Academy Sports & Outdoors, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollar amounts in thousands, except per share data) April 30, 2022 January 29, 2022 May 1, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 472,395 $ 485,998 $ 593,288 Accounts receivable - less allowance for doubtful accounts of $ 808 , $ 732 and $ 1,450 , respectively 12,666 19,718 10,831 Merchandise inventories, net 1,323,886 1,171,808 1,080,804 Prepaid expenses and other current assets 39,578 36,460 30,369 Assets held for sale 1,763 1,763 1,763 Total current assets 1,850,288 1,715,747 1,717,055 PROPERTY AND EQUIPMENT, NET 339,529 345,836 366,005 RIGHT-OF-USE ASSETS 1,085,805 1,079,546 1,127,645 TRADE NAME 577,246 577,215 577,000 GOODWILL 861,920 861,920 861,920 OTHER NONCURRENT ASSETS 4,368 4,676 7,685 Total assets $ 4,719,156 $ 4,584,940 $ 4,657,310 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 825,456 $ 737,826 $ 864,966 Accrued expenses and other current liabilities 274,399 303,207 287,592 Current lease liabilities 85,719 83,077 82,676 Current maturities of long-term debt 3,000 3,000 4,000 Total current liabilities 1,188,574 1,127,110 1,239,234 LONG-TERM DEBT, NET 683,325 683,585 781,035 LONG-TERM LEASE LIABILITIES 1,081,871 1,077,667 1,132,196 DEFERRED TAX LIABILITIES, NET 224,366 217,212 164,038 OTHER LONG-TERM LIABILITIES 12,512 12,420 26,932 Total liabilities 3,190,648 3,117,994 3,343,435 COMMITMENTS AND CONTINGENCIES (NOTE 12) STOCKHOLDERS' EQUITY: Preferred stock, $ 0.01 par value, authorized 50,000,000 shares; none issued and outstanding — — — Common stock, $ 0.01 par value, authorized 300,000,000 shares; 85,071,234 ; 87,079,394 and 93,887,109 issued and outstanding as of April 30, 2022, January 29, 2022 and May 1, 2021, respectively. 850 870 939 Additional paid-in capital 199,559 198,016 150,370 Retained earnings 1,328,099 1,268,060 1,164,964 Accumulated other comprehensive loss — — ( 2,398 ) Stockholders' equity 1,528,508 1,466,946 1,313,875 Total liabilities and stockholders' equity $ 4,719,156 $ 4,584,940 $ 4,657,310 See Condensed Notes to Consolidated Financial Statements 3 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts in thousands, except per share data) Thirteen Weeks Ended April 30, 2022 May 1, 2021 NET SALES $ 1,467,730 $ 1,580,333 COST OF GOODS SOLD 946,306 1,016,632 GROSS MARGIN 521,424 563,701 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 315,931 324,627 OPERATING INCOME 205,493 239,074 INTEREST EXPENSE, NET 10,920 14,549 OTHER (INCOME), NET ( 697 ) ( 397 ) INCOME BEFORE INCOME TAXES 195,270 224,922 INCOME TAX EXPENSE 45,464 47,126 NET INCOME $ 149,806 $ 177,796 EARNINGS PER COMMON SHARE: BASIC $ 1.73 $ 1.93 DILUTED $ 1.69 $ 1.84 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 86,658 92,088 DILUTED 88,614 96,472 See Condensed Notes to Consolidated Financial Statements 4 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands) Thirteen Weeks Ended April 30, 2022 May 1, 2021 COMPREHENSIVE INCOME: Net income $ 149,806 $ 177,796 Recognized interest expense on interest rate swaps — 1,196 Tax expense — ( 270 ) Total comprehensive income $ 149,806 $ 178,722 See Condensed Notes to Consolidated Financial Statements 5 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts in thousands, except per share amounts) Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Common Stock Shares Amount Balances as of January 29, 2022 87,079 $ 870 $ 198,016 $ 1,268,060 $ — $ 1,466,946 Net income — — — 149,806 — 149,806 Equity compensation — — 3,499 — — 3,499 Repurchase of common stock for retirement ( 2,272 ) ( 23 ) ( 5,247 ) ( 83,231 ) — ( 88,501 ) Settlement of vested Restricted Stock Units 63 1 ( 1 ) — — — Stock option exercises 201 2 3,292 — — 3,294 Cash dividends declared, $ 0.075 per share — — — ( 6,536 ) — ( 6,536 ) Balances as of April 30, 2022 85,071 $ 850 $ 199,559 $ 1,328,099 $ — $ 1,528,508 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Common Stock Shares Amount Balances as of January 30, 2021 91,114 $ 911 $ 127,228 $ 987,168 $ ( 3,324 ) $ 1,111,983 Net income — — — 177,796 — 177,796 Equity compensation — — 5,874 — — 5,874 Settlement of vested Restricted Stock Units 87 1 ( 1 ) — — — Share-Based Award Payments adjustment for forfeitures — — 39 — — 39 Stock option exercises 2,686 27 17,230 — — 17,257 Recognized interest expense on interest rate swaps (net of tax impact of $ 270 ) — — — — 926 926 Balances as of May 1, 2021 93,887 $ 939 $ 150,370 $ 1,164,964 $ ( 2,398 ) $ 1,313,875 See Condensed Notes to Consolidated Financial Statements 6 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Thirteen Weeks Ended April 30, 2022 May 1, 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 149,806 $ 177,796 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,578 25,298 Non-cash lease expense 586 500 Equity compensation 3,499 5,874 Amortization of terminated interest rate swaps, deferred loan and other costs 777 2,030 Deferred income taxes 7,154 25,064 Changes in assets and liabilities: Accounts receivable, net 7,052 6,474 Merchandise inventories, net ( 152,078 ) ( 90,769 ) Prepaid expenses and other current assets ( 3,118 ) ( 2,055 ) Other noncurrent assets 23 612 Accounts payable 85,640 77,326 Accrued expenses and other current liabilities ( 66,475 ) ( 29,039 ) Income taxes payable 38,561 21,357 Other long-term