Academy Sports and Outdoors, Inc. (ASO) Q3 2021 Earnings Call Transcript

Academy Sports and Outdoors, Inc. (NASDAQ: ASO) Q3 2021 earnings call dated Dec. 10, 2021

Corporate Participants:

Matt Hodges — Vice President, Investor Relations

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

Analysts:

Robert F. Ohmes — BofA Securities, Inc. — Analyst

Greg Melich — Evercore ISI — Analyst

Michael Lasser — UBS Securities LLC — Analyst

Christopher Horvers — JPMorgan Securities LLC — Analyst

Kate Fitzsimons — Wells Fargo Securities LLC — Analyst

Daniel Imbro — Stephens, Inc. — Analyst

Seth Basham — Wedbush Securities — Analyst

John Zolidis — Quo Vadis Capital, Inc. — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the Academy Sports and Outdoors Third Quarter of Fiscal Year 2021 Earnings Conference Call. At this time, this call is being recorded. [Operator Instructions]

I will now turn the call over to Matt Hodges, Vice President of Investor Relations for Academy Sports and Outdoors. Matt, please go ahead.

Matt Hodges — Vice President, Investor Relations

Good morning, everyone, and thank you for joining the Academy Sports and Outdoors’ third 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 may be considered forward-looking statements.

These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our 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 comparable GAAP 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 C. Hicks — Chairman, President, and Chief Executive Officer

Thank you, Matt. Good morning and thank you all for joining us today. I want to start the call by thanking all of the Academy Sports and Outdoor team members for their continued hard work and commitment to our vision and mission to become the best sports and outdoors retailer in the country, by providing fun for all. You have met our challenges and raised expectations for the company. One year ago, we hosted our first earnings call as a public company.

Since that time, we’ve improved our balance sheet and made tremendous progress against our key business priorities of building a stronger omni-channel business, enhancing the customer shopping experience in-store and online, improving our merchandise planning and allocation capabilities, increasing targeted marketing and strengthening our supply chain. These efforts have resulted in enormous success in 2021, and we believe there is much more to come as we continue to improve our merchandise processes, develop new capabilities and open new stores to drive growth and profits.

We appreciate your support as we continue on this exciting journey. Now, I’ll provide a high-level overview of the third quarter, and then Michael and Steve will present more details about the results and our expectations for the fourth quarter. During the third quarter, the team was resilient and delivered record financial results in the face of numerous challenges, including supply chain constraints, transportation bottlenecks, and two severe storms in our market. Consumer demand was strong across all of our major product categories, as our customers are self-centered on making healthy, lasting lifestyle changes and having fun experiences with friends and family.

We are well-positioned to meet their needs with our broad and diverse assortment of high quality value products from leading brands. Total sales for the third quarter increased 18.1% to a record $1.59 billion, with comparable sales of 17.9%. On a two-year basis, sales grew 39.1%. These outstanding results represent nine consecutive quarters of positive comparable sales and are a direct outcome of the work done against our priorities. The quarter included a robust back-to-school season in August and broad-based growth in September and October, led by apparel, field, team sports, and athletic footwear sales.

We saw continued strength in [Technical Issues] customer base as they shop more frequently across more categories and spent more per trip. This resulted in growth in our transactions, average ticket size, and selling price compared to last year. Overall, each of our product divisions and regions grew more than 20% compared to Q3 2020, and we gained market share in each of our four product divisions across our entire footprint. E-commerce sales grew 25.9%, which was significantly faster than the stores. On a two-year basis, e-com sales increased 146.6%. We continue to enhance the site’s capabilities both from a back-end functionality and a consumer-facing perspective, and expect omni-channel to continue to grow faster than the stores over time.

We’re especially pleased by the early traction of our Academy app, which is now available to both Apple and Android users. We feel the customer will further leverage this new feature over the holiday selling season. By operating more efficiently and effectively in a tempered promotional environment, we achieved record gross margin of $560.8 million. Like most retailers, we saw an increase in freight costs but were able to absorb the majority of them with higher merchandise margins while maintaining our everyday value proposition for our customers.

As a result of our efforts, for the third quarter we reported adjusted net income of $164.1 million and adjusted earnings per share of $1.75. A significant milestone during the quarter was KKR completing a secondary offering selling its remaining shares of Academy Sports and Outdoors common stock. As part of this offering, we repurchased and retired 4.5 million shares for approximately $200 million as part of the company’s $500 million share repurchase program. We also purchased approximately $50 million worth of shares in the open market during the third quarter, which signifies that returning capital to shareholders is one of our capital allocation priorities, in addition to growing the business.

Year-to-date, Academy has repurchased and retired 8.9 million shares for approximately $350 million. Looking ahead to the fourth quarter, the team’s persistent hard work with our key vendors such as Nike, Adidas, Under Armour, The North Face, and Columbia has put us in a strong position to meet the expected demand for the holiday season. We’re also in good shape in our private label business which makes up roughly 20% of our total sales. Overall, our inventory is 22.4% higher than prior year quarter and up 18.9% from last quarter.

From a customer perspective, our stores and e-commerce platform are prepared for holiday shoppers. We’ve improved the in-store shopping experience, making it more fun and engaging and easier to shop with more local, tailored products and the appropriate staffing levels. We’ve also added features and functionality to our website and mobile app to create faster, more seamless transactions that improve conversion and customer satisfaction.

We’re pleased with the results of the quarter thus far, but there’s still a tremendous amount of business to be done over the next several weeks. Our store teams and websites are ready to serve our customers during this final push to Christmas. All together, our best-in-class team, healthy inventory position, convenient and engaging sales channels paired with strong consumer demand and a rational promotional environment give us optimism about the fourth quarter. Therefore, we’re raising our full year sales and earnings guidance.

