Academy(ASO) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements: balance sheets, income, comprehensive income, equity, cash flows, and notes Consolidated Balance Sheets Presents the company's financial position, showing increased cash, total assets, and total liabilities as of October 31, 2020 Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | Oct 31, 2020 | Feb 1, 2020 | Nov 2, 2019 | | :-------------------------- | :----------- | :---------- | :---------- | | Cash and cash equivalents | $869,725 | $149,385 | $43,538 | | Total current assets | $1,992,092 | $1,289,444 | $1,413,208 | | Total assets | $4,981,916 | $4,331,321 | $4,488,709 | | Accounts payable | $868,879 | $428,823 | $529,926 | | Total current liabilities | $1,241,102 | $750,649 | $841,420 | | Total liabilities | $3,997,352 | $3,340,284 | $3,516,808 | | Stockholders'/partners' equity | $984,564 | $988,219 | $969,083 | Consolidated Statements of Income Reveals strong financial performance with substantial year-over-year increases in net sales, gross margin, operating income, and net income Thirteen Weeks Ended October 31, 2020 vs November 2, 2019 (Amounts in thousands, except per share data) | Metric | Oct 31, 2020 | Nov 2, 2019 | Change | % Change | | :----------------- | :----------- | :---------- | :------- | :------- | | Net Sales | $1,349,076 | $1,145,203 | $203,873 | 17.8% | | Gross Margin | $440,511 | $362,422 | $78,089 | 21.5% | | Operating Income | $81,556 | $53,176 | $28,380 | 53.4% | | Net Income | $59,586 | $28,552 | $31,034 | 108.7% | | Basic EPS | $0.78 | $0.39 | $0.39 | 100.0% | | Diluted EPS | $0.74 | $0.38 | $0.36 | 94.7% | Thirty-Nine Weeks Ended October 31, 2020 vs November 2, 2019 (Amounts in thousands, except per share data) | Metric | Oct 31, 2020 | Nov 2, 2019 | Change | % Change | | :----------------- | :----------- | :---------- | :------- | :------- | | Net Sales | $4,091,797 | $3,459,405 | $632,392 | 18.3% | | Gross Margin | $1,234,957 | $1,060,622 | $174,335 | 16.4% | | Operating Income | $279,366 | $137,204 | $142,162 | 103.6% | | Net Income | $217,242 | $102,305 | $114,937 | 112.3% | | Basic EPS | $2.94 | $1.41 | $1.53 | 108.5% | | Diluted EPS | $2.82 | $1.37 | $1.45 | 105.8% | Consolidated Statements of Comprehensive Income Shows a significant increase in total comprehensive income for both periods, driven by net income and interest rate swap changes - Total comprehensive income for the thirteen weeks ended October 31, 2020, was $62,898k, a substantial increase from $27,381k in the prior year[8] - Total comprehensive income for the thirty-nine weeks ended October 31, 2020, was $220,281k, up from $86,402k in the prior year[8] Consolidated Statements of Partners' / Stockholders' Equity Details equity evolution, reflecting Reorganization Transactions, IPO conversion of units to stock, net income, and distributions - Stockholders' equity as of October 31, 2020, was $984,564k[5] - The Reorganization Transactions involved the conversion of NAHC membership units to ASO, Inc. common stock at a 3.15:1 ratio, impacting common stock, additional paid-in capital, and retained earnings[10][25] - The IPO resulted in the issuance of 15,625,000 shares of common stock, generating $184,882k in proceeds[10][18] Consolidated Statements of Cash Flows Shows a substantial increase in net cash from operating activities and a significant net increase in cash for the thirty-nine weeks Cash Flow Summary (Thirty-Nine Weeks Ended, Amounts in thousands) | Cash Flow Activity | Oct 31, 2020 | Nov 2, 2019 | Change | | :------------------------------------------ | :----------- | :---------- | :------- | | Net cash provided by operating activities | $857,218 | $94,756 | $762,462 | | Net cash used in investing activities | $(13,790) | $(52,579) | $38,789 | | Net cash used in financing activities | $(123,088) | $(74,330) | $(48,758) | | Net increase (decrease) in cash and cash equivalents | $720,340 | $(32,153) | $752,493 | | Cash and cash equivalents at end of period | $869,725 | $43,538 | $826,187 | Condensed Notes to Consolidated Financial Statements Provides essential context for financial statements, covering business, accounting policies, revenue, debt, derivatives, and equity 1. Nature of Operations Describes Academy Sports and Outdoors, Inc. as a leading U.S. sporting goods retailer, detailing its stores, IPO, and Reorganization - The Company operates 259 'Academy Sports + Outdoors' retail locations in 16 states and three distribution centers, supported by its academy.com website[17] - On October 6, 2020, ASO, Inc. completed an IPO, issuing 15,625,000 shares of common stock for approximately $184.9 million in net proceeds[18] - In connection with the IPO, Reorganization Transactions were completed, making New Academy Holding Company, LLC (NAHC) a wholly-owned subsidiary of ASO, Inc., which became the new parent holding company[19] 2. Summary of Significant Accounting Policies Outlines financial statement preparation, consolidation, estimates, reclassifications, and retrospective adjustments for ownership exchange - The unaudited financial statements are prepared in accordance with Rule 10-01 of Regulation S-X, with certain GAAP disclosures condensed or omitted[20] - All membership units and redeemable membership units have been retrospectively adjusted to reflect the 3.15:1 contribution and exchange ratio from NAHC membership units to ASO, Inc. common stock, as if it occurred in all pre-IPO periods[25] - Redeemable Membership Units are classified as temporary equity, initially at fair value, and re-measured to fair value if redemption becomes probable[30] 3. Net Sales Details revenue recognition for merchandise sales, providing a breakdown by division and highlighting significant e-commerce growth Net Sales by Merchandise Division (Amounts in thousands) | Division | Thirteen Weeks Ended Oct 31, 2020 | Thirteen Weeks Ended Nov 2, 2019 | Thirty-Nine Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Nov 2, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Outdoors | $487,401 | $364,944 | $1,448,987 | $1,002,138 | | Sports and recreation | $263,506 | $196,592 | $919,699 | $721,665 | | Apparel | $318,731 | $322,375 | $939,388 | $951,385 | | Footwear | $272,626 | $255,649 | $762,174 | $769,857 | | Total merchandise sales | $1,342,264 | $1,139,560 | $4,070,248 | $3,445,045 | | Other sales | $6,812 | $5,643 | $21,549 | $14,360 | | Net Sales | $1,349,076 | $1,145,203 | $4,091,797 | $3,459,405 | - E-commerce sales constituted 7.5% of merchandise sales for the thirteen weeks ended October 31, 2020 (up from 4.5% in 2019) and 9.8% for the thirty-nine weeks ended October 31, 2020 (up from 3.8% in 2019)[35] 4. Long-Term Debt Details the company's long-term debt, primarily the 2015 Term Loan and 2018 ABL Facility, including terms, rates, and refinancing Long-Term Debt (Amounts in thousands) | Metric | Oct 31, 2020 | Feb 1, 2020 | Nov 2, 2019 | | :-------------------------------- | :----------- | :---------- | :---------- | | Senior Secured Term Loan Facility | $1,429,667 | $1,466,402 | $1,470,695 | | Total long-term debt, net | $1,408,885 | $1,428,542 | $1,492,609 | - The 2015 Term Loan Facility, a $1.8 billion senior secured term loan, matures on July 2, 2022, with a weighted average interest rate of 5.00% as of October 31, 2020[40] - The 2018 ABL Facility, a $1 billion secured asset-based revolving credit facility, matures on May 22, 2023, with an available borrowing capacity of $844.7 million as of October 31, 2020[41][42] - During the thirty-nine weeks ended October 31, 2020, the company repurchased $23.9 million in principal on the 2015 Term Loan Facility for $16.0 million, recognizing a net gain of $7.8 million[41] 5. Derivative Financial Instruments Explains the use of interest rate swap agreements to hedge market risk, detailing the reclassification of losses from accumulated other comprehensive loss (AOCI) due to planned debt refinancing and the de-designation of certain swaps - Approximately $1.3 million of losses were reclassified from AOCI to other (income) expense, net, for the thirteen and thirty-nine weeks ended October 31, 2020, due to a portion of underlying cash flows related to $100.0 million of swap notional principal no longer being probable[47] - A $650 million notional principal amount of interest rate swaps was de-designated as cash flow hedges, with the remaining $4.0 million loss in AOCI to be amortized to interest expense[47] - An estimated $4.6 million of the AOCI balance is expected to be reclassified as an increase in interest expense over the next 12 months[50] 6. Fair Value Measurements Outlines the three-level hierarchy for fair value measurements and provides the fair values for derivative financial instruments and the 2015 Term Loan Facility - Derivative financial instruments (interest rate swaps) are classified as Level 2 in the fair value hierarchy, with a total net liability of $5,882k as of October 31, 2020[55] - The estimated fair value of the 2015 Term Loan Facility was $1.4 billion as of October 31, 2020, also classified as Level 2[56] - The company held $767.0 million in money market funds (U.S. Government treasury bills and securities) as of October 31, 2020[55] 7. Property and Equipment Provides a breakdown of the company's property and equipment, net, including leasehold improvements, equipment, software, furniture, fixtures, construction in progress, and land, along with associated depreciation expense Property and Equipment, Net (Amounts in thousands) | Category | Oct 31, 2020 | Feb 1, 2020 | Nov 2, 2019 | | :-------------------------------- | :----------- | :---------- | :---------- | | Leasehold improvements | $435,094 | $436,807 | $433,266 | | Equipment and software | $543,147 | $537,364 | $527,845 | | Furniture and fixtures | $317,371 | $316,420 | $314,909 | | Construction in progress | $27,979 | $17,639 | $21,197 | | Land | $3,698 | $3,698 | $3,698 | | Total property and equipment | $1,327,289 | $1,311,928 | $1,300,915 | | Accumulated depreciation and amortization | $(944,669) | $(870,521) | $(846,509) | | Property and equipment, net | $382,620 | $441,407 | $454,406 | - Depreciation expense was $25.5 million for the thirteen weeks ended October 31, 2020, and $79.7 million for the thirty-nine weeks ended October 31, 2020[59] 8. Leases Details the company's lease accounting, including the impact of COVID-19 related lease concessions, lease modification accounting for extensions, and the components of net lease expense and operating lease information - The company received $0.4 million and $2.4 million in lease expense credit for landlord abated rent during the thirteen and thirty-nine weeks ended October 31, 2020, respectively, due to COVID-19 guidance[60] - Net lease expense was $50,866k for the thirteen weeks ended October 31, 2020, and $150,414k for the thirty-nine weeks ended October 31, 2020[61] - The weighted-average remaining lease term was 11.2 years as of October 31, 2020, with a weighted-average incremental borrowing rate of 9.09%[62] 9. Accrued Expenses and Other Current Liabilities Provides a detailed breakdown of the company's accrued expenses and other current liabilities, showing an increase in total liabilities, particularly in accrued personnel costs and property taxes, as of October 31, 2020 Accrued Expenses and Other Current Liabilities (Amounts in thousands) | Category | Oct 31, 2020 | Feb 1, 2020 | Nov 2, 2019 | | :-------------------------------- | :----------- | :---------- | :---------- | | Accrued interest | $6,996 | $7,835 | $3,261 | | Accrued personnel costs | $72,995 | $54,065 | $41,237 | | Accrued professional fees | $6,041 | $2,451 | $2,787 | | Accrued sales and use tax | $18,590 | $12,651 | $18,041 | | Accrued self-insurance | $13,136 | $14,107 | $13,912 | | Deferred revenue - gift cards