Academy Sports & Outdoors, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-looking Statements This Quarterly Report on Form 10-Q (this "Quarterly Report") includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. Forward-looking statements include all statements that are not historical facts, including statements reflecting our current views with respect to, among other things, our operations and financial performance. These forward-looking statements are included throughout this Quarterly Report, including this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in the section entitled "Risk Factors," and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "future," "will," "seek," "foreseeable," the negative version of these words or similar terms and phrases to identify forward-looking statements in this Quarterly Report. The forward-looking statements contained in this Quarterly Report are based on management’s current expectations and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include but are not limited to those described under "Risk Factors" in the Company's final prospectus dated October 1, 2020 (the "Prospectus"), as filed with the Securities and Exchange Commission (the "SEC") on October 2, 2020 pursuant to Rule 424(b)(4) under the Securities Act, and in this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC's website at www.sec.gov, and also include the following: • overall decline in the health of the economy and consumer discretionary spending; • our ability to predict or effectively react to changes in consumer tastes and preferences, to acquire and sell brand name merchandise at competitive prices and/or to manage our inventory balances; • intense competition in the sporting goods and outdoor recreation retail industries; • the impact of COVID-19 on our business and financial results; • our ability to safeguard sensitive or confidential data relating to us and our customers, team members and vendors; • risks associated with our reliance on internationally manufactured merchandise; • our ability to comply with laws and regulations affecting our business, including those relating to the sale, manufacture and import of consumer products; • claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient; • harm to our reputation; • our ability to operate, update or implement our information technology systems; • risks associated with disruptions in our supply chain and losses of merchandise purchasing incentives; • any failure of our third-party vendors of outsourced business services and solutions; • our ability to successfully continue our store growth plans or manage our growth effectively, or any failure of our new stores to generate sales and/or achieve profitability; • risks associated with our e-commerce business; • risks related to our owned brand merchandise; • any disruption in the operation of our distribution centers; • quarterly and seasonal fluctuations in our operating results; • the occurrence of severe weather events, catastrophic health events, natural or man-made disasters, social and political conditions or civil unrest; • our ability to protect our intellectual property and avoid the infringement of third-party intellectual property rights; • our dependence on our ability to meet our labor needs; 30 • the geographic concentration of our stores; • fluctuations in merchandise costs and availability; • our ability to manage the growth of our business; • our ability to retain key executives; • our ability to successfully pursue strategic acquisitions and integrate acquired businesses; • payment-related risks; • the effectiveness of our marketing and advertising programs; • our substantial indebtedness; and • our sponsor (affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR")) controls us and their interests may conflict with ours or yours in the future. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements. Any forward-looking statement made by us in this Quarterly Report speaks only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws. All references to "Academy," "Academy Sports + Outdoors," "we," "us," "our" or the "Company" in this Quarterly Report refer to (1) prior to October 1, 2020, New Academy Holding Company, LLC, a Delaware limited liability company and the prior parent holding company for our operations, and its consolidated subsidiaries; and (2) on and after October 1, 2020, Academy Sports and Outdoors, Inc., a Delaware corporation and the current parent holding company of our operations, and its consolidated subsidiaries. 31 The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited financial statements and related notes included elsewhere in this Quarterly Report for the thirteen and thirty-nine weeks ended October 31, 2020 and our audited financial statements for the fiscal year ended February 1, 2020 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. See the section of this Quarterly Report entitled "Cautionary Statement Regarding Forward-Looking Statements." When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. Known material factors that could affect our financial performance and actual results, and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this discussion or otherwise made by our management, are described in the "Risk Factors" sections of the Prospectus and this Quarterly Report. Any reference in this Quarterly Report to "year" or any year in particular refers to our fiscal year, which represents the fifty-two or fifty-three week period ending on the Saturday closest to January 31. Any reference in this Quarterly Report to the "current quarter", "2020 third quarter" or similar reference refers to the thirteen week period ended October 31, 2020, and any reference in this Quarterly Report to the "prior year quarter", "2019 third quarter" or similar reference refers to the thirteen week period ended November 2, 2019. Any reference in this Quarterly Report to "current year-to-date", "year-to-date 2020" or similar reference represents the thirty-nine week period ended October 31, 2020, and any reference in this Quarterly Report to "prior year-to-date", "year-to-date 2019" or similar reference represents the thirty-nine week period ended November 2, 2019. Unless otherwise specified, all comparisons regarding the current quarter 2020 are made to the corresponding quarter of 2019. All statements in this Quarterly Report concerning our current and planned operations are modified by reference to our discussion of recent developments related to the COVID-19 pandemic, and our ability to carry out our current and planned operations are dependent on further developments associated with the COVID-19 pandemic. Overview We are one of the leading full-line sporting goods and outdoor recreation retailers in the United States. Our mission is to provide “Fun for All” and fulfill this mission with a localized merchandising strategy and value proposition that deeply connect with a broad range of consumers. Our broad and localized assortment appeals to all ages, incomes and aspirations, including beginning and advanced athletes, families enjoying outdoor recreation, and enthusiasts pursuing their passion for sports and the outdoors. We sell a range of sporting and outdoor recreation products, including sporting equipment, apparel, footwear, camping gear, patio furniture, outdoor cooking equipment, and hunting and fishing gear, among many others. Our strong merchandise assortment is anchored by our broad offering of year-round items, such as fitness equipment and apparel, work and casual wear, folding chairs, wagons and tents, training and running shoes, and coolers. We also carry a deep selection of seasonal items, such as sports equipment and apparel, seasonal wear and accessories, hunting and fishing equipment and apparel, patio furniture, trampolines, play sets, bicycles, and severe weather supplies. We provide locally relevant offerings, such as crawfish boilers in Louisiana, licensed apparel for area sports fans, baits and lures for area fishing spots, and beach towels in coastal markets. Our value-based assortment also includes exclusive products from our portfolio of 17 owned brands. As of October 31, 2020, we operated 259 stores that range in size from approximately 40,000 to 130,000 gross square feet, with an average size of approximately 70,000 gross square feet, throughout 16 contiguous states located primarily in the southern United States. Our stores are supported by over 20,000 team members, three distribution centers, and our rapidly growing e-commerce platform, www.academy.com. We are deepening our customer relationships, further integrating our e-commerce platform with our stores and driving operating efficiencies by developing our omnichannel capabilities, such as our buy-online-pickup-in-store ("BOPIS") program, which we launched in 2019. 