I’ll now turn the call over to Michael to review our Q3 results and share our updated outlook. Michael.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Thanks, Ken. Good morning, everyone. A record third quarter results clearly show that our business remains very strong. Academy’s customer proposition based on excellent customer service and a broad value-based assortment that supports active, healthy living continues to connect with new and existing customers. Because of this connection, this is the ninth consecutive quarter of positive comparable sales, including double-digit increases for the last six quarters. It is also the fourth consecutive quarter that all four merchandise positions achieved positive sales growth.

I will review the record third quarter P&L, then discuss our updated 2021 guidance, which we are raising based on the strong results, continued consumer demand and a healthier inventory position. Net sales were $1.59 billion, an 18.1% increase versus last year and a 39.1% increase compared to 2019. Comparable sales were 17.9% on top of last year’s 16.5% comp. Our two-year growth rate has been relatively consistent throughout the entire year. Our business remains strong, even with less stimulus dollars in the market, fewer travel and dining restrictions, and more retail competition compared to last year.

We believe there’s been a lasting shift of consumer spending into the sports and outdoor sector. This puts Academy in good position to grow and increase market share because we have the products, brands and value customers are looking for. Customers are shopping more frequently across more categories and spending more than pre-pandemic. As a result, our transaction count and ticket size continued to grow in existing, new, and reactivated customer segments. That [Phonetic] our transaction growth was significantly higher than our average ticket.

We are seeing the benefits of our targeted customer outreach, such as direct marketing, higher Academy credit card adoption, and improved website personalization. During the quarter, we also saw additional progress in our rapidly growing and profitable omni-channel business. Our e-commerce business grew 25.9%. And when compared to Q3 2019, e-com sales increased 146.6%. Sales penetration rate was 8% compared to 7.5% in Q3 2020 and 4.5% in Q3 2019. Buy online, pickup in store remains a significant portion of our omni-channel sales and continues to be a competitive differentiator for us. As we have said before, omni-channel is a key strategic priority for us and we will continue to invest in its growth.

Based on current projections, full year 2021 omni-channel sales are expected to be strong compared to 2020. This growth is expected to continue into 2022 as we expand our store footprint with 8 to 10 new stores, which will complement our growing omni-channel business. What we have seen throughout 2021, merchandise margins are once again, very strong. Led by disciplined pricing management, margins benefited from less promotional activity and fewer markdowns. This resulted in gross margin expansion of 250 basis points to 35.2% and record third quarter gross margin of $560.8 million.

SG&A expenses were $344.7 million or 21.6% of sales, which was 500 basis points lower than Q3 2020 and 540 basis points lower than 2019. Excluding costs related to the initial public offering from Q3 2020 — SG&A to get a proper comparison, SG&A expenses decreased by 230 basis points, primarily attributable to workforce management, advertising cost efficiencies and cost leverage from the strong sales growth. Year-to-date, SG&A expenses are 21.3% of sales or 210 basis point below year-to-date 2020. The record sales and margin results led to pretax income of $205.3 million, a 250% increase compared to $58.4 million last year. GAAP net income for the quarter was $161.3 million. GAAP diluted earnings per share increased 132.4% to $1.72 per share compared to $0.74 per share in Q3 2020.

Pro forma adjusted net income, which excludes the impact of certain extraordinary items, increased 122.6% to $164.1 million. Pro forma diluted earnings per share were $1.35 per share, an increase of 92.3% compared to $0.91 per share last year. Looking at the balance sheet, Academy ended the quarter in a healthy financial position with $400 million in cash and $982 million available under our credit facility. During the quarter, the company generated $84 million in adjusted free cash flow, while at the same time, improving our inventory position.

The ending inventory balance was $1.3 billion. This is 22.4% higher than the prior year third quarter. This is our strongest inventory position in two years and a testament to the entire Academy team working together to keep product flowing despite the challenging environment. Our supply chain is benefiting from Academy’s status as a preferred vendor partner, our extensive vendor base and broad and diverse product assortment, our improved planning capabilities, our valuable partnerships with the ports of Houston and Savannah and our strong financial position and flexibility.

Now, on to our updated outlook for fiscal 2021; based on our third quarter results, continued strong consumer trends and the visibility we have into Q4, we are raising our comparable sales forecast for the full year from up 14% to 17% to a range of up 17% to 18%. On a two-year basis, this represents comp growth of 33% to 34%. Our gross margin rate for the full year is expected to range from 33% to 34%. Capital expenditures for the full year are expected to be approximately $90 million. GAAP diluted earnings per share are now forecasted to range from $6.75 per share to $6.85 per share, based on 94.5 million diluted weighted average shares outstanding for the full year.

Non-GAAP diluted earnings per share, which excludes the impact of certain extraordinary items are expected to range from $7.21 per share to $7.31 per share. This guidance considers various outcomes for the remainder of the year given the uncertainty of the supply chain, the labor market, the impact of inflation, and potentially more promotional and competitive marketplace. While we are not providing fiscal 2022 guidance today, we are excited about our growth prospects and the continued performance and development of our sales and profit driving initiatives.

With that, I will turn the call over to Steve for more details around merchandising and operations.

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

Thanks, Michael. Ken and Michael did a great job of covering the financial highlights from the third quarter. I’ll now give you a little more color around our performance by category and by month. As was already covered, we drove a 17.9% comp increase versus 2020. Probably the greatest enabler of this growth is our improving inventory position. We started the quarter with inventory up 24% versus last year, and the team worked hard to keep receipts flowing so that we could deliver improved in-stocks, build [Phonetic] the sales within the quarter while ensuring we’re well-positioned heading into the holiday season.

