiled by these huge growth numbers. That said, we continue to see good growth for the company, because we are off to a good start this quarter. And we -- as Steve said, we've got the inventory and are positioned well for the back half. There are some things that could come up, but we feel confident. And the -- probably the biggest thing is the consumer continues to say, we like what you have. We want what you have, and we want to shop at Academy and buy from you.

Christopher Horvers

Thanks very much. Best of luck.

Ken Hicks

Okay. Thanks, Chris.

Operator

And our next question is from Lavesh Hemnani with Credit Suisse. Please proceed with your question.

Lavesh Hemnani

Hi. Thanks for taking my question and congrats on the strong quarter. I just had one long-term question.

So, if I look at just the unit growth outlook, right, for 2020 eight to 10 stores, considering the business is showing strong growth, I mean, there are structural changes in the consumer lifestyle trends that you highlighted, the strong free cash flow position. I mean, is it a possibility that you could accelerate store growth? I mean, stronger than the eight to 10 that you called out to accelerate those share gains.

Ken Hicks

I think that for next year eight to 10 probably is a good number because of the capability.

Beyond that we have, the financial wherewithal. We've got the market opportunities and we are developing the organizational capability to expand beyond that and add more stores, but we want to do it right and we will grow what is appropriate. But the eight to 10 number is, I think, a good number for next year, beyond that it could be higher.

Michael Mullican

Yeah. The only thing I'd add just to make sure everybody is clear, we could add up to a 100 stores without having to expand our distribution networks.

So, there's plenty of capacity to grow with our existing network. When it cost you $3 million to build a store and you can see the EBITDA we're delivering, a 100% of our fleet is profitable.

You should build more stores.

And so, as Ken said, we're going to put the infrastructure in place and evaluate after 2022 what that cadence.

Ken Hicks

Yeah.

And so we won't be have to wait and delay to build a distribution center, first one. And the second thing I think is important, this is another point that Michael has made in the past is, one of our requirements is the stores in their first year cash flow positive.

So, we don't want it.

As we expand, it will not be a drain on our ability to continue expanding.

Lavesh Hemnani

Got it. Thank you for the color.

Michael Mullican

Thank you.

Ken Hicks

Thank you.

Operator

And our next question is from Daniel Adam with Loop Capital Markets. Please proceed with your question.

Daniel Adam

Hi, everyone. Thanks for taking the question.

Just one for me on capital allocation. I'm curious as to what the thought process was behind the buyback versus a dividend. And just given the balance sheet strength and strong free cash flow generation, do you see yourself as a dividend yielding company, say one year from now? Thanks.

Ken Hicks

We will continue to explore what we think is best for the company and for our investors. Right now, given where the stock quite frankly is valued, a buyback makes the most sense, and we will evaluate all the options to make sure that we are giving their shareholders the adequate return.

Daniel Adam

Thanks, Ken. That makes a lot of sense.

Ken Hicks

Thank you, Daniel.

Operator

And our next question is from John Heinbockel with Guggenheim. Please proceed with your question.

John Heinbockel

Hey, Ken, maybe -- when you step back and look at the -- you've improved these strategic capabilities of the business in a lot of different areas. What other than supply chain, which we've talked about, what areas would you still like to work on? And when I think about use of capital, do you think about strategic M&A? Are there capabilities that you don't have that, that might be interesting going down that path, or you pretty much have what you need right now.

Ken Hicks

I think is -- you talk about things that we need to improve on. We've got continued opportunities in our merchandising.

We have a lot of work to continue in our marketing.

We have opportunities to, as you said, improve our supply chain. Omnichannel, we've talked about. Improving our stores and our -- the service and what we're doing in our stores.

So, we've got a lot of things that we can do better. This is a company that fortunately has no shortage of opportunities for improvement. With regard to the capability, because we have the opportunities for growth, I don't think we have to take a risk in looking outside the company for opportunities or trying to think of what's a new idea that might work and may or may not work. We've got within our bone structure, the capability to grow, to carry that extra weight, if you will, and still be just as fast and nimble as we were, as opposed to having to take the risk and cost of spending money outside. And that is something that I think is very important.

As you look at a company is -- are they growing things that you're pretty sure of that they know how to do versus is it going to work or isn't it going to work?

John Heinbockel

Okay. Then maybe as a follow-up to that, right? You talk about building a national brand, what -- I mean -- and it's a long way out, but you think about adjustments to how you go to market in the South, Northeast, West Coast. How do you think about -- maybe this more for Steven, how do you think about merchandising adjustments, as you move to the Northern part of the country or is that -- that's a pretty easy transition to make?