32 The following table summarizes store activity for the periods indicated: Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 Beginning stores 259 253 Q1 new stores — 1 Q2 new stores — 2 Q3 new stores — 5 Closed — (2) Ending stores 259 259 Relocated stores — — Trends and Other Factors Affecting Our Business Various trends and other factors affect or have affected our operating results, including: Overall Economic Trends. All of our sales are generated within the United States, making our results of operations highly dependent on the U.S. economy and U.S. consumer discretionary spending. Macroeconomic factors that may affect customer spending patterns, and thereby our results of operations, include, but are not limited to: health of the economy; consumer confidence in the economy; financial market volatility; wages, jobs and unemployment trends; the housing market, including real estate prices and mortgage rates; consumer credit availability; consumer debt levels; gasoline and fuel prices; interest rates and inflation; tax rates and tax policy; immigration policy; import and customs duties/tariffs and policy; impact of natural or man-made disasters; legislation and regulations; international unrest, trade disputes, labor shortages, and other disruptions to the supply chain; changes to raw material and commodity prices; national and international security and safety concerns; and impact any of public health pandemics. Factors that impact consumer discretionary spending, which remains volatile globally, continue to create a complex and challenging retail environment for us. See the section of this Quarterly Report entitled "Impact of COVID-19 on Our Business." Consumer Preferences and Demands. The level of success we achieve is dependent on, among other factors, how accurately and timely we predict consumer tastes and preferences regarding sporting goods and outdoor recreation merchandise, the level of consumer demand, the availability of merchandise, and the competitive environment. Our products must appeal to a broad range of customers whose preferences cannot be predicted with certainty and are subject to change. We must identify, obtain supplies of, and offer to our customers, attractive and high-quality merchandise on a continuous basis. It is difficult to predict consistently and successfully the products and services our customers will demand as we often purchase products from our vendors several months in advance of the proposed delivery. If we misjudge the market for our products, we may be faced with excess inventories for some products. We utilize a variety of measures to help us identify products that are relevant to our customer base and to better understand changing customer trends, such as social media analysis, internet search analytics, internal customer insights and vendor intelligence. Strategic Inventory Management. We must maintain sufficient inventory levels of merchandise that our customers desire to successfully operate our business. A shortage of popular merchandise could reduce our net sales. Conversely, we also must seek to avoid accumulating excess inventory to maintain appropriate in-stock levels. If we overstock unpopular merchandise, then we may be forced to take significant inventory markdowns or miss opportunities for the sale of other merchandise, both of which could have a negative impact on our profitability, and, in turn, our sales may decline or we may be required to sell the merchandise we have obtained at lower prices. We have deployed several new tools over recent years to improve inventory handling and vendor management, including third-party programs to analyze our inventory stock and execute a disciplined markdown strategy throughout the year at every location. This implementation, along with other factors, has allowed us to improve our inventory management in stores, increasing our average inventory turns from 1.96x in the year-to-date 2019 to 2.79x in the year-to-date 2020. We have coupled these tools with the data we have been able to collect from our Academy Credit Card program and targeted customer surveys, so that we can better estimate future inventory requirements. It is imperative that we continue to find innovative ways to strengthen our inventory management if we are to remain competitive and expand our margins on a go-forward basis. During the year-to-date 2020, we experienced significant inventory reductions from high sell-through during the period. We expect to use cash to replenish such inventory throughout the rest of the current fiscal year, which we expect will impact our net cash provided by operating activities for the fourth quarter of 2020. 33 Value Strategy . We offer a broad assortment of products at competitive prices that offer extraordinary value. Our in-store experience includes value-added customer service delivered by our highly trained and passionate staff, such as free assembly of certain products (such as bicycles, grills, and bows), fitness equipment demonstrations, issuances and renewals of hunting and fishing licenses, fishing line spooling and assisting customers with carrying bulk items to the car, among others. Our goal is to consistently offer better value than our peer retailers. Our value-based pricing gives us an advantage over the specialty retailers and other large format retailers, who typically offer their more limited assortment at premium prices. Our broad assortment gives us an advantage over mass general merchants who typically do not carry the leading national brands sold at Academy. We have also continued to add owned brand products to our assortment of products, which we generally price lower than the national brand products of comparable quality that we also offer. A shift in our sales mix in which we sell more units of our owned brand products and fewer units of the national brand products would generally have a positive impact on our gross margin but an adverse impact on our total net sales. E-commerce / BOPIS. We expect that the expansion and enhancement of our omnichannel capabilities will be a key driver of growth in our net sales and gross margin. We continue to invest in initiatives that will increase traffic to our e-commerce website and drive increased online sales conversion. Our improved website also supports our stores with digital marketing and our BOPIS program. In the thirty-nine weeks ended October 31, 2020 and November 2, 2019, BOPIS accounted for approximately 50% and 15%, respectively, of our e-commerce sales and approximately 5% and 1%, respectively, of total merchandise sales for such periods. Our website also allows us to reach customers outside of our current store footprint and introduces new customers to the Academy brand. Our website is also a platform for marketing and product education, allowing us to connect further with our customers. We believe it is important that we continue to grow our omnichannel capabilities, especially in light of changing consumer preferences as a result of the COVID-19 pandemic, which, together with recent enhancements made to our website and omnichannel capabilities, contributed to the substantial increase in e-commerce sales during the year-to-date 2020. It is, however, difficult to ascertain with precision what portion of our increased e-commerce sales during the year-to-date 2020 was attributable to the COVID-19 pandemic as compared to such recent enhancements. We expect to continue to invest in expanding and enhancing our omnichannel capabilities, including BOPIS, will continue to require significant investments by us. Competition . The U.S. sporting goods and outdoor recreation retail industries are highly competitive and fragmented. We compete with specialty footwear and outdoor retailers, traditional sporting goods stores, large format sporting goods stores, mass general merchants and catalogue and internet retailers. This competition takes place both in physical retail locations and online. Some of our competitors may be significantly larger and have substantially greater resources than us. Pressure from our competitors could require us to reduce our prices or increase our spending for advertising and promotion. Traditional competitors have become increasingly promotional and, if our competitors reduce their prices, it may be difficult for us to reach our net sales goals without reducing our prices, which could impact our margins. We may require significant capital in the future to sustain or grow our business, including our store and e-commerce activities, due to increased competition. Sourcing and Supply Chain Management. For our business to be successful, our suppliers must provide us with quality products in substantial quantities, in compliance with regulatory requirements, at acceptable costs and on a timely basis. Competition for resources throughout the supply chain, such as production and transportation capacities, has increased. Trends affecting the supply chain include the impact of fluctuating prices of labor and raw materials on our suppliers, as well as the impact of the COVID-19 pandemic. The merchandise we sell is sourced from a wide variety of domestic and international suppliers and our ability to find qualified suppliers and access merchandise in a timely and efficient manner is often challenging, particularly with respect to merchandise sourced outside the United States. We generally do not have long-term written contracts with our suppliers that would require them to continue supplying us with merchandise, particular payment terms or the extension of credit. As a result, these suppliers could modify the terms of these relationships due to general economic conditions or otherwise. Changes in our relationships with our suppliers (which can occur for various reasons in or out of our control) also have the potential to increase our expenses and adversely affect our results of operations. Moreover, many of our suppliers provide us with merchandise purchasing incentives, such as return privileges, volume purchasing allowances and cooperative advertising, and a decline or discontinuation of these incentives could severely impact our results of operations. In addition, the announcement or imposition of any new or increased tariffs, duties or taxes as a result of trade or political tensions between the United States and other countries or otherwise could adversely affect our supply chain. In recent years, the Trump administration imposed multiple rounds of tariffs on exports from China, where we and many of our vendors source commodities. As a result, we have experienced rising inventory costs on owned brand products we directly source from China, as well as national brand products from China that we source through our vendors. These higher inventory costs have resulted in higher prices and/or lower margins, thus resulting in a negative impact to net sales and/or gross margin. On January 15, 2020, President Trump signed Phase I of a new trade agreement with China, signaling potential resolution between the two countries to the ongoing trade war in 2020. However, no significant modifications have been enacted to date, relative to the escalated tariffs which impact our business. 