The end result was that we started the fourth quarter with inventory up 22% versus last year. More importantly, the content and overall quality of this inventory is much more balanced versus last year, heading into our peak weeks. We’re back in stock in most categories, and we believe that we’re well-positioned to take advantage of the fourth quarter holiday traffic. We saw continued solid growth across all four of our major divisions. Our soft goods division comprised apparel and footwear, once again, had the highest growth.

Apparel posted the largest comp for the quarter up 25% versus 2020, and up 24% versus 2019. Footwear drove a 17% comp versus 2020, was up 25% when compared with 2019. Both of these businesses surged in August driven by a back-to-school timing, which normalized across our footprint versus the delayed starts from last year. We were well-prepared and came into the quarter with healthy inventory positions, most of our key branded partners such as Nike, Adidas, and The North Face, which set us up to drive double-digit comps in each of these brands.

Our key private brands in apparel and footwear such as BCG, Magellan Outdoors and Freely also grew by double digits. The combination of both these factors helped propel August to the largest increase in the quarter. As we moved into September and October, we saw the license business accelerate as college and pro football kicked off. While still positive, the comp softened a little bit in September as we anniversaried last year’s later back to school. As we got into October, we saw the business accelerate again driven by [Indecipherable] sales that were sparked when the weather started to break.

Shifting gears to the hard good side of the store. Our sports and direct business also drove a strong comp and up 8% versus 2020, plus 46% versus 2019. The team sports business also benefited from the return of back to school across our footprint. We delivered a double-digit comp across all major sports, including football, baseball and soccer, as participation rates increased in the youth sports being played across all of our markets. Our outdoor business also generated solid growth during third quarter, plus 18% versus 2020, plus 59% versus 2019. The camping and field businesses both generated double-digit growth, driven by increased interest in outdoor activities coupled with improved in-stocks.

The self-described strong double-digit comps in many of our key national brands, including Yeti, Wilson, and Rawlings, as well as our key private brands such as Magellan Outdoors. On the margin front, we achieved a 35.2% gross profit rate during the quarter, which was plus 250 basis points higher than last year. We covered many of the key factors and continue to drive our merchandise margin growth in last quarter’s call. To quickly recap them, first, we continue to refine our allocation strategies, which are driving better localization efforts.

This has helped us improve inventory productivity while driving higher AURs through better regular price selling. Second, the stronger sell-through regular price when coupled with our markdown optimization strategy. This helped reduce the amount of goods we’re taking to clearance along with driving higher AURs and better margins of the clearance we do have. Third, we’re operating in a less promotional marketplace. This has a lot of scale-back discounts during high traffic time periods such as back to school. We’re seeing this carry-through into the fourth quarter.

The combination of all of these improvements is along as to raise AURs and gross margins but not only offset the rising product and shipping costs but to also deliver continued long term gross profit improvement. We believe that many of the factors that have driven sales growth and margin improvement through the first three quarters of the year will continue and carry forward and allow us to keep our momentum going into the fourth quarter. Consumer demand for the Sports and Outdoor categories remains elevated and we see this continue forward into the fourth quarter and beyond.

We worked hard to build back our inventories and improve in-stocks and are well-positioned to take advantage of increased consumer spending. The team has done a great job in navigating all the supply chain disruptions and has worked hard to develop a flexible and robust pipeline of inventory that will ensure we continue to fuel sales through fourth quarter and into next year. Next, many brands continued to tighten their distribution strategies, and as a preferred partner, this leaves us well-positioned to capture the increased demand for our categories, therefore, gaining market share along with attracting the consumers to our brand.

Also, we continue to focus on the launch of new and innovative products and brands that resonate with our core consumer. A great example of this was our Whataburger plus Magellan Outdoors collaboration, which launched in the third quarter and sold out shortly after being delivered. One of the new ideas we’re going after for Q4 is the rollout of Yellowstone Apparel to all stores. This is one of the hottest shows on TV, and customer demand for this product is high. We’re also growing our Outdoor Cooking business by expanding into new categories such as Outdoor pizza ovens. Early tests on this product were successful, so we quickly secured the inventory we needed to really go after this item during the holiday season.

Another positive is our.com growth is accelerating and we expect this to continue to be a tailwind for us on a long-term basis. Finally, we continue to refine and improve the overall effectiveness of our marketing spend through more targeted messaging. This is yielding higher conversion rates, which is driving top line sales on putting our overall marketing productivity. As you can tell, we’ve got a lot of exciting things going on here at Academy and we believe we’re well-positioned to carry momentum into the fourth quarter and beyond.

Now, I’d like to turn the call back over to Ken for some closing comments. Ken?

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thanks, Steve, Michael. We are proud of our quarter and year-to-date results and believe this momentum will continue. We’ve successfully navigated numerous challenges and believe we are capable of tackling the ongoing supply chain disruptions. We’ve built a strong foundation for the company pre-pandemic, which has only strengthened over the last year and a half.

We’re excited about the growth ahead of us as we focus on further investing in omni-channel, the overall customer experience in stores and online, more targeted marketing and direct customer communication, enhancing our supply chain and opening stores. Academy has a great future and we are prepared to execute to achieve it.

We’ll now open up the call for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Thank you. Our first question comes from the line of Robby Ohmes with Bank of America. Please proceed with your question.