and other | $54,557 | $70,220 | $49,603 | | Income taxes payable | $19,197 | $4,941 | $4,575 | | Interest rate swaps | $5,746 | $6,129 | $5,184 | | Property taxes | $49,679 | $16,919 | $50,066 | | Sales return allowance | $5,000 | $5,500 | $5,500 | | Other | $22,675 | $16,563 | $25,826 | | Total accrued expenses and other current liabilities | $274,612 | $211,381 | $219,992 | 10. Equity and Share-Based Compensation Outlines the adoption of the 2020 Omnibus Incentive Plan, the freezing of the prior 2011 Unit Incentive Plan, and details the types of equity awards, associated compensation expense, and the impact of a $257.0 million distribution to members - The 2020 Omnibus Incentive Plan was adopted, reserving 5,150,000 shares of common stock for issuance, while the 2011 Unit Incentive Plan was frozen[67][71] - Equity compensation expense was $23.4 million for the thirteen weeks ended October 31, 2020 (including $19.9 million from IPO-related vesting), and $27.0 million for the thirty-nine weeks ended October 31, 2020[75] - A $257.0 million distribution was paid to NAHC members on August 28, 2020, with $20.7 million in cash payments for vested share-based awards through October 31, 2020[76] 11. Earnings per Common Share Explains the calculation of basic and diluted earnings per common share and provides a table detailing the weighted average common shares outstanding and EPS for the thirteen and thirty-nine weeks ended October 31, 2020, and November 2, 2019 Earnings Per Common Share (Amounts in thousands, except per share data) | Metric | Thirteen Weeks Ended Oct 31, 2020 | Thirteen Weeks Ended Nov 2, 2019 | Thirty-Nine Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Nov 2, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $59,586 | $28,552 | $217,242 | $102,305 | | Weighted average common shares outstanding - basic | 76,771 | 72,484 | 73,908 | 72,480 | | Weighted average common shares outstanding - diluted | 80,714 | 75,201 | 77,171 | 74,766 | | Earnings per common share - basic | $0.78 | $0.39 | $2.94 | $1.41 | | Earnings per common share - diluted | $0.74 | $0.38 | $2.82 | $1.37 | 12. Income Taxes Details the company's income tax accounting, including the transition to being taxed as a U.S. corporation post-IPO, the resulting deferred tax liability, and the components of income tax expense/benefit and deferred tax assets/liabilities - Post-IPO (October 1, 2020), ASO, Inc. is treated as a U.S. corporation for federal, state, and local income tax purposes, incurring a provision for income taxes[85] - A net deferred tax liability of $144.2 million and a current tax liability of $4.6 million were recorded due to Reorganization Transactions, resulting in a $148.8 million cumulative adjustment to additional paid-in capital[86] Income Tax Expense (Benefit) (Amounts in thousands) | Category | Thirteen Weeks Ended Oct 31, 2020 | Thirteen Weeks Ended Nov 2, 2019 | Thirty-Nine Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Nov 2, 2019 | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Total current tax expense | $10,546 | $588 | $12,064 | $2,160 | | Total deferred tax benefit | $(11,739) | $(82) | $(11,739) | $(246) | | Total tax expense (benefit) | $(1,193) | $506 | $325 | $1,914 | - Net deferred tax asset (liability) was $(132,701)k as of October 31, 2020[91] 13. Related Party Transactions Details transactions with related parties, including the termination of the Monitoring Agreement with Kohlberg Kravis Roberts & Co. L.P. (KKR) affiliates upon IPO completion, fees for underwriting services, and the settlement of notes receivable from members - The Monitoring Agreement with KKR was terminated upon IPO completion, resulting in a final termination fee of $12.3 million accrued[96] - Advisory fees related to the Monitoring Agreement, including the termination fee, totaled approximately $13.0 million for the thirteen weeks and $14.8 million for the thirty-nine weeks ended October 31, 2020[96] - The company paid $2.7 million to KKR Capital Markets LLC (KCM), an affiliate of KKR, for underwriting services in connection with the IPO[97] - Outstanding notes receivable and related interest of $8.5 million from a member were offset and satisfied by a distribution on August 28, 2020[103] 14. Commitments and Contingencies Outlines various contractual commitments and potential liabilities, including technology-related obligations, the Monitoring Agreement termination fee, financial guarantees, legal proceedings, and sponsorship/intellectual property agreements - As of October 31, 2020, technology-related contractual commitments totaled $15.2 million, with approximately $12.7 million payable in the next 12 months[104] - Obligations under the Monitoring Agreement, including the termination fee, amounted to $13.3 million, all payable within the next 12 months[105] - Sponsorship and intellectual property commitments totaled $12.8 million through 2027, with $7.4 million payable in the next 12 months[109] - The company is a defendant in various lawsuits but believes the ultimate resolution will not materially impact its financial position, results of operations, or cash flows[108] 15. Subsequent Events Reports significant events that occurred after the reporting period, including the partial exercise of the IPO over-allotment option and a major debt refinancing that restructured the company's long-term debt - On November 3, 2020, the company issued an additional 1,807,495 shares of common stock from the IPO over-allotment exercise, generating approximately $22.1 million in net proceeds[110] - On November 6, 2020, the company completed a debt refinancing, issuing $400.0 million of 6.00% senior secured notes (due Nov 15, 2027) and entering a new $400.0 million first lien term loan facility (due Nov 6, 2027)[111][112][120] - The refinancing also extended the maturity of the asset-based revolving credit facility (now 2020 ABL