34 New Store Openings. We expect that new stores will be a key driver of growth in our net sales and gross margin in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. We are continually assessing the number of locations available that could accommodate our preferred size of stores in markets we would consider and we expect to open eight to 10 new stores per year, starting in 2022, similar to our growth rates from 2018 through 2019. The performance of new stores may vary depending on various factors such as the store opening date, the time of year of a particular opening, the amount of store opening costs, the amount of store occupancy costs and the location of the new store, including whether it is located in a new or existing market. For example, we typically incur higher than normal team member costs at the time of a new store opening associated with set-up and other opening costs. Most of our stores achieve profitability within the first twelve months of opening a store. We believe our real estate strategy has positioned us well for further expansion. However, our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. New stores in new markets, where we are less familiar with the target customer and less well-known by the target customer, may face different or additional risks and increased costs compared to new stores in existing markets. We may have to broaden our assortment to merchandise more locally as we grow into newer markets. Managing our growth effectively will require us to continue to enhance our store management systems, financial and management controls and information systems. We will also be required to hire, train and retain store management and store personnel, which, together with increased marketing costs, affects our operating income and net income. Interim Results and Seasonality . Our business is subject to seasonal fluctuations. A significant portion of our net sales and profits is driven by summer holidays, such as Memorial Day, Father’s Day and Independence Day, during the second quarter. Our net sales and profits are also impacted by the November/December holiday selling season, and in part by the sales of cold weather sporting goods and apparel during the fourth quarter. 53rd Week . We operate on the retail industry’s 4-5-4 calendar. The 4-5-4 calendar is a guide for retailers that ensures sales comparability between years by dividing the year into months based on a 4 weeks – 5 weeks – 4 weeks format. Every five to six years a week is added to the 4-5-4 fiscal calendar. Impact of COVID-19 on Our Business The outbreak of COVID-19, which has been declared a global pandemic by the World Health Organization, continues to affect our business, as well as our customers, team members and suppliers, and has resulted in federal, state and local governmental authority safety recommendations and requirements aimed at mitigating the spread of the virus, such as stay-at-home orders, prohibitions of large group gatherings, travel restrictions and closures of certain businesses. The scope and nature of these impacts continue to evolve on a daily basis, including with a potential resurgence in COVID-19 cases in the 2020 fourth quarter and beyond. In response to these restrictions, and in order to serve our customers while also providing for the safety of our customers, team members and service providers, we have taken many actions, including cleaning each store professionally on a regular basis, equipping each store with hand sanitizer stations and signage illustrating how to socially distance within the store, wearing face coverings, limiting the number of customers admitted at one time, and having protective shields installed at cash registers and other countertops. We have incurred increased costs related to the implementation of these measures. We also incurred temporary wage premiums and additional sick time for our active store and distribution center team members. To mitigate the cost of these measures, during the thirteen weeks ended May 2, 2020, we temporarily furloughed a significant number of corporate, store and distribution center team members and enforced temporary pay cuts for executives and remaining active team members as well as other strategic actions to significantly reduce operating expenses during the period. We also drew down $500 million on our 2018 ABL Facility (as defined below) in March 2020 as a precautionary measure to ensure financial flexibility and maximize liquidity. We shortened the operating hours of our stores and fully closed six stores at some point during the thirteen weeks ended May 2, 2020, only one of which was closed for more than a week. We have also reduced, deferred or cancelled planned capital expenditures, primarily related to store remodels, have worked with our business partners to modify vendor and landlord payments and terms, and reduced near term marketing. Our temporary furlough period ended by June 8, 2020 for all of our store, distribution center and corporate team members, and on June 25, 2020, we completed repaying the $500 million draw on the 2018 ABL Facility. All three of our distribution centers remained open during the year-to-date 2020, all of our 259 stores have been fully operational since May 20, 2020, and our corporate office has been fully open since June 8, 2020. We continue to monitor the rapidly evolving situation and expect to continue to adapt our operations to address federal, state, and local requirements as well as to implement standards or processes that we determine to be in the best interest of our team members, customers, and communities. 35 The impact of the pandemic and actions taken in response to it had varying effects on our results of operations, as further discussed below, and our business has been especially unpredictable during the year-to-date 2020. However, as an essential retailer, we have been able to serve our customers as their needs evolved during the pandemic. In early March 2020, we saw the acceleration of sales in specific categories, such as outdoor cooking, camping, shooting sports and hunting. Later in the first quarter, customers realized they needed to find ways to entertain their families and stay fit while schools and gyms closed, so they turned to us for isolated recreation, outdoor and leisure activities that we support, and as a result, we saw increased sales of weights, yoga mats, treadmills, indoor bicycles, fishing, hunting and camping gear, backyard and driveway games, trampolines, patio seating and grills. We anticipate that the increased popularity of isolated recreation, outdoor and leisure activity products will continue for the duration of the pandemic and will result in a long-term increase to our customer base. At the same time, during the first quarter 2020 we experienced decreased sales of certain of our offerings, primarily for apparel and footwear, and had to from time to time cancel certain of our purchase orders for these products. We believe that our consumers feel comfortable visiting our stores due to the fact that we have big-box stores and curbside pick-up availability for online orders, making it easier to socially distance, and that we are not in, or tethered to, malls, as customers seek to avoid crowded spaces. We also saw a significant increase in customers purchasing our products through omnichannel platforms, specifically as customers increasingly take advantage of our curbside pickup service, which we launched during the first quarter 2020. The extent to which our operations and business trends will be impacted by, and any unforeseen costs will result from, the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. These developments include, among other things, new information that may emerge concerning the severity of the outbreak and health implications, the development of vaccines to mitigate the risk of COVID-19, actions by government authorities to contain the outbreak or treat its impact, and changes in consumer behavior resulting from the outbreak and such government actions. We continue to monitor the evolving situation as there remain many uncertainties regarding the pandemic and its resurgence, including the anticipated duration. See the section of the Prospectus entitled "Risk Factors—Risks Related to Our Business—The impact of COVID-19 may adversely affect our business and financial results." How We Assess the Performance of Our Business Our management considers a number of financial and operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate projections. These metrics include operational measures and non-GAAP metrics supplemental to our GAAP results. Comparable Sales. We define comparable sales as the percentage of period-over-period net sales increase or decrease, in the aggregate, for stores open after thirteen full fiscal months, as well as for all e-commerce sales. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this Quarterly Report regarding our comparable sales may not be comparable to similar data made available by other retailers. Stores which have been significantly remodeled or relocated are removed from this calculation until the new store has been in operation for substantially all of the periods being compared. Stores which have been closed for an extended period of time due to circumstances beyond our control are also removed from the calculation. Any sales made through our website are allocated to e-commerce sales for the purpose of measuring comparable sales, regardless of how those sales are fulfilled, whether shipped to home or picked up in-store or curbside through BOPIS. For example, all BOPIS transactions, which are originated by our website, are allocated to e-commerce sales for the purpose of comparable sales, despite the fact that our customers pick-up these purchases from a specific store. Increases or decreases in e-commerce between periods being compared directly impact the comparable sales results. Various factors affect comparable sales, including consumer preferences, buying trends and overall economic trends; our ability to identify and respond effectively to customer preferences and local and regional trends; our ability to provide an assortment of high quality/value oriented product offerings that generate new and repeat visits to our stores and our website; the customer experience and unique services we provide in our stores; our ability to execute our omnichannel strategy, including the growth of our e-commerce business; changes in product mix and pricing, including promotional activities; the number of items purchased per visit and average order value; a shift in the timing of a holiday between comparable periods; and the number of stores that have been in operation for more than 13 months. 36 Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow. Management uses Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish and award discretionary annual incentive compensation, to report our compliance with certain covenants in our debt agreements, and to compare our performance against that of other peer companies using similar measures. See "Non-GAAP Measures" below. E-commerce Penetration. E-commerce penetration is defined as total e-commerce merchandise sales (which includes BOPIS) divided by total Company merchandise sales. Components of Our Results of Operations Our profitability is primarily influenced by fluctuations in net sales, gross margin and our ability to leverage selling, general and administrative expenses. Net Sales . Net sales are derived from in-store and e-commerce merchandise sales, net of sales tax and an allowance for merchandise returns. Net sales fluctuations can be driven by new store openings, comparable sales increases or decreases including e-commerce sales, our ability to adjust inventory based on sales fluctuations, our management of vendor relations and meeting customer demand, allowances and logistics, seasonality, unseasonal or extreme weather, changes in consumer shopping preferences, consumer discretionary spending, and market and sales promotions. Gross Margin. Gross margin is our net sales less cost of goods sold. Our cost of goods sold includes the direct cost of merchandise and costs related to procurement, warehousing and distribution. These costs consist primarily of payroll and benefits, occupancy costs and freight and are generally variable in nature relative to our sales volume. Our gross margin depends on a number of factors, such as net sales increases or decreases, our promotional activities, product mix including owned brand merchandise sales, and our ability to control cost of goods sold, such as inventory and logistics cost management. Our gross margin is also impacted by variables including commodity costs, freight costs, shrinkage and inventory processing costs and e-commerce shipping costs. We track and measure gross margin as a percentage of net sales in order to evaluate our performance against profitability targets. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses include store and corporate administrative payroll and payroll benefits, store and corporate headquarters occupancy costs, advertising, credit card processing, information technology, pre-opening costs and other store and administrative expenses. These expenses are both variable and fixed in nature. We track and measure operating expenses as a percentage of net sales in order to evaluate our performance against profitability targets. Management of SG&A expenses depends on our ability to balance a control of operating costs, such as store, distribution center, and corporate headcount, information technology infrastructure and marketing and advertising expenses, with efficiently and effectively servicing our customers. We expect that our SG&A expenses will increase in future periods due to our continuing growth and in part to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a newly public company. Income Tax Expense (Benefit). Prior to October 1, 2020, New Academy Holding Company, LLC, our prior ultimate parent company, was treated as a flow through entity for U.S. federal income tax purposes and thus no federal income tax expense was recorded in our consolidated statements of income for periods prior to October 1, 2020. Our tax rate prior to October 1, 2020 was almost entirely the result of state income taxes. In connection with our initial public offering ("IPO"), as a result of the Reorganization Transactions (see Note 1 to the financial statements included in this Quarterly Report) completed on October 1, 2020, as described further in the Prospectus, Academy Sports and Outdoors, Inc. ("ASO, Inc.") is treated as a U.S. corporation for U.S. federal, state, and local income tax purposes and accordingly, a provision for income taxes has been recorded for the anticipated tax consequences of our reported results of operations for federal, state and local income taxes since October 1, 2020. 37 Results of Operations Thirteen Weeks Ended October 31, 2020 Compared to Thirteen Weeks Ended November 2, 2019 The following table sets forth amounts and information derived from our unaudited statements of income for the periods indicated as follows (dollar amounts in thousands): Thirteen Weeks Ended Change October 31, 2020 November 2, 2019 Dollars Percent Net sales $ 1,349,076 100.0 % $ 1,145,203 100.0 % $ 203,873 17.8 % Cost of goods sold 908,565 67.3 % 782,781 68.4 % 125,784 16.1 % Gross margin 440,511 32.7 % 362,422 31.6 % 78,089 21.5 % Selling, general and administrative expenses 358,955 26.6 % 309,246 27.0 % 49,709 16.1 % Operating income 81,556 6.0 % 53,176 4.6 % 28,380 53.4 % Interest expense, net 22,399 1.7 % 24,585 2.1 % (2,186) (8.9) % Other (income) expense, net 764 0.1 % (467) 0.0 % 1,231 NM Income before income taxes 58,393 4.3 % 29,058 2.5 % 29,335 101.0 % Income tax expense (benefit) (1,193) (0.1) % 506 0.0 % (1,699) NM Net income $ 59,586 4.4 % $ 28,552 2.5 % $ 31,034 108.7 % *Percentages in table may not sum properly due to rounding. **NM - Not meaningful Net Sales . Net sales increased $203.9 million, or 17.8%, in the 2020 third quarter over the prior year third quarter due to an increase in comparable sales of 16.5%, as well as additional net sales generated by new locations. As of the end of the 2020 third quarter, we had the full benefit of five stores opened during the prior year quarter. Collectively, these stores accounted for a net $13.6 million increase in net sales for the 2020 third quarter. The 16.5% increase in comparable sales resulted from favorable results across most of our merchandise divisions. The sports and recreation division sales increased as a result of various products such as fitness equipment and accessories, bikes, barbecues and grills, golf and outdoor games. The increase in the outdoors division was primarily driven by strong sales in firearms, ammunition, fishing, hunting and shooting sports products. The footwear division sales increased due to increases in the athletic and work footwear categories which were partially offset by declines in team sports footwear sales. The apparel division decreased as a result of declines in sales of licensed apparel resulting from the Astros World Series appearance in the prior year which were partially offset by increases in athletic, outdoor and seasonal, and youth apparel. We believe our merchandise division sales continue to be impacted by the COVID-19 pandemic which has caused increases in popularity in our outdoors and sports and recreation merchandise divisions as demand has increased in the merchandise categories that provide customers with isolated recreation, outdoor and leisure activities. Additionally we believe that the substantial increase in e-commerce sales described below and ongoing improvements to our business, such as enhancements to our merchandise planning and allocation capabilities that began in February 2019 and the launch of the Academy Credit Card in May 2019, together with our big-box store format and the implementation of a number of safety measures within our stores in response to COVID-19 that helped facilitate our customers' ability to obtain the products they sought in a safe manner, contributed to the increase in comparable sales during this period. E-commerce net sales increased $49.5 million, or 95.9%, in the 2020 third quarter compared to the prior year third quarter and represented 7.5% of merchandise sales for the 2020 third quarter compared to 4.5% in the prior year. This increase was driven by a change in consumer shopping preferences resulting from the COVID-19 pandemic. Additionally, enhancements to our e-commerce platform, including the introduction of buy-online-pickup-in-store ("BOPIS") at the end of the 2019 second quarter and rapid development of curbside fulfillment to further support BOPIS in the 2020 first quarter contributed to the increase in e-commerce sales. 