Robert F. Ohmes — BofA Securities, Inc. — Analyst

Good morning, guys. Another great quarter. Really, two questions, I think, Ken, I know you’re not giving guidance on 2022, but could you maybe talk about how we should think about puts and takes on things like stimulus rolling off? What you’re anniversarying? I know you’ve got a lot of momentum continuing into the fourth quarter here, but can you give us any thoughts on things that you were thinking about in terms of maybe how the first half and back half might play out? And then, the second one, maybe for Michael, I think the guidance implies a little bit of a gross margin contraction in the fourth quarter. Could you kind of talk through where the fourth quarter gross margin outlook pressure versus last year may be different versus 3Q? Thanks.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thanks, Robby. Next year will be like the last couple of years will be a challenging year. There are a number of factors that will make it challenging, still continuous supply chain issues at least through the first half. We’re seeing inflation. However, usually, inflation in the early period is a good thing for retail. And there are labor pressures and the consumer continues to be challenged. That said, we feel that the programs that we’ve put in place position us well for the future. We’ve worked hard to ensure that we have the inventory to sell to overcome the supply chain issues.

We’re working hard to make sure that our product is priced properly and that we’re giving the value to the consumer, making sure that we really focus on key items that — and key price points and at the same time providing make — improved making the product to make it worth whatever the customer may be paying more if they have to do that. We feel that the consumer will continue to want to be interested in their health and wellness and, more importantly, fun. There’s no doubt that at this time in the world, we need more fun and that’s what we deliver and then just the ability of the team to execute and achieve strong results.

We’ve demonstrated that through a number of different issues and challenges. And I think we will continue to do that as we go forward. So we’re very optimistic. We also have numerous significant growth opportunities. We’ll begin opening stores next year. We’ve got continued improvements in our omni-channel business and you’re seeing that grow faster than the store and also faster than most of the competition. And we are working hard on the other initiatives that have improved our operations, such as supply chain, our planning and allocation and our merchandising and targeted marketing. So, we feel confident that we will be very competitive and have a strong future at 2022 and beyond.

Robert F. Ohmes — BofA Securities, Inc. — Analyst

Thanks. That’s really helpful. Yeah, thanks, Michael.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

This is Michael. With respect to the gross margin question in the fourth quarter, look, there’s still challenges in the marketplace that we’ve got to consider. Certainly, the supply chain has been tough. We’re winning there but it’s been a bit of street fight to be quite frank. Last quarter we spoke about our ability to move the chips around the table with our diverse vendor base to get products to our customers, the products they want to our stores. And we were able to do that not only post strong sales to build our inventory position. That being said, it’s still tough. We also need to consider the impact of inflation on consumer health and the potential of more promotion. The other thing that I’d add is that fourth quarter for us generally mix us more hard goods. And so there’s a mix issue that that occurs in the fourth quarter that we tend to make up for throughout the remainder of the year.

Robert F. Ohmes — BofA Securities, Inc. — Analyst

Got it. Thanks so much.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thanks, Robby. Appreciate it.

Operator

Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.

Greg Melich — Evercore ISI — Analyst

Hi. Thanks. I really have two questions. One is on the gross margins, if we look back over two years, the expansion just keeps getting larger. I think, Michael, last quarter you talked about where would be a, sort of, normal settling rate a few hundred basis points lower. Could you frame that again if any — if your thoughts have changed on that in any way?

Michael P. Mullican — Executive Vice President and Chief Financial Officer

No, I don’t think we have any anything new to update there. I mean, we’re still thinking about it the same way. We’re still seeing the same progress in our initiatives that would help drive that on a sustained basis. The one thing that that was a little different in the third quarter than we had planned is we didn’t get the full benefit of the mix shift that we expected. So that should help us going forward.

Greg Melich — Evercore ISI — Analyst

Got it. And then second is on capital allocation. So we have the 8 to 10 stores next year, and I guess you’ve done what, $300-some-million of the $500 million buyback. Do you expect that to become a more normal thing, the buyback, and how are you thinking about allocating the — whatever it is, $600 million of free cash flow now?

Michael P. Mullican — Executive Vice President and Chief Financial Officer

We’ll continue to evaluate it in this deferred — its $250 million that we’ve deployed, so we still have about half of it left and we’ll continue to evaluate as the business develops.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Yeah. We will continue to make sure we are financially stable. We’ve got a number of investment opportunities, one of them is stores, and we see, as we stated, we’re going to open 8 to 10 stores this year — this next year. And we will evaluate that and the number could go up into — in the future. We also are investing in our dot-com business that continues to be a good growth opportunity. And as we build stores that will help us grow our dot-com. We’ve seen store growth and dot-com growth go very much hand in hand and work on things that will improve our operations such as supply chains and our planning and allocation systems, and those will help both in the top line and the bottom line.

Greg Melich — Evercore ISI — Analyst

Got it. And as you start to do the 8 to 10 stores a year, how should we think about the capex and P&L impact of that in terms of store opening cost and the P&L and obviously capital?

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Well, nothing — I think due to update there prior than we had discussed. Again, the 8 to 10 is our target for next year. First store vintage will be in Conyers, Georgia, kind of helping round out our Atlanta markets. So we’re excited about it. The one kind of salient nugget of information that we haven’t previously provided is that the store format will mirror what we did in 2019, the 2019 vintage.

That vintage, even though it’s in its infancy and, Greg, I know you and I have toured that store. Those are the most productive stores in the chain from a sales per square footage standpoint in the last 10 years, so we’re very optimistic about them. We picked the location. From a capital spend roughly $3.5 million is how to think of it per store. We’re on track not only for 2022, but we have about that many locations identified for 2023. And as Ken said, we’re looking to deploy capital and accelerate that potentially.