Facility) to November 6, 2025[125] - Net proceeds from the new notes and term loan, combined with cash on hand, were used to repay $1,431.4 million of the existing term loan[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial condition and operations, analyzing performance drivers, market trends, the impact of COVID-19, and liquidity Cautionary Statement Regarding Forward-looking Statements Warns readers that the report contains forward-looking statements that are subject to various risks and uncertainties, emphasizing that actual results may differ materially from projections - Forward-looking statements are subject to risks such as overall economic decline, changes in consumer tastes, intense competition, the impact of COVID-19, supply chain disruptions, and substantial indebtedness[127][128] - The company undertakes no obligation to publicly update or review any forward-looking statement, except as required by applicable securities laws[130] Overview Overview of Academy Sports and Outdoors, Inc. as a leading U.S. sporting goods retailer, highlighting its extensive store footprint, localized merchandising, value proposition, and growing omnichannel capabilities - The company operates 259 stores across 16 contiguous states, with an average size of approximately 70,000 gross square feet[139] - It offers a broad assortment of sporting and outdoor recreation products, including 17 owned brands, and provides locally relevant offerings[138][144] - The company is developing omnichannel capabilities, including its buy-online-pickup-in-store (BOPIS) program launched in 2019, to deepen customer relationships and drive operating efficiencies[139] Trends and Other Factors Affecting Our Business Discusses various internal and external factors influencing the company's operating results, including macroeconomic conditions, evolving consumer preferences, strategic inventory management, competitive landscape, supply chain dynamics, and growth strategies Overall Economic Trends Sales are highly dependent on the U.S. economy and consumer discretionary spending, with macroeconomic factors such as consumer confidence, employment trends, and financial market volatility significantly impacting customer purchasing patterns - The company's results of operations are highly dependent on the U.S. economy and U.S. consumer discretionary spending[142] - Macroeconomic factors like consumer confidence, financial market volatility, wages, jobs, and unemployment trends affect customer spending patterns[142] Consumer Preferences and Demands Success hinges on accurately and timely predicting evolving consumer tastes and preferences in sporting goods and outdoor recreation, requiring continuous identification and supply of attractive merchandise - Success is dependent on accurately and timely predicting consumer tastes and preferences, which are subject to change[142] - The company uses social media analysis, internet search analytics, internal customer insights, and vendor intelligence to identify relevant products and understand changing customer trends[142] Strategic Inventory Management Effective inventory management is crucial, balancing sufficient stock of popular merchandise with avoiding excess; new tools improved handling and markdown strategies, leading to increased inventory turns - The company improved its inventory management, increasing average inventory turns from 1.96x in year-to-date 2019 to 2.79x in year-to-date 2020[143] - Significant inventory reductions from high sell-through in year-to-date 2020 are expected to require cash for replenishment, impacting net cash provided by operating activities for the fourth quarter of 2020[143] Value Strategy Offers a broad assortment of products at competitive prices, complemented by value-added customer services such as free assembly and hunting/fishing license issuance, aiming to differentiate from specialty and mass retailers - The company offers value-added customer services, including free assembly of certain products, fitness equipment demonstrations, and issuance/renewal of hunting and fishing licenses[144] - A shift in sales mix towards owned brand products, generally priced lower than national brands of comparable quality, would positively impact gross margin[144] E-commerce/BOPIS Expansion and enhancement of omnichannel capabilities, particularly e-commerce and the Buy-Online-Pickup-In-Store (BOPIS) program, are key growth drivers, with significant investments and increased online sales observed, partly due to the COVID-19 pandemic - BOPIS accounted for approximately 50% of e-commerce sales in the thirty-nine weeks ended October 31, 2020, up from 15% in the prior year[145] - E-commerce sales saw a substantial increase in year-to-date 2020, attributed to changing consumer preferences due to COVID-19 and platform enhancements[145] Competition The U.S. sporting goods and outdoor recreation retail industries are highly competitive and fragmented, with the company facing pressure from various retailers across physical and online channels, potentially impacting pricing and margins - The company competes with specialty footwear and outdoor retailers, traditional sporting goods stores, large format sporting goods stores, mass general merchants, and catalogue and internet retailers[146] - Competitive pressures may necessitate price reductions or increased advertising, which could impact net sales goals and margins[146] Sourcing and Supply Chain Management Sourcing and supply chain management face challenges from competition for resources, fluctuating raw material prices, and the impact of COVID-19; reliance on suppliers without long-term contracts and the effect of tariffs on imported goods are also key concerns - The company experienced rising inventory costs on owned brand products directly sourced from China due to tariffs, leading to higher prices and/or lower margins[147] - The absence of