38 Gross Margin. Gross margin increased $78.1 million, or 21.5%, to $440.5 million in the 2020 third quarter from $362.4 million in the 2019 third quarter. As a percentage of net sales, gross margin increased 1.1% from 31.6% in the 2019 third quarter to 32.7% in the 2020 third quarter. The increase of 110 basis points in gross margin is primarily attributable to: • 106 basis points of favorability in merchandise margins from less clearance activity and lower markdowns. Selling, General and Administrative Expenses. SG&A expenses increased $49.7 million to $359.0 million in the 2020 third quarter as compared to $309.2 million in the 2019 third quarter. As a percentage of net sales, SG&A expenses were down 0.4% to 26.6% in the 2020 third quarter compared to 27.0% in the 2019 third quarter. The decrease of 40 basis points in SG&A is primarily attributable to: • 165 basis point decrease in property and facility fees as a result of leveraging costs on increased sales; • 58 basis point decrease in advertising as a result of favorable leveraging of costs on increased sales and reduced marketing and promotional activities; partially offset by • 94 basis point increase in employee costs, primarily driven by increased incentive compensation expense and incremental expenses resulting from the expensing of certain share-based awards in connection with the completion of the IPO; and • 87 basis point increase in professional fees driven by the expensing of fees related to the termination of our monitoring agreement which occurred upon completion of the IPO. Interest Expense. Interest expense decreased $2.2 million, or 8.9%, in the 2020 third quarter when compared with the 2019 third quarter, primarily as a result of lower interest rates and a reduction in outstanding principal balance on our term loan from current year principal repurchases. Other (Income) Expense, net. Other (income) expense, net decreased $1.2 million in the 2020 third quarter when compared with the 2019 third quarter caused by a portion of the underlying cash flows related to $100.0 million of swap notional principal amount which were no longer probable of occurring and resulted in the immediate recognition of $1.3 million of expense. Income Tax Expense (Benefit). Income tax expense decreased $1.7 million to an income tax benefit of $1.2 million in the 2020 third quarter as compared to an income tax expense of $0.5 million in the 2019 third quarter. As a result of the Reorganization Transactions, which occurred on October 1, 2020, ASO, Inc. became subject to U.S. federal income taxes and is being taxed at the prevailing corporate rates. For periods subsequent to the Reorganization Transactions, we incurred a pre-tax loss as a result of incremental equity compensation expense in connection with the IPO and the termination of the Monitoring Agreement, which resulted in a net tax benefit for the thirteen weeks ended October 31, 2020. 39 Thirty-Nine Weeks Ended October 31, 2020 Compared to Thirty-Nine Weeks Ended November 2, 2019 The following table sets forth amounts and information derived from our unaudited statements of income for the periods indicated as follows (dollar amounts in thousands): Thirty-Nine Weeks Ended Change October 31, 2020 November 2, 2019 Dollars Percent Net sales $ 4,091,797 100.0 % $ 3,459,405 100.0 % $ 632,392 18.3 % Cost of goods sold 2,856,840 69.8 % 2,398,783 69.3 % 458,057 19.1 % Gross margin 1,234,957 30.2 % 1,060,622 30.7 % 174,335 16.4 % Selling, general and administrative expenses 955,591 23.4 % 923,418 26.7 % 32,173 3.5 % Operating income 279,366 6.8 % 137,204 4.0 % 142,162 103.6 % Interest expense, net 70,487 1.7 % 77,171 2.2 % (6,684) (8.7) % Gain on early retirement of debt, net (7,831) (0.2) % (42,265) (1.2) % 34,434 (81.5) % Other (income), net (857) 0.0 % (1,921) (0.1) % 1,064 (55.4) % Income before income taxes 217,567 5.3 % 104,219 3.0 % 113,348 108.8 % Income tax expense 325 0.0 % 1,914 0.1 % (1,589) (83.0) % Net income $ 217,242 5.3 % $ 102,305 3.0 % $ 114,937 112.3 % *Percentages in table may not sum properly due to rounding. Net Sales . Net sales increased $632.4 million, or 18.3%, for the year-to-date 2020 compared to the year-to-date 2019 as a result of increased comparable sales of 16.1% and additional net sales generated by new locations. As of the end of the 2020 third quarter, we had a full benefit of a net six stores opened during the prior year-to-date. Collectively, these stores accounted for a net $73.6 million increase in net sales for the year-to-date 2020. The 16.1% increase in comparable sales resulted from strong performances in the outdoors merchandise division and the sports and recreation merchandise division, partially offset by declines the apparel and footwear merchandise divisions, respectively. The effects of the COVID-19 pandemic during the year-to-date 2020 have caused significant increases in popularity of isolated recreation, outdoor and leisure activities that we believe have driven the increases in our outdoors and sports and recreation merchandise divisions. Likewise, we believe the decreases in our apparel and footwear merchandise divisions were predominately driven by a temporary but significant shift in customer behavior at the substantial beginning of the COVID-19 pandemic, which saw customers purchasing primarily isolated recreation, outdoor and leisure activity products in addition to "essential items." The outdoors division increase was driven primarily by strong sales in firearms, ammunition, fishing, hunting and shooting sports products. The sports and recreation division sales increased as a result of various products such as fitness equipment and accessories, bikes, barbecues and grills, patio and watersports, trampolines, outdoor games and play sets. These increases were partially offset by declining sales in the team sports category. The apparel division decreased as a result of declines in licensed apparel resulting from the Astros World Series appearance in the prior year, outdoor apparel and seasonal apparel products, partially offset by increases in the athletic apparel products. The footwear division sales decreased due to declines in the team sports category and the work, casual and youth category, which were partially offset by an increase in athletic footwear. We believe that the substantial increase to e-commerce sales described below and the ongoing improvements to our business, such as enhancements to our merchandising planning and allocation capabilities that began in February 2019 and the launch of the Academy Credit Card in May 2019, together with our big-box store format and the implementation of a number of safety measures within our stores in response to the COVID-19 pandemic that helped facilitate our customers' ability to obtain the products they sought in a safe manner, contributed to the increase in comparable sales this year-to-date. E-commerce net sales increased $270.1 million, or 208.6%, for the current year-to-date compared to the prior year-to-date and represented 9.8% of merchandise sales for the current year-to-date compared to 3.8% in the prior year-to-date. This increase was driven by a change in consumer shopping preferences and sales restrictions resulting from the COVID-19 pandemic. Additionally, enhancements to our e-commerce platform, including the introduction of BOPIS at the end of the 2019 second quarter and rapid development of curbside fulfillment to further support BOPIS in the year-to-date 2020 contributed to the increase in e-commerce sales. 