Greg Melich — Evercore ISI — Analyst

That’s great. Well, everyone, have a great holiday.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thank you. You, too.

Operator

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser — UBS Securities LLC — Analyst

Good morning. Thanks a lot for taking my question. So Michael, you outlined a bunch of factors that you’re mindful of for the fourth quarter, which guided your gross margin outlook for the period. Are you already starting to see some of those factors play out in the P&L or alternatively, you just tried to frame what a conservative expectation is for the fourth quarter? And along those lines, your guidance implies a sizable step down on a multiyear stack basis, so what would be driving that?

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Well, there’s a lot of the quarter still to go, and we still have half of the quarter still to go in the roughly 15% of the year out there. So, we’re going to do what we’ve done in the past and take a cautious view with all of that’s changing in the marketplace. I mean, three weeks ago, we weren’t talking about the Delta variant and we were talking about inflation in a much different way. So, we’re off to a strong start. We like the way the quarter has started, but we want to maintain a cautious outlook when there’s still so much left to go.

Michael Lasser — UBS Securities LLC — Analyst

My follow-up question is you have seen the dollars declined about $40 million in the third quarter. You’re pointing to a lot of SG&A leverage in the fourth quarter. Some of this is coming from workforce management. Can you describe what that is further? And given all the significant growth in sales and customers you’ve had, how do you ensure that you maintain a top rate customer experience while trying to manage your P&L? Thank you.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Yeah. We’ve spoken, I think with great new, great faith about the initiatives that we’ve deployed over the past few years and the benefit we expected them to deliver in better labor management and talent development is one of them. And I’ll tell you, in a very challenging environment, Sam Johnson and the Operations team, they were able to ensure our stores were well-staffed. We’ve been able to take hours out of the store by reducing the number of tasks that team members perform at the same time be fully staffed.

And we delivered the best customer service stores — service scores that the organization has delivered, frankly, that we ever have. So we’re very confident in what we’re doing there. We do think we got the best team in the business, the folks in the blue shirt, and that’s what it’s all about. So you — I’m glad you noticed it. But the G&A levers that we deliver was because we’ve been managing the workforce a little better.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Yeah. If you think about it, there are several different things that we’ve done. One is with our new schedule — labor scheduling system, we are scheduling people when we need them. So we’re able to have people there, and during the hours when we need them rather than just a historic scheduling process. And quite frankly, we’ve also put in some things for the team members that in terms of the notification time that they have and their ability to adjust their shifts with other team members that they like so that the team members are happier about that.

We also, as Michael said, with some of the operational things we’re doing by flowing the merchandise better and by not overstocking the stores able to focus more of that labor on the force — or on the customer. And the other — another thing that we’ve done with our enthusiast program is have people who are really experts in the different areas and also staff the key areas that require assistance in the stores more than we used to. So we’ve got more customer-facing hours at the right time.

Michael Lasser — UBS Securities LLC — Analyst

Understood. If I could add one more follow-up question quickly. Your stock trades at a pretty low valuation, implying that the market assumes your sales and earnings are going to be down maybe not just next year, but the year after. Ken, recognizing you don’t want to outline specific expectations for 2022, would you be surprised given stimulus laps, the movement to other categories, would you be surprised if your sales are down 10% or more next year? Would there be a surprise in the outcome for you?

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Well, first of all, I’ll go back to the start of your question. We don’t control the PE. What we control is our performance, and our performance has demonstrated quarter after quarter after quarter, we’ve now comps to comps to comps that we can deliver during difficult times and challenging times. We are working hard to make sure that we continue to move forward. And we will be thoughtful in our plans and thoughtful in what we forecast so we don’t overextend ourselves. At the same time, we don’t like to give up a territory that we’ve already captured and we’re going to do our damnedest to make sure that we deliver the appropriate results each quarter going forward.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Michael, a couple more things just as we think about 2022. First, consumer demand in the sports and outdoors category remains very strong. Second, we’re taking share. We’ve been taking share for a while and we’re optimistic about what the future holds for us there. And I think third, probably most importantly, we’re very confident in our initiatives and how they’re developing and what they deliver.

We’ve talked for several years about our ability to expand gross margins and operating margins due to better merchandise and planning functions, utilizing machine learning tools, more localized and relevant product mix, better clear to markdown discipline. We’ve delivered those things and we expect to continue to deliver them. We talked about omni-channel. Ken spoke there. I mean, we talked in the second quarter and the first quarter that we probably needed to take a step back to take two steps forward, and we were able to do that this quarter with the growth that we delivered in omni-channel both on a one-year basis and a two-year basis.

And we talked about the initiatives we have lined up for next year, which we really haven’t even started, new stores, more targeted marketing, the supply chain. So we’ve got a lot to look forward to. And regardless of what happens in the macro environment, we’ve got a very resilient business model in the best performing years that the company had prior to the past few where in 2008, 2009 and 2010 where the consumer was strained. So we believe being on the value end of the equation is a good place to be in all environments.

Michael Lasser — UBS Securities LLC — Analyst

Thank you very much and have a good holiday.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

You, too.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thanks, Michael. You, too.

Operator

Our next question comes from the line of Chris Horvers with JPMorgan. Please proceed with your question.

Christopher Horvers — JPMorgan Securities LLC — Analyst

Thanks. Good morning. So I guess my first question is, as you talked about the ability to drive traffic, just to rehash that, how much did traffic drive the total comp and you talked about a few different initiatives. And, I don’t know, if you were going to weight those initiatives sort of in rank order in terms of impact, how would you rate those?