long-term written contracts with suppliers means terms can be modified, potentially increasing expenses and adversely affecting operations[147] New Store Openings New store openings are expected to be a key driver of future net sales and gross margin growth, with plans to open 8-10 new stores per year starting in 2022; this expansion will place increased demands on operational and administrative resources - The company expects to open eight to 10 new stores per year, starting in 2022[148] - Most new stores typically achieve profitability within the first twelve months of opening[148] Interim Results and Seasonality The company's business is subject to seasonal fluctuations, with a significant portion of net sales and profits generated during summer holidays and the November/December holiday selling season - A significant portion of net sales and profits is driven by summer holidays (Memorial Day, Father's Day, Independence Day) during the second quarter[149] - Net sales and profits are also impacted by the November/December holiday selling season and cold weather sporting goods sales during the fourth quarter[149] 53rd Week The company operates on the retail industry's 4-5-4 calendar, which periodically includes an extra (53rd) week every five to six years to ensure sales comparability between fiscal years - The company operates on the retail industry's 4-5-4 calendar, which adds a 53rd week every five to six years for sales comparability[150] Impact of COVID-19 on Our Business The COVID-19 pandemic significantly impacted the business, leading to the implementation of extensive safety measures, temporary operational adjustments, and a notable shift in consumer purchasing towards isolated recreation and outdoor activities, driving increased sales in specific merchandise categories and omnichannel platforms - The company implemented various safety measures, including professional cleaning, hand sanitizer stations, social distancing signage, face coverings, and protective shields, incurring increased costs[152] - Sales accelerated in categories like outdoor cooking, camping, shooting sports, hunting, fitness equipment, and backyard games as customers sought isolated recreation and outdoor activities during the pandemic[154] - A significant increase in omnichannel purchases, particularly curbside pickup, was observed as customers preferred to avoid crowded spaces[155] - Temporary furloughs and pay cuts were implemented, but all 259 stores, distribution centers, and the corporate office were fully operational by June 2020[152] How We Assess the Performance of Our Business Outlines the key financial and operating metrics used by management to evaluate business performance, including comparable sales, various Adjusted non-GAAP measures, and e-commerce penetration Comparable Sales Comparable sales are defined as the period-over-period net sales increase or decrease for stores open after thirteen full fiscal months, combined with all e-commerce sales, regardless of fulfillment method - Comparable sales include all e-commerce sales, whether shipped to home or picked up in-store/curbside through BOPIS[158] - Stores significantly remodeled or relocated are excluded from the calculation until they have been in operation for substantially all of the comparable periods[158] Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow These non-GAAP measures are utilized by management to supplement GAAP results, providing a consistent basis for evaluating business strategies, budgeting, incentive compensation, and peer comparisons by excluding items not indicative of core operating performance - These non-GAAP measures assist investors and analysts in comparing operating performance across reporting periods on a consistent basis by excluding items not indicative of core operating performance[160][191] - Management uses these measures for evaluating business strategies, making budgeting decisions, establishing incentive compensation, and reporting compliance with debt covenants[160][191] E-commerce Penetration E-commerce penetration is defined as the ratio of total e-commerce merchandise sales (including Buy-Online-Pickup-In-Store, or BOPIS) to total company merchandise sales - E-commerce penetration is calculated as total e-commerce merchandise sales (which includes BOPIS) divided by total Company merchandise sales[161] Components of Our Results of Operations Outlines the primary financial components that drive the company's profitability: net sales, gross margin, selling, general and administrative (SG&A) expenses, and income tax expense (benefit), detailing the factors influencing each Net Sales Net sales are derived from in-store and e-commerce merchandise sales, net of sales tax and returns, with fluctuations driven by new store openings, comparable sales, inventory management, seasonality, and promotional activities - Net sales fluctuations are influenced by new store openings, comparable sales, inventory adjustments, vendor relations, seasonality, weather, consumer shopping preferences, and market promotions[163] Gross Margin Gross margin, calculated as net sales less cost of goods sold, is influenced by sales volume, promotional activities, product mix (including owned brands), and the effective management of procurement, warehousing, distribution, and e-commerce shipping costs - Gross margin depends on net sales, promotional activities, product mix (including owned brand merchandise), and control over cost of goods sold, such as inventory, logistics, freight, shrinkage, and e-commerce shipping costs[165] Selling, General and Administrative Expenses SG&A expenses encompass store and corporate payroll, occupancy costs, advertising, and IT, with both variable and fixed components; these expenses are anticipated to increase in future periods due to ongoing growth and the additional costs associated with being a newly public company - SG&A expenses are expected to increase in future periods due to continuing growth and additional legal, accounting, insurance, and other expenses incurred as a newly public company[166] Income Tax Expense (Benefit) Prior to October 1, 2020, the company operated as a flow-through entity for federal income tax purposes; following the IPO and Reorganization Transactions, it is now treated as a U.S. corporation, incurring federal, state, and local income taxes - Prior to October 1, 2020, the company was a flow-through entity for U.S. federal income tax purposes, with tax primarily from state income taxes[167] - On and after October 1, 2020, following the IPO and Reorganization Transactions, Academy Sports and Outdoors, Inc. is treated as a U.S. corporation for federal, state, and local income tax purposes[167] Results of Operations Provides a detailed comparative analysis of the company's financial performance for the thirteen and thirty-nine weeks ended October 31, 2020, against the corresponding prior-year periods, highlighting key drivers of changes in net sales, gross margin, and expenses Thirteen Weeks Ended October 31, 2020 Compared to Thirteen Weeks Ended November 2, 2019 For the thirteen weeks ended October 31, 2020, the company reported significant increases in net sales, gross margin, and net income, driven by strong comparable sales growth, a surge in e-commerce, and improved merchandise margins, despite increased employee and professional fees - Net sales increased by $203.9 million (17.8%) to $1,349.1 million, primarily due to a 16.5% increase in comparable sales and contributions from new store locations[169] - Gross margin increased by $78.1 million (21.5%) to $440.5 million, with the gross margin percentage rising 1.1% to 32.7%, mainly due to 106 basis points of favorability in merchandise margins from less clearance activity and lower markdowns[169][173] - E-commerce net sales surged by $49.5 million (95.9%), representing 7.5% of merchandise sales, up from 4.5% in the prior year, driven by changing consumer preferences and platform enhancements[171] - SG&A expenses decreased by 0.4% as a percentage of net sales to 26.6%, primarily due to leveraging property and facility fees (165 bps decrease) and advertising (58 bps decrease), partially offset by increased employee costs (94 bps) and professional fees (87 bps)[174] Thirty-Nine Weeks Ended October 31, 2020 Compared to Thirty-Nine Weeks Ended November 2, 2019 For the thirty-nine weeks ended October 31, 2020, the company achieved substantial growth in net sales and net income, driven by strong comparable sales and a significant increase in e-commerce, despite a slight decrease in gross margin percentage due to import freight and vendor allowances - Net sales increased by $632.4 million (18.3%) to $4,091.8 million, driven by a 16.1% increase in comparable sales and contributions from new store locations[180] - Gross margin increased by $174.3 million (16.4%) to $1,235.0 million, but as a percentage of net sales, it decreased by 0.5% to 30.2%, primarily due to 43 basis points of unfavorability from import freight and 37 basis points from decreased vendor allowances[183] - E-commerce net sales increased by $270.1 million (208.6%), representing 9.8% of merchandise sales, up from 3.8% in the prior year, driven by changes in consumer shopping preferences and platform enhancements[182] - SG&A expenses decreased by 3.3% as a percentage of net sales to 23.4%, primarily due to leveraging property and facility fees (171 bps decrease), advertising (96 bps decrease), and employee costs (78 bps decrease)[184] - Gain on early retirement of debt, net, decreased by $34.4 million (81.5%) to $7.8 million, due to lower principal repurchases of the 2015 Term Loan Facility compared to the prior year[185] Non-GAAP Measures Defines and reconciles various non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share, and Adjusted Free Cash Flow, which management uses to evaluate performance and liquidity by excluding non-core operating items Adjusted EBITDA Adjusted EBITDA is presented as a supplemental measure, reconciling net income by excluding interest, taxes, depreciation, amortization, and specific non-recurring or non-operating items such as consulting fees, Adviser monitoring fees, and equity compensation Adjusted EBITDA (Amounts in thousands) | Metric | Thirteen Weeks Ended Oct 31, 2020 | Thirteen Weeks Ended Nov 2, 2019 | Thirty-Nine Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Nov 2, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $59,586 | $28,552 | $217,242 | $102,305 | | Interest expense, net | $22,399 | $24,585 | $70,487 | $77,171 | | Income tax expense | $(1,193) | $506 | $325 | $1,914 | | Depreciation, amortization and impairment | $25,567 | $29,596 | $79,718 | $88,693 | | Consulting fees | $102 | $237 | $194 | $3,517 | | Adviser monitoring fee | $12,953 | $937 | $14,793 | $2,697 | | Equity compensation | $23,359 | $1,405 | $27,049 | $5,872 | | Gain on early extinguishment of debt, net | — | — | $(7,831) | $(42,265) | | Severance and executive transition costs | — | $1,237 | $4,137 | $1,237 | | Costs related to the COVID-19 pandemic | — | — | $17,632 | — | | Other adjustments | $2,965 | $1,704 | $4,894 | $4,455 | | Adjusted EBITDA | $145,738 | $88,759 | $428,640 | $245,596 | Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share This section provides reconciliations for Adjusted Net Income, Pro Forma Adjusted Net Income, and Pro Forma Adjusted Earnings per Share, adjusting net income for non-recurring items and applying a retrospective tax effect to reflect the company's C-Corporation status post-IPO Pro Forma Adjusted Net Income and EPS (Amounts in thousands, except per share data) | Metric | Thirteen Weeks Ended Oct 31, 2020 | Thirteen Weeks Ended Nov 2, 2019 | Thirty-Nine Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Nov 2, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $59,586 | $28,552 | $217,242 | $102,305 | | Adjusted Net Income | $98,894 | $34,062 | $278,001 | $77,862 | | Pro Forma Adjusted Net Income | $73,747 | $25,590 | $208,591 | $58,327 | | Pro Forma Adjusted Basic EPS | $0.96 | $0.35 | $2.82 | $0.80 | | Pro Forma Adjusted Diluted EPS | $0.91 | $0.34 | $2.70 | $0.78 | Adjusted Free Cash Flow Adjusted Free Cash Flow, calculated as net cash provided by operating activities less net cash used in investing activities, is presented as a useful measure of liquidity and the company's ability to generate cash Adjusted Free Cash Flow (Amounts in thousands) | Metric | Thirty-Nine Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :----------------------------------- | :----------------------------------- | | Net cash provided by operating activities | $857,218 | $94,756 | | Net cash provided by (used in) investing activities | $(13,790) | $(52,579) | | Adjusted Free Cash Flow | $843,428 | $42,177 | Liquidity and Capital Resources Discusses the company's strategies for managing liquidity, including cost-cutting measures, the impact of a special distribution, proceeds from the IPO, and subsequent debt refinancing; it also outlines historical cash sources and uses, and future funding plans Sources and Uses of Liquidity The company's liquidity is primarily sourced from operating activities, debt issuances, and credit facilities, used for working capital, capital improvements, debt service, and distributions; recent IPO proceeds and debt refinancing significantly impacted its financial flexibility - Cash and cash equivalents totaled $869.7 million as of October 31, 2020[205] - The IPO generated approximately $184.9 million in net proceeds on October 6, 2020, with an additional $22.1 million from the over-allotment exercise on November 3, 2020[204][209] - Proceeds from the IPO, new 2020 Notes, and 2020 Term Loan Facility, along with cash on hand, were used to repay $1,431.4 million of the existing term loan on November 6, 2020[210] - The company expects to fund anticipated capital expenditures, working capital needs, and scheduled debt service costs using existing cash balances, internally generated cash flows, and available borrowings under the 2020 ABL Facility[211] Capital Expenditures Planned capital expenditures for fiscal year 2020 are approximately $46.6 million, with the majority allocated to corporate, e-commerce, and information technology programs, and the remainder to existing stores, distribution centers, and remodels - Expected capital expenditures for fiscal year 2020 are approximately $46.6 million[213] - Approximately 65% of planned cash outflow relates to investments in corporate, e-commerce, and information technology programs, 30% to existing stores and distribution centers, and 5% to store remodels[213] Cash Flows for the Thirty-Nine Weeks Ended October 31, 2020 and November 2, 2019 This section provides a detailed analysis of cash flow changes, highlighting a significant increase in net cash provided by operating activities, driven by improved operating assets and liabilities, higher net income, and increased non-cash charges, while also detailing changes in investing and financing activities - Net cash provided by operating activities increased by $762.5 million for the thirty-nine weeks ended October 31, 2020, compared to the prior year, primarily due to a $599.1 million net increase from operating assets and liabilities, a $114.9 million increase in net income, and a $48.4 million increase in non-cash charges[215] - Key drivers for the increase in operating cash flows include a $214.5 million decrease in merchandise inventories (due to high sell-through) and a $340.1 million increase in accounts payable (due to increased inventory receipts and extended vendor payment terms)[215] - Net cash used in investing activities decreased by $38.8 million, mainly due to $26.7 million less in capital expenditures and a $12.1 million increase from the repayment of notes receivable from a NAHC member[218] - Net cash used in financing activities increased by $48.8 million, driven by a $277.7 million distribution to NAHC's members, partially offset by $184.9 million in net IPO proceeds and $88.6 million lower term loan principal repurchases[219] Critical Accounting Policies and Estimates This section reaffirms that the financial statements are prepared in accordance with GAAP and rely on management's estimates, particularly for merchandise inventories and impairment analyses of goodwill, intangibles, and long-lived assets, noting that the COVID-19 pandemic makes these estimates more challenging - The most significant estimates involve the valuation of merchandise inventories and performing goodwill, intangible, and long-lived asset impairment analyses[221] - The global economic climate and unforeseen effects from the COVID-19 pandemic are making these estimates more challenging, with actual results potentially differing materially from estimates[221] Recent Accounting Pronouncements This section incorporates by reference the information on recent accounting pronouncements detailed in Note 2 to the unaudited consolidated financial statements - Information on recent accounting pronouncements is incorporated by reference from Note 2 to the unaudited consolidated financial statements[222] Related Party Transactions This section incorporates by reference the detailed information on related party transactions provided in Note 13 to the unaudited consolidated financial statements - Information on related party transactions is incorporated by reference from Note 13 to the unaudited consolidated financial statements[223] Off-Balance Sheet Arrangements The company's off-balance sheet arrangements primarily consist of future minimum guaranteed contractual payments and letters of credit, with no material changes reported during the quarter ended October 31, 