Ken Hicks

It's something that quite frankly, we've learned. We're learning. We've got stores in Missouri and …

Michael Mullican

Illinois.

Ken Hicks

… Illinois, which is whether it's different than Texas and Florida. And we -- that's gets to the point I made earlier about the localization, lacrosse in North Carolina, they have different sports, they have different cooking, they have different seasons for apparel. And we -- those are things that -- when I talk about learning and merchandising or learning, and that localization, I think will really help us as we go into new markets and understand what's important in a new market. And it's not something that, geez, this is foreign to us, it's way that we operate.

Steve Lawrence

Yeah. I'd say that, that was a mistake we made in the past when we went into new markets and why they underperformed was. And we talked about this, I think, with a lot of different conversations where we'd try to take what works in Texas and apply it there. We're not doing that anymore.

So, that's a new muscle from a localization, from an assortment perspective that we've learned to exercise. Back to Michael's point earlier, the 100 stores were in the future, most of those would fit within our existing DC structure.

So that keeps us still somewhat in the Southern part of the geography of the United States.

I think if we start pushing into the north, yeah, we're going to have to add in some of the winter sports, like hockey, maybe skiing at some point, but that's well into the future.

I think what's more important is understanding all the local nuances, whether it's in cooking, whether they're grillers, using smokers, whether it's propane, whether it be deep frying turkeys, it's all those other nuances when the back-to-school timing is. But I think we've gotten a lot better at in terms of how to explaining it.

Ken Hicks

One of the most localized things that we do is fishing. And the most localized because of bait and one market's very different and that's something we've got a great team there and it's helping us apply that thought process to other parts of the store.

John Heinbockel

Thank you.

Ken Hicks

Thanks, John.

Steve Lawrence

Thanks.

Operator

And ladies generally do have time for only one more question. And that last question, we go to John Zolidis with Quo Vadis Capital. Please proceed with your question.

John Zolidis

Hi. Good morning. I have -- many questions have been answered. But I do have one question about the reasons you cited for confidence that trends on the top line and gross margin would continue.

I think a lot of us understand the demand side of the equation, but a little bit more difficult to quantify and drill down on are some of the things that you mentioned, for example, distribution strategies of key vendors, sort of if you could talk about that specifically. And then secondly, in the post-COVID environment, what's happened from a brick and mortar competitive standpoint? Thanks.

Steve Lawrence

I think, we'll -- probably I will take a chance at answering parts of that question. But back to growth drivers, I mean, we already mentioned you, you brought up strong consumer demand.

So, that that's clearly a tailwind for us. We brought up dotcom our dotcom business is accelerating, traditionally been under penetrated there. We -- obviously as we were coming through the first half of year and anniversary, some of the COVID surges that business is flattening out a little bit, but it's back to growth force. That's going to be a traffic and sales driver for us in the future. The improving inventory levels and content we already talked about. We touched on marketing.

We are shifting our marketing spend from the more traditional print broadcast to a much more digital targeted and talking to the customer on a one-on-one basis that is going to make us much more efficient and a better retailer. We talked about the underlying strategies that we have from a merchandising perspective that really we put in place pre-COVID that were fueling the business.

Now the better allocation, the better localization, the better assortments, regular price markdown optimization. And then, you brought up the control distribution, that is definitely something that is happening in the market, where vendors are controlling the distribution better. That's helping us a couple of different ways. It's funneling more customers into our stores. It's protecting and making those brands more important. It's pulling it. It's allowing us and a lot of retailers pull back on income.

Some of the promotionality that are differential to retailers, we're leading into is a way to drive those brands going forward.

So, all those things we think in addition to the consumer demand behind our category are driver growth.

Ken Hicks

Yeah.

You think John of literally the thousands of outlets that have been cut by several of the larger vendors, those customers that didn't all of a sudden dislike that brand and they're looking to find it. And we're one of the key places where they -- in our markets where they can find it and they know they can get a real good selection of it.

Steve Lawrence

And our partnership says they're just getting stronger. I mean, a lot of -- there's been a lot of noise around these vendors moving to a more of a digital space. But when you think about how much volume is still done in brick and mortar stores, and they really value the customers that we reach that they can't reach. We see that continuing to just strengthen our relationship with our key partners going forward.

John Zolidis

Thanks. Thanks, guys and good luck.

Steve Lawrence

Thank you.

Ken Hicks

Thank you very much, John.

Ken Hicks

Thank you everybody. We appreciate your interest and participation. We hope that you have a better understanding of the opportunities. And you heard on the call we're all excited about what we're doing and where we're going, and we've got a great team working on it. And thank you for your support. Have a great day.

Operator

And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.