Ken C. Hicks — Chairman, President, and Chief Executive Officer

We — the traffic — increased traffic was the major driver for the results. We sold to more people, both new customers and existing customers, but we also have a lot of returning customers, people who hadn’t shopped us for a while. That’s actually the group that we’re very excited about because they’ve come back. And so we feel good about traffic. I would say probably first I would say probably first and foremost we got the product and products not only that they want that were in stock, much better stocked. Steve talked about that on the call that were much better stocked than we were last year at this time and last quarter.

We also, our targeted marketing and that’s been very helpful. The moves that we’ve made with our dot-com business on both our site and the addition of the app have helped. The addition of operational capabilities BOPIS we now have shipped to store. We’ve put that in place. Those have helped the other search improvements on our site so people can find things and know whether they’re going to go to a store or buy it online. And the service level in the store, the stores are doing a great job as Michael mentioned. The highest service scores that we’ve ever had in a challenging environment really bring the customer back. So I think that there — it’s difficult to say this is the one. It’s all of them working in concert to give our customers a great experience, value and assortment.

Christopher Horvers — JPMorgan Securities LLC — Analyst

Got it. And it sounds like you haven’t — the consumer started earlier this holiday season, two-part question. It sounds like you’re not seeing sort of this big pull forward that maybe some other retailers are talking about would love to hear your comment on that. And, Ken, last year you said show me a good December and I’ll show you a bad January. I mean, January, you sort of ran out of in stock and there was nothing to clear and the comps really decelerated and in the month of January. So could you maybe contextualize how much of a slowdown and how are you feeling given that so far the first half of the quarter sounds very good. Could we still have — could we have a good January and a good December?

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

Yeah, this is Steve, I’ll try to jump and answer that. I mean, as we’ve said on the call we’re pretty pleased with how November started out. It’s a good start. To Michael’s point, we still have about a little over half quarter, I think still ahead of us. So still a lot of a lot of game to be played. But probably the difference between this year and last year was we were still dealing with some pretty big supply chain disruptions. We were not quite certain how high the demand was. And what we’ve proven I think over the last year is the team has been really resilient in building a pipeline of inventory that allows us to flex up or flex down depending upon where the sales are.

So our anticipation would be heading into next year, we’re going to be in a better inventory position. You think about categories like bikes or fitness equipment or fishing, those businesses surged in the summer last year and then as we got back and stocked for holiday sold out, we went into spring really broken on a lot of those categories. We’re really happy with our overall inventory levels and content. We think it’s going to set us up well heading into spring and probably not have anywhere near the house we had last year.

Christopher Horvers — JPMorgan Securities LLC — Analyst

And that any sort of cadence, commentary how it played out just to remind us from last year?

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

I think you called it, I mean, last year, November, December we’re strong. January was a little — it’s probably the softest month of the quarter and it was really driven primarily by just running on fumes from an inventory perspective. Our goal would be and we don’t anticipate being in that same position this year.

Christopher Horvers — JPMorgan Securities LLC — Analyst

That’s great. Have a have a great holiday season. Thanks, guys.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

All right. Thank you very much, Chris.

Operator

Our next question comes from the line of Kate Fitzsimons with Wells Fargo. Please proceed with your question.

Kate Fitzsimons — Wells Fargo Securities LLC — Analyst

Yes, hi. Congratulations on the strong results and thanks for taking my question. Just two quick ones. I wanted to follow up on the supply chain commentary and just the product availability comments that were just made. It sounds like you feel good about future receipts, maybe looking ahead into 2022 in the spring season, maybe on the hard goods side. But just curious, if you can give any read maybe on how you’re feeling a bit more, perhaps on the athletic footwear side?

And then secondly, can just higher level, the category is obviously seeing some outsized demands here through the pandemic. Ultimately, when we see some sort of normalization in the category, whatever that looks like in the end. I guess in contrast, you guys seem to have a lot of drivers on the productivity and margin front looking out the next few years. Beyond 2022, just when you think about some of the key drivers that are under your control, how would you frame them looking out the next three to five years? Thank you.

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

This is Steve. I’ll try to answer the first part and let kind of Michael answer the second part. On the supply chain, I mean, we’re pretty pleased with our ability to manage through some of the disruption. I mean, obviously, to start the quarter with inventory up around 24%, ended up around 22%. We feel we’re well-positioned for holiday. As you move forward to your point, probably the biggest challenge that was out there was Vietnam being shut down for almost two months. And yeah, I mean, you hit on it. I mean, the categories that are most impacted that, athletic footwear was a big one.

At this point, we work with most of our suppliers. We have a really good visibility of what’s coming, what’s not coming. And that’s really allowed us to go out and work with other alternative plans and try to make sure we’ve got the inventory to fuel the sales. So we feel pretty good that we know what is coming or not coming and we’ve got offsets. I would also say though, that, beneath the surface, one of the things that’s great about Academy is we have a really balanced, diversified portfolio of businesses and brands.

And so, even in footwear, if we’re a little light where we like to be in athletic footwear, we have a big workforce business. We have a big casual business. So we have other categories we can lean into. And then outside of footwear and apparel, I mean, obviously, we had the hard goods categories to lean into. So we feel confident we’ve got the pipeline of inventory to drive the sales, and we’re confident that we have enough offsets, even if it’s in a particular category, maybe a little light, they have offsets in other businesses. So right now we’re feeling pretty good about that.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

And again, as a reminder, one of the things that we did see in the last quarter is the customers’ willingness to trade between brands when we might have had in-stock challenges in some brands. So from a footwear perspective, that should help us.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Yeah. With regard to — so we feel there will be challenges. There’s no question in the first quarter of next year and the second quarter for that matter. But we feel that we are taking the appropriate steps to be best positioned. And so one of the things I think it’s important to understand is while there may be some pullback that doesn’t necessarily mean there will be a give back. I can — I’m old enough to remember when things didn’t always grow in the high-teens, low-20s. There actually used to be a period of time where they grew in the single digits and that can be normal. But that’s not bad. That can still be good. And we are well-positioned for that.