40 Gross Margin. Gross margin increased $174.3 million, or 16.4%, to $1,235.0 million for the year-to-date 2020 from $1,060.6 million for the year-to-date 2019. As a percentage of net sales, gross margin decreased 0.5% from 30.7% for the year-to-date 2019 to 30.2% in the year-to-date 2020. The decrease of 50 basis points in gross margin is primarily attributable to: • 43 basis points of unfavorability related to import freight as a result of increased duties on products sold; • 37 basis points of unfavorability as a result of decreased vendor allowances, including new store allowances; partially offset by • 30 basis points of favorability related to inventory overhead expenditures as a result of less expenses capitalized during the first half of 2020, which are primarily wage related, due to temporary workforce furloughs and wage cuts during the first half of 2020. Selling, General and Administrative Expenses. SG&A expenses increased $32.2 million, or 3.5%, to $955.6 million in the year-to-date 2020 from $923.4 million in the year-to-date 2019. As a percentage of net sales, SG&A expenses were down 3.3% to 23.4% in the year-to-date 2020 compared to 26.7% in the year-to-date 2019. The decrease of 330 basis points in SG&A is primarily attributable to: • 171 basis point decrease in property and facility fees as a result of leveraging costs on increased sales and decreased depreciation costs; • 96 basis point decrease in advertising due to favorable leveraging of costs on increased sales and reduced marketing and promotional activities; and • 78 basis point decrease in employee costs from leveraging costs on increased sales, partially offset by increased incentive compensation expense and incremental expenses resulting from the expensing of certain share-based awards in connection with the completion of the IPO. Gain on early retirement of debt, net. Gain on early retirement of debt, net decreased $34.4 million, or 81.5%, to $7.8 million from $42.3 million in the prior year-to-date. During the year-to-date 2020, we repurchased $23.9 million in principal on the 2015 Term Loan Facility, which was trading at a discount, in open market transactions for $16.0 million and recognized a net gain of $7.8 million. During the year-to-date 2019, we repurchased $147.7 million in principal on the 2015 Term Loan Facility, which was trading at a discount in open market transactions for $104.6 million and recognized a net gain of $42.3 million. Interest Expense. Interest expense decreased $6.7 million, or 8.7%, in the year-to-date 2020 when compared to the year-to-date 2019, primarily as a result of a lower outstanding principal balance and interest rates on our term loan from prior year and current year principal repurchases of $147.7 million and $23.9 million, respectively, partially offset by higher interest on our ABL facility due to a higher average outstanding balance. Other (Income) Expense, net. Other income decreased $1.1 million in the year-to-date 2020 when compared to the year-to-date 2019 caused by a portion of the underlying cash flows related to $100.0 million of swap notional principal amount which were no longer probable of occurring and resulted in the immediate recognition of $1.3 million of expense. Income Tax Expense. Income tax expense decreased $1.6 million to $0.3 million in the year-to-date 2020 as compared to $1.9 million in the year-to-date 2019. As a result of the Reorganization Transactions, which occurred on October 1, 2020, ASO, Inc. became subject to U.S. federal income taxes and is being taxed at the prevailing corporate rates. The increase in our federal income tax effective rate upon completion of the Reorganization Transactions was largely offset by a net tax benefit for the third quarter of 2020, which resulted from a pre-tax loss subsequent to the Reorganization Transactions caused by incremental costs, including equity compensation expense, in connection with the IPO and the termination of the Monitoring Agreement. 41 Non-GAAP Measures We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense and depreciation, amortization and impairment, further adjusted to exclude consulting fees, Adviser monitoring fees, stock based compensation expense, gain on early extinguishment of debt, net, severance and executive transition costs, costs related to the COVID-19 pandemic, inventory write-down adjustments associated with strategic merchandising initiative and other adjustments. We describe these adjustments reconciling net income (loss) to Adjusted EBITDA in the applicable table below. We define Adjusted Net Income as net income (loss), plus consulting fees, Adviser monitoring fees, stock based compensation expense, gain on early extinguishment of debt, net, severance and executive transition costs, costs related to the COVID-19 pandemic, inventory write-down adjustments associated with strategic merchandising initiative and other adjustments, less the tax effect of these adjustments. We define Pro Forma Adjusted Net Income as Adjusted Net Income less the retrospective tax effect of Adjusted Net Income at our estimated effective tax rate of approximately 25% for periods prior to October 1, 2020, the effective date of our conversion to a C-Corporation. We define basic Pro Forma Adjusted Earnings per Share as Pro Forma Adjusted Net Income divided by the basic weighted average common shares outstanding during the period and diluted Pro Forma Adjusted Earnings per Share as Pro Forma Adjusted Net Income divided by the diluted weighted average common shares outstanding during the period. We define these adjustments reconciling net income (loss) to Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share in the applicable table below. We define Adjusted Free Cash Flow as net cash provided by (used in) operating activities less net cash used in investing activities. We describe these adjustments by reconciling net cash provided by operating activities to Adjusted Free Cash Flow in the applicable table below. Adjusted EBITDA, Adjusted Net Income, Pro-Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow, as shown below, have been presented in this Quarterly Report as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We believe Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management believes Adjusted Free Cash Flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash. Management uses Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow are not recognized terms under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or net cash provided by operating activities as a measure of liquidity, or any other performance measures derived in accordance with GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share should not be construed to imply that our future results will be unaffected by unusual or non-recurring items. In evaluating Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our GAAP results in addition to using Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow supplementally. 42 Our Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow measures have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: • Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share do not reflect costs or cash outlays for capital expenditures or contractual commitments; • Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share do not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, and Adjusted Free Cash Flow does not reflect the cash requirements necessary to service principal payments on our debt; • Adjusted EBITDA does not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes; • Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted Free Cash Flow do not reflect cash requirements for such replacements; and • other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, Adjusted EBITDA, Adjusted Net Income, Pro Forma Adjusted Net Income, Pro Forma Adjusted Earnings per Share and Adjusted Free Cash Flow should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. 43 Adjusted EBITDA The following table provides reconciliations of net income (loss) to Adjusted EBITDA for the periods presented (amounts in thousands): Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 October 31, 2020 November 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 (a) 102 237 194 3,517 Adviser monitoring fee (b) 12,953 937 14,793 2,697 Equity compensation (c) 23,359 1,405 27,049 5,872 Gain on early extinguishment of debt, net — — (7,831) (42,265) Severance and executive transition costs (d) — 1,237 4,137 1,237 Costs related to the COVID-19 pandemic (e) — — 17,632 — Other (f) 2,965 1,704 4,894 4,455 Adjusted EBITDA $ 145,738 $ 88,759 $ 428,640 $ 245,596 (a) Represents outside consulting fees associated with our strategic cost savings and business optimization initiatives. (b) Represents our contractual payments under the Monitoring Agreement. See Note 13 to the financial statements included in this Quarterly Report). (c) Represents non-cash charges related to equity based compensation, which vary from period to period depending on certain factors such as timing and valuation of awards, achievement of performance targets and equity award forfeitures. (d) Represents severance costs associated with executive leadership changes and enterprise-wide organizational changes. (e) Represents costs incurred as a result of the COVID-19 pandemic, including temporary wage premiums, additional sick time, costs of additional cleaning supplies and third party cleaning services for the stores, corporate office and distribution centers, accelerated freight costs associated with shifting our inventory purchase earlier in the year to maintain stock, and legal fees associated with consulting in local jurisdictions. (f) Other adjustments include (representing deductions or additions to Adjusted EBITDA) amounts that management believes are not representative of our operating performance, including investment income, installation costs for energy savings associated with our profitability initiatives, legal fees associated with a distribution to NAHC's members and our omnibus incentive plan, store exit costs and other costs associated with strategic cost savings and business optimization initiatives. 