2020 - Off-balance sheet contractual obligations and commercial commitments relate to future minimum guaranteed contractual payments and letters of credit[224] - There have been no other material changes in off-balance sheet arrangements during the quarter ended October 31, 2020[224] Contractual Obligations and Commercial Commitments The company's contractual obligations and commercial commitments primarily involve debt facilities, operating leases, technology-related commitments, the Monitoring Agreement, and sponsorship/intellectual property agreements, with no material changes during the quarter other than the termination of the Monitoring Agreement - Contractual obligations and commercial commitments primarily relate to debt facilities, senior secured notes, operating leases, technology-related commitments, the Monitoring Agreement, and sponsorship and intellectual property agreements[225] - No material changes occurred during the quarter ended October 31, 2020, other than fluctuations from ordinary course business and the termination of the Monitoring Agreement[225] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the company's primary market risk exposures or management strategies from those previously disclosed in the Prospectus, except for the subsequent events detailed in Note 15 - No material changes in primary risk exposures or management of market risks have occurred, except as disclosed in Note 15 to the consolidated financial statements[226] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and confirms no material changes in internal control over financial reporting during the period Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of the end of the reporting period and concluded they were effective at a reasonable assurance level - The CEO and CFO concluded that the design and operation of the company's disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report[227] Changes in Internal Control over Financial Reporting No changes in the company's internal control over financial reporting occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting - No changes in internal control over financial reporting occurred during the period that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[228] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various lawsuits and claims typical of its business, but does not anticipate any individual or group of cases to materially affect its operations, financial position, or liquidity, and believes established reserves are adequate - The company is a defendant or co-defendant in lawsuits, claims, and demands relating to product, premises, employment, and/or commercial liability[229] - No individual case, or group of cases, is expected to have a material effect on the manner in which the company conducts its business or on its results of operations, financial position, or liquidity[229] - Reserves have been established that management believes to be adequate based on current evaluations and experience[229] Item 1A. Risk Factors This section refers to the risk factors discussed in the Prospectus, with updates reflecting the Refinancing Transactions; it emphasizes the significant risks associated with the company's high level of indebtedness, which demands substantial cash flow for debt service and constrains financial flexibility and growth opportunities - The risk factors discussed in the Prospectus are incorporated, with updates provided due to the Refinancing Transactions[231][232] - After giving effect to the Refinancing Transactions, the company would have had approximately $800.0 million of outstanding secured indebtedness as of October 31, 2020[234] - The high level of indebtedness requires a substantial portion of cash flows for debt service, reducing funds available for operations, capital expenditures, acquisitions, and other business opportunities[233][235] - Despite current indebtedness, the company may incur substantially more debt, including off-balance sheet financings, which could further exacerbate financial risks[239][240] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the completion of the company's initial public offering (IPO) and the subsequent partial exercise of the underwriters' over-allotment option, outlining the net proceeds received and their use to fully repay existing term loan borrowings - The company completed its IPO on October 6, 2020, selling 15,625,000 shares of common stock for approximately $184.9 million in net proceeds[249] - On November 3, 2020, an additional 1,807,495 shares were issued from the partial exercise of the underwriters' over-allotment option, generating approximately $22.1 million in further net proceeds[249] - The net proceeds from the IPO, along with proceeds from the 2020 Notes, the Term Loan Facility, and cash on hand, were used to repay $1,431.4 million of outstanding borrowings under the existing term loan[250] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report, including key organizational documents, incentive plans, and certifications, providing transparency into the company's governance and operational frameworks - Exhibits include the Amended and Restated Certificate of Incorporation and Bylaws of Academy Sports and Outdoors, Inc[253] - The 2020 Omnibus Incentive Plan and various forms of equity award agreements are listed as exhibits[253] - Certifications of the Chief Executive Officer and Chief Financial Officer under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are included[253] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the accuracy and completeness of the Quarterly Report on Form 10-Q as of December 10, 2020 - The Quarterly Report on Form 10-Q was signed on December 10, 2020, by Ken C. Hicks, Chairman, President and Chief Executive Officer[256][257] - The report was also signed by Michael P. Mullican, Executive Vice President and Chief Financial Officer[257]