To your question in looking at the long term, the customers’ trend, this is a long-term trend that will last for a long time in terms of health, wellness, fun, experience. So we have that from the outside. We’ve got physical things that we are doing with the addition of stores. We got — we’re in 16 States with 259 stores. We haven’t even in those 16 States several of the States only have two, three, four stores. So we have an opportunity for physical growth within our current footprint and then beyond. And our format has proven as we’ve grown that this format works well beyond just our core area. We have the dot-com business that is under penetrated that we’re seeing good growth, a 140% growth over the past two years that as we put more focus and make sure that we have a good site.

Operational improvements in terms of making sure that we have the right staffing, the right staff, that we have the right goods and the right stores. New operational methods like BOPIS and ship to store. And then communicating with the customers, we are in the early stages here of our targeted marketing in terms of a content and how we talk to the customer, what we talk to the customer. And so when you look at the customer, the physical opportunities we have, the operational improvements that we put in place and our ability to communicate that with the customer, I think I feel very, very good about our future and what we’re doing as a company.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

And just as a reminder, Kate, this run that we’re on it extends pre-pandemic, during the pandemic and now anniversarying the pandemic where we’ve had consistent sales and earnings growth and margin expansion. And we still have a lot to do to Ken’s point and that’s what we’re excited about. But certainly have big expectations for the future.

Kate Fitzsimons — Wells Fargo Securities LLC — Analyst

That’s great. Best of luck for holiday.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thank you. You too.

Operator

Our next question comes from the line of Daniel Imbro with Stephens. Please proceed with your question.

Daniel Imbro — Stephens, Inc. — Analyst

Hey. Good morning, guys. Thanks for taking our questions. Ken I wanted to ask on — you mentioned, obviously, some of the apparel companies are narrowing their distribution. I’d be curious to hear your opinion on how that plays out longer term. In this environment, when there’s not enough inventory, it seems like a great way to do it, but do you think it sticks as production improves? And if the industry gets into an over inventory position, how do you think that plays out given the narrower distribution?

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Well, I think it plays out well for us and we are benefiting and will continue to benefit both as they cut back on their — some of their outlets because those outlets, first of all, don’t present the product as well as it should. They don’t have the customer base and in some cases they don’t — they have a tendency to be more promotional. From our perspective, we will benefit from that and they view us as an important outlet because we bring a different customer because we — we’re at a place where sports begins for so many people. And longer term, whether they can reach their goals.

I’m assuming that they’re implementing the strategy so they feel they can. But, from our perspective, we are very happy to support them and grow with them and we’re seeing good growth with our key branded vendors as they execute their strategy. And I think they all realize they can’t do it all themselves. They need people like Academy to support them to achieve their long-range goals. There are others that they may not need, but they know Academy is important to them and we will work hard with them. Steve and his team have developed great relationships. And we will continue to grow and develop as they do. But for their strategy, I can’t answer. For our strategy, we appreciate it.

Daniel Imbro — Stephens, Inc. — Analyst

That’s helpful. I guess a quick follow up on that, Steve, have the success of Academy in the last year and a half opened up any new national brand that you could get in your store, that maybe you couldn’t previously? An how is that changing your merchandising initiative of maybe private label versus national?

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

So yeah, I mean obviously when business is good, people are more receptive to conversations. I mean, we’re always talking to new vendors. I mean a couple that we’ve launched this year, I mean when we spent some time earlier talking about was Hydro Flask, that wasn’t in our assortment before we added them in. So we’re pretty excited about that. Performance has been good. We continue to talk to other brands out there.

I mean some — we probably aren’t ready to share yet but we will one when we bring them in. It’s allowed us to expand categories like North Face where it was in limited stores to all stores in the more category. So it’s definitely opening up doors for us. And what our customer has shown is there’s a robust appetite for newness, new ideas, new things that’s why we — on the call talked about our collaboration, Whataburger and Magellan or we talked about getting Yellowstone product out there or the Pizza Ovens that we’re selling right now. It’s definitely brought some of those brands with things to the table and we’ll continue to work on those.

In terms of shift between private label and national brands, I mean, we’ve cited a number it’s right around 20%, private brand 80%, national brand. I don’t see the percentage of private brand going down. We’ve talked about maybe over time it settles in longer term and somewhere in that 75-25 ratio. I don’t see that changing in terms of anything that we’ve seen right now from an availability perspective. But we’re always going to be talking to new suppliers looking for new ideas. And if it’s something that fits within our bookends, it makes sense for our customer, we’ll definitely bring it in.

Daniel Imbro — Stephens, Inc. — Analyst

Great. Thanks for the color. I’ll stick to the one follow-up rule and hop back in the queue. Thanks, guys.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thanks Dan. Appreciate it.

Operator

Thank you. Ladies and gentlemen, we have time for two more questions. Our next question comes from the line of Seth Basham with Wedbush. Please proceed with your question.