44 Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share The following table provides a reconciliation of net income to Adjusted Net Income, Pro Forma Adjusted Net Income and Pro Forma Adjusted Earnings per Share for the periods presented (amounts in thousands, except per share data): Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Net income $ 59,586 $ 28,552 $ 217,242 $ 102,305 Consulting fees (a) 102 237 194 3,517 Adviser monitoring fee (b) 12,953 937 14,793 2,697 Equity compensation (c) 23,359 1,405 27,049 5,872 Gain on early extinguishment of debt, net — — (7,831) (42,265) Severance and executive transition costs (d) — 1,237 4,137 1,237 Costs related to the COVID-19 pandemic (e) — — 17,632 — Other (f) 2,965 1,704 4,894 4,455 Tax effects of these adjustments (g) (71) (10) (109) 44 Adjusted Net Income 98,894 34,062 278,001 77,862 Estimated tax effect of change to C-Corporation status (h) (25,147) (8,472) (69,410) (19,535) Pro Forma Adjusted Net Income $ 73,747 $ 25,590 $ 208,591 $ 58,327 Pro Forma Adjusted Earnings per Share Basic $ 0.96 $ 0.35 $ 2.82 $ 0.80 Diluted $ 0.91 $ 0.34 $ 2.70 $ 0.78 Weighted average common shares outstanding Basic (1) 76,771 72,484 73,908 72,480 Diluted (1) 80,714 75,201 77,171 74,766 (1) See Retrospective Presentation of Ownership Exchange in Note 2 to the financial statements. (a) Represents outside consulting fees associated with our strategic cost savings and business optimization initiatives. (b) Represents our contractual payments under the Monitoring Agreement. See Note 13 to the financial statements included in this Quarterly Report. (c) Represents non-cash charges related to equity based compensation, which vary from period to period depending on certain factors such as timing and valuation of awards, achievement of performance targets and equity award forfeitures. (d) Represents severance costs associated with executive leadership changes and enterprise-wide organizational changes. (e) Represents costs incurred as a result of the COVID-19 pandemic, including temporary wage premiums, additional sick time, costs of additional cleaning supplies and third party cleaning services for the stores, corporate office and distribution centers, accelerated freight costs associated with shifting our inventory purchase earlier in the year to maintain stock, and legal fees associated with consulting in local jurisdictions. (f) Other adjustments include (representing deductions or additions to Adjusted Net Income) amounts that management believes are not representative of our operating performance, including investment income, installation costs for energy savings associated with our profitability initiatives, legal fees associated with a distribution to NAHC's members and our omnibus incentive plan, store exit costs and other costs associated with strategic cost savings and business optimization initiatives. (g) Represents the tax effect of the total adjustments made to arrive at Adjusted Net Income at our historical tax rate. (h) Represents the retrospective tax effect of Adjusted Net Income at our estimated effective tax rate of approximately 25% for periods prior to October 1, 2020, the effective date of our conversion to a C-Corporation, upon which we became subject to federal income taxes. 45 Adjusted Free Cash Flow The following table provides a reconciliation of net cash provided by operating activities to Adjusted Free Cash Flow for the periods presented (amounts in thousands): Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Net cash provided by (used in) operating activities $ 83,597 $ (9,205) $ 857,218 $ 94,756 Net cash provided by (used in) investing activities 60 (20,812) (13,790) (52,579) Adjusted Free Cash Flow $ 83,657 $ (30,017) $ 843,428 $ 42,177 Liquidity and Capital Resources Sources and Uses of Liquidity Historically, our principal sources of cash have included: • cash generated from operating activities; • issuances of debt securities; and • borrowings under term loan and ABL credit facilities. Our historical uses of cash have been associated primarily with: • operating activities such as the purchase and growth of inventory, expansion of our sales and marketing activities and other working capital needs; • capital improvements and support of expansion plans, as well as various investments in store remodeling, store fixtures and on-going infrastructure improvements; • paying debt obligations and related interest expense; • paying partnership distributions to our members; and • fluctuations in working capital due to timing differences of cash receipts and cash disbursements. On October 31, 2020, our cash and cash equivalents totaled $869.7 million. We are focused on navigating the recent challenges presented by COVID-19 through the preservation of our long-term liquidity and management of cash flow through preemptive actions to enhance our ability to meet our short-term liquidity needs. During the year-to-date 2020, we have taken various cost cutting measures to maximize operational cash flows (see "Impact of COVID-19 on Our Business" in the MD&A). Such actions include, but are not limited to, reduction of discretionary spending, deferring or cancelling our planned expenses, revisiting and reprioritizing our strategic investments, and reducing our payroll costs, including temporary team member furloughs, workforce reductions and pay cuts. On August 28, 2020, we paid a $257.0 million one-time special distribution to our members of record as of August 25, 2020, $248.0 million of which was paid with cash on hand and the remainder of which was distributed through an offset of outstanding loans receivable from a member as well as state income tax withholdings made on behalf of NAHC's members. Related cash payments of $20.7 million to vested share-based award holders was paid through October 31, 2020 and an additional $12.1 million of payments will be made to unvested share-based award holders as the related awards vest (see "Distribution" in Note 10 to the financial statements included in this Quarterly Report). On October 6, 2020, we completed our IPO in which we issued and sold 15,625,000 shares of common stock, $0.01 par value, to the IPO underwriters for cash consideration of $12.22 per share (representing an initial public offering price of $13.00 per share, net of underwriting discounts) that resulted in net proceeds of approximately $184.9 million after deducting underwriting discounts, which included approximately $2.7 million paid to KKR Capital Markets LLC ("KCM"), an affiliate of KKR, for underwriting services in connection with the IPO, and $6.1 million in costs directly associated with the IPO, such as legal and accounting fees (see "Initial Public Offering and Reorganization Transactions" in Note 1 to the financial statements 46 included in this Quarterly Report). The shares sold in the offering were registered under the Securities Act of 1933, as amended, pursuant to our registration statement on Form S-1 (File No. 333-248683, which was declared effective by the Securities and Exchange Commission on October 1, 2020). Subsequent to the third quarter, on November 3, 2020, the Company issued and sold an additional 1,807,495 shares of the Company’s common stock, par value $0.01 per share, for cash consideration of $12.22 per share (representing an initial public offering price of $13.00 per share, net of underwriting discounts) to the IPO underwriters, resulting in approximately $22.1 million in proceeds net of underwriting discounts (see "Initial Public Offering and Reorganization Transactions" in Note 1 to the financial statements included in this Quarterly Report), which included $0.3 million paid to KCM, for underwriting services, pursuant to the partial exercise by the underwriters of their option to purchase up to 2,343,750 additional shares to cover over-allotments in connection with our IPO. The option has expired with respect to the remaining shares (see Note 15 to the financial statements included in this Quarterly Report). Subsequent to the third quarter, on November 6, 2020, the Company (1) issued $400.0 million of 6.00% senior secured notes (the "2020 Notes"), which are due November 15, 2027, (2) entered into a $400.0 million first lien term loan facility (the "2020 Term Loan Facility"), which is due November 6, 2027 and (3) extended the maturity of Academy, Ltd.’s asset-based revolving credit facility thereunder to November 6, 2025 (as extended, the "2020 ABL Facility") (see Note 15 to the financial statements included in this Quarterly Report). We used the net proceeds from the 2020 Notes and the net proceeds from the 2020 Term Loan Facility, together with cash on hand, to repay in full our existing term loan, in the amount of $1,431.4 million (see Note 15 to the financial statements included in this Quarterly Report). We expect to use existing cash balances, internally generated cash flows, and available borrowings under the 2020 ABL Facility to fund anticipated capital expenditures, working capital needs and scheduled debt service costs and maturities over at least the next twelve months. The 2020 ABL Facility provides for these financing needs and other general corporate purposes, as well as to support certain letter of credit requirements. We may continue to use the 2020 ABL Facility to repay debt under the 2020 Term Loan Facility. Availability under the 2020 ABL Facility is subject to customary asset-backed loan borrowing base and availability provisions. Amounts outstanding under the 2020 ABL Facility may fluctuate materially during each quarter mainly due to cash flow from operations, normal changes in working capital, capital expenditures and debt service costs. Our availability under the 2020 ABL Facility during the peak borrowing days of the year-to-date 2020 was ample to support our operations and service our requirements. Liquidity information related to our ABL facility is as follows for the periods shown (dollar amounts in thousands): Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 Average funds drawn $ 168,864 $ 34,891 Number of days with outstanding balance 99 151 Maximum daily amount outstanding $ 500,000 $ 147,100 Minimum available borrowing capacity $ 161,089 $ 771,750 Liquidity information related to our ABL facility (amounts in thousands) as of: October 31, 2020 February 1, 2020 November 2, 2019 Outstanding borrowings $ — $ — $ 44,300 Issued letters of credit $ 21,112 $ 15,927 $ 14,427 Available borrowing capacity $ 844,712 $ 827,404 $ 941,273 Capital Expenditures. We expect capital expenditures for fiscal year 2020 to be approximately $46.6 million. Approximately 65% of our planned cash outflow relate to investments in our corporate, e-commerce and information technology programs. Investments in existing stores and distribution centers is expected to account for approximately 30% of the planned cash outflow and the remaining 5% is expected to be utilized through investments in store remodels. We review forecasted capital expenditures throughout the year and will adjust or modify projects based on business conditions at that time. 47 Cash Flows for the Thirty-Nine Weeks Ended October 31, 2020 and November 2, 2019 Our unaudited statements of cash flows are summarized as follows (in thousands): Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 Net cash provided by operating activities $ 857,218 $ 94,756 Net cash used in investing activities (13,790) (52,579) Net cash used in financing activities (123,088) (74,330) Net increase (decrease) in cash and cash equivalents $ 720,340 $ (32,153) Operating Activities. Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, non-cash lease expense, equity compensation, amortization of deferred loan and other costs, non-cash gain on early retirement of debt, net, and changes in assets and liabilities, loss on swaps from debt refinancing and deferred income taxes. Cash flows from operating activities are seasonal in our business. Typically, cash flows from operations are used to build inventory in advance of peak selling seasons, with the fourth quarter pre-holiday season inventory increase being the most significant. Cash provided by operating activities in the year-to-date 2020 increased $762.5 million, compared to the year-to-date 2019. This increase in cash was attributable to: • $599.1 million net increase in cash flows provided by operating assets and liabilities; • $114.9 million increase in net income; and • $48.4 million increase in non-cash charges. The increase in cash flows from operating assets and liabilities for the year-to-date 2020 compared to the year-to-date 2019 was primarily attributable to: • $214.5 million decrease in merchandise inventories, net due to inventory reductions from high sell through in the current year-to-date, coupled with an increase in inventory during the prior year; and • $340.1 million increase in accounts payable related to increased inventory receipts in recent months and extensions of vendor payment terms. The increase from non-cash charges for the year-to-date 2020 compared to the year-to-date 2019 was primarily caused by: • $34.4 million decrease in non-cash gains on the early retirement of debt, net resulting from lower current year-to-date principal repurchases of portions of our 2015 Term Loan Facility; • $21.2 million increase in stock compensation expense, which includes approximately $19.9 million of stock compensation associated with the expensing of certain outstanding restricted stock units as a result of the liquidity condition being achieved upon completion of our IPO; • $12.4 million increase in non-cash lease expense due to timing of rent payments and 46 lease extensions executed during the year-to-date 2020; partially offset by • $11.5 million decrease related to increased deferred income tax accruals as a result of the Company becoming subject to federal income taxes in connection with the Reorganization Transactions; and • $9.0 million decrease in depreciation and amortization. 48 Investing Activities . The following table details the amounts of capital expenditures for each period indicated (amounts in thousands): Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 Change Capital expenditures $ 21,915 $ 48,614 $ (26,699) Cash used in investing activities decreased $38.8 million in the current year-to-date compared to the same period last year. The decrease in cash used in investing activities is primarily due to: • $26.7 million less capital expenditures due to a planned overall reduction in the year-to-date 2020 led by a reduction in new stores and store remodeling; and • $12.1 million increase related to cash proceeds as a result of repayment of notes receivable from a one NAHC member during the year-to-date 2020 compared to cash outflow related to the issuance of a note receivable to one NAHC member in 2019. Financing Activities . Cash used in financing activities increased $48.8 million in the year-to-date 2020, compared to the same period last year. The primary drivers of the increase were: • $277.7 million increase in cash outflow resulting from a distribution to NAHC's members and related share-based award payments which occurred in the year-to-date 2020; • $44.3 million increase in cash outflow due to decreased net proceeds from the ABL facility; partially offset by • $184.9 million of net proceeds from the issuance of common stock during the third quarter of 2020, net of offering costs; and • $88.6 million decrease in cash outflows related to lower current year-to-date principal repurchases of portions of our term loan facility. Critical Accounting Policies and Estimates This management's discussion and analysis of our financial condition and results of operations is based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Our management bases its estimates on historical experience and other assumptions it believes to be reasonable under the circumstances. Actual results could differ significantly from those estimates. Management evaluated the development and selection or our critical accounting policies and estimates used in the preparation of the Company's unaudited financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical. Our most significant estimates and assumptions that materially affect the financial statements involve difficult, subjective or complex judgments by management including the valuation of merchandise inventories, and performing goodwill, intangible and long-lived asset impairment analyses. Given the global economic climate and additional unforeseen effects from the COVID-19 pandemic, these estimates are becoming more challenging, and actual results could differ materially from our estimates. More information on all of our significant accounting policies can be found in Note 2, "Summary of Significant Critical Accounting Policies and Estimates" to our audited consolidated financial statements included in the Prospectus and the section of the Prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the Prospectus. Recent Accounting Pronouncements The information set forth in Note 2 to our unaudited consolidated financial statements under Part I, Item 1 of this Quarterly Report is incorporated herein by reference. 49 Related Party Transactions The information set forth in Note 13 to our unaudited consolidated financial statements under Part I, Item 1 under the heading of this Quarterly Report entitled "Related Party Transactions" is incorporated herein by reference. Off-Balance Sheet Arrangements As of October 31, 2020, our off-balance sheet contractual obligations and commercial commitments relate to future minimum guaranteed contractual payments and letters of credit. There have been no other material changes in our off-balance sheet arrangements as discussed in the section of the Prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" or our audited financial statements for the fiscal year ended February 1, 2020 included in the "Off-Balance Sheet Arrangements" section of the Prospectus. Contractual Obligations and Commercial Commitments Our contractual obligations and commercial commitments primarily relate to our debt facilities and senior secured notes, operating leases for stores, distribution centers, and office buildings, technology related commitments, the Monitoring Agreement, and sponsorship and intellectual property agreements. Other than fluctuations from transactions in the ordinary course of business, there were no material changes during the quarter ended October 31, 2020 to the contractual obligations and commercial commitments disclosed in "Contractual Obligations and Commercial Commitments" in the section of the Prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", other than the termination of the Monitoring Agreement as described in Note 13 to the financial statements included in this Quarterly Report.