Seth Basham — Wedbush Securities — Analyst

Thanks a lot. Good morning. Thanks for taking my question. My first question is around inflation and just thinking about how much inflation contributed to the third quarter comp and how much you expect to contribute to comps over the next couple of quarters.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

So we said it on a call that the majority of the comp was driven by increased traffic to the stores. We’ve also been very upfront. I mean I think it’s widely publicized. I mean there are definitely cost increases the vendors have passed along to us that we’re seeing on our own private brand. We’re being very thoughtful about where and how we have taken price increases. We view ourselves as the value provider in our space. And we are very focused — laser-focused on making sure we don’t seed that positioning and we make sure that we keep providing the customer the great quality and value that they’re looking for.

So there’s been some surgical moves. We’ve taken a couple of items up here and there. But right now the vast majority of what we’re seeing has come through traffic increases. The places where we’re actually getting AUR gains has been more from less promotions than anything else quite candidly. I mean the pullback of the suppliers that was asked on an earlier call and distribution has really kind of rationalized the promotional environment out there. And we’re seeing stronger sell-throughs at regular price, which means less clearance and an overall healthier margin sales position for us. So that’s what we’re seeing candidly in most of the AUR increase.

Seth Basham — Wedbush Securities — Analyst

Got it. That’s really helpful perspective. And just as a follow-up to that, Ken, you mentioned that usually inflation in that early period is a good thing for retail. When do you think the turning point might be?

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Depends on how long and how high it gets. If I think transitional has been taken out of the vocabulary. But if it goes on for an extended period of time and like I said, I’m old, so I lived through when it went for years. That’s a problem. But we’ve had periods where we’ve had let’s call it intermediate inflation and that did not have a big impact. That was actually usually during a high-growth period. So it will really depend on how high and how long.

Seth Basham — Wedbush Securities — Analyst

Fair enough. Thank you very much and happy holidays.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Yeah. Thanks.

Operator

Our final question comes from the line of John Zolidis with Quo Vadis Capital. Please proceed with your question.

John Zolidis — Quo Vadis Capital, Inc. — Analyst

Hi, guys. Good morning, and thanks for taking my question. I know this has been addressed a couple of ways but as we’ve sat here, we kind of think about Academy as a simplistic view of it as a pandemic beneficiary and that therefore as the pandemic recedes, you get lower sales and margins. And you’ve talked from a number of angles about why that might not be the case from internal standpoint and also what the vendors are doing, from a distribution standpoint in your customer.

I was wondering if you could talk a little bit about specific innovation in categories that you think are coming down for next year that you believe will drive customer excitement and repeat purchases or incremental purchases. Maybe specific categories that you think are going to help to drive business next year kind of irrespective of what goes on with the pandemic and the consumer. Thanks.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Yeah, John, we were performing well before the pandemic which is one reason that gives us confidence. And the other thing is it’s a little more difficult for those who are outside of our market areas to see, but if you’ve been to our market and it’s not just Texas or Florida, but in the Carolinas and in Arkansas and Oklahoma, Mississippi, Alabama, they for the most part have been open. And so they are –I won’t call them post-pandemic because the pandemic is still here, but they are operating as they did before the pandemic, and we’re seeing significant growth in all of those areas. So that’s one of the things that gives us confidence.

In terms of categories of things, people are going to continue to build on the hobbies and habits and things that they’ve been doing and some of the new things that will help them in exercise equipment. We’ve got new connected exercise with iFit, that’s doing very, very well. And so that will bring in a new customer and also get a customer to upgrade. In camping, Steve mentioned, North Face, we’ve added that in camping in a number of stores, but we’ve also stepped up our efforts with Magellan and with Coleman that we will see more people who are going outdoors and camping. In fishing, we’ve got a number of things that have improved in some of the fishing equipment that we have.

And so those areas — in grilling, Steve mentioned the pizza oven. You can cook a pizza in one minute. I mean, so you’re cooking your steak, the kids have their pizza, everybody’s happy, it’s phenomenal. It’s a phenomenal item. Everybody who has a grill should have a pizza oven. And so those are some of the things that will drive big important categories, as well as what we’re seeing in apparel. We continue to some of the things vendors that Steve’s working with that we’ll be adding. New apparel vendors, our new Freely private label, but also Nike Yoga. What we’re doing with some of the new things from Adidas and Under Armour. So, I’m excited about what we’ve got in terms of newness and Steve you’re closer to it than I am.

Steven P. Lawrence — Executive Vice President and Chief Merchandising Officer

No, you hit on it. I mean, there — we have a steady diet of newness coming from new brands across multiple categories, brand expansions or extensions in the new categories. Ken brought up fishing. We’ve got some great brands like Googan and Bubba Blade, which we’re extending into other categories within fishing. We’ve got innovation in a lot of our private label. Ken mentioned some of the stuff we’re bringing in, in camping, outdoor cooking, backyard living we’ve got a private brand, Mosaic. We’re doing a whole brand relaunch on for spring. We’ve got some new innovation coming in there. So, there is — there’s a lot of newness coming, I think, to really propel the business forward and keep the customer engaged with us.

John Zolidis — Quo Vadis Capital, Inc. — Analyst

Great, thanks very much for that answer and happy holidays to everyone.

Michael P. Mullican — Executive Vice President and Chief Financial Officer

Thank you.

Ken C. Hicks — Chairman, President, and Chief Executive Officer

Thanks, John. Well, I appreciate the interest and the questions, good questions and hopefully, the comments we gave you helped to answer those questions. We appreciate all the support from our shareholders and we look forward to — as Michael said, we’re off to a good start and we anticipate that we will continue to have a good holiday season and we’ve got a very bright future. We’re in it for the long-term And we’ve got a lot of good things working as I said. I hope that everybody has a very, very happy holidays and a terrific New Year and you get a chance to shop at Academy or academy.com. Thanks. Happy Holidays.

Operator

[Operator Closing Remarks]