liabilities 92 ( 1,240 ) Net cash provided by operating activities 97,097 219,228 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 17,280 ) ( 16,808 ) Purchases of intangible assets ( 32 ) — Net cash used in investing activities ( 17,312 ) ( 16,808 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of Term Loan ( 750 ) ( 1,000 ) Share-Based Award Payments — ( 2,993 ) Proceeds from exercise of stock options 3,294 17,257 Taxes paid related to net share settlement of equity awards ( 895 ) — Repurchase of common stock for retirement ( 88,501 ) — Dividends paid ( 6,536 ) — Net cash provided by (used in) financing activities ( 93,388 ) 13,264 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 13,603 ) 215,684 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 485,998 377,604 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 472,395 $ 593,288 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 3,909 $ 6,253 Cash paid for income taxes $ 260 $ 1,773 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES: Non-cash issuance of common shares $ — $ 501 Change in capital expenditures in accounts payable and accrued liabilities $ 1,991 $ 3,765 Right-of-use assets obtained in exchange for new operating leases $ 30,019 $ 5,939 See Condensed Notes to Consolidated Financial Statements 7 ACADEMY SPORTS AND OUTDOORS, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Operations The Company All references to "we", "us," "our" or the "Company" in the financial statements refer to Academy Sports and Outdoors, Inc., a Delaware corporation ("ASO, Inc.") and the current parent holding company of our operations, and its consolidated subsidiaries. We conduct our operations primarily through our parent holding company's indirect subsidiary, Academy, Ltd., a Texas limited partnership doing business as "Academy Sports + Outdoors", or Academy, Ltd. Our fiscal year represents the 52 or 53 weeks ending on the Saturday closest to January 31. On August 3, 2011, an investment entity owned by investment funds and other entities affiliated with Kohlberg Kravis Roberts & Co. L.P. (collectively, "KKR"), acquired a majority interest in the Company. On October 6, 2020, ASO, Inc. completed an initial public offering and as of September 17, 2021, KKR no longer held an ownership interest in the Company. The Company is one of the leading full-line sporting goods and outdoor recreational products retailers in the United States in terms of net sales. As of April 30, 2022, we operated 260 "Academy Sports + Outdoors" retail locations in 16 states and three distribution centers located in Katy, Texas, Twiggs County, Georgia and Cookeville, Tennessee. We also sell merchandise to customers across most of the United States via our academy.com website. Secondary Offering On January 27, 2021, ASO, Inc. entered into an Underwriting Agreement (the “Underwriting Agreement”), by and among ASO, Inc., Allstar LLC, Allstar Co-Invest Blocker L.P., KKR 2006 Allstar Blocker L.P., MSI 2011 LLC, MG Family Limited Partnership and the former management selling stockholder named therein (collectively, the “Selling Stockholders”), and Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC, as representatives of the several underwriters named therein (the “Underwriters”), relating to an underwritten offering of 12,000,000 shares of common stock (the “Secondary Offering”), pursuant to the Company’s Registration Statement on Form S-1 (File No. 333-252390), filed on January 25, 2021. The Selling Stockholders granted the Underwriters the option to purchase, within 30 days from the date of the Underwriting Agreement, an additional 1,800,000 shares of common stock. On January 29, 2021, the Underwriters exercised in full their option to purchase the additional shares. The Secondary Offering was completed on February 1, 2021. Pursuant to the Underwriting Agreement, the Underwriters purchased the shares from the Selling Stockholders at a price of approximately $ 20.69 per share. The Company did no t receive any proceeds from the Secondary Offering. 2. Summary of Significant Accounting Policies The accompanying unaudited financial statements of the Company have been prepared as though they were required to be in accordance with Rule 10-01 of Regulation S-X for interim financial statements, however, they do not include all information and footnotes required by United States generally accepted accounting principles ("GAAP") for complete financial statements. Certain information and footnote disclosures normally included in our annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. However, we believe that the disclosures included herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2022, as filed with the Securities and Exchange Commission on March 29, 2022 (the "Annual Report"). The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the thirteen weeks ended April 30, 2022 are not necessarily indicative of the results that will be realized for the fiscal year ending January 28, 2023 or any other period. The balance sheet as of January 29, 2022 has been derived from our audited financial statements as of that date. For further information, refer to our audited financial statements and notes thereto included in the Annual Report. 8 Basis of Presentation and Principles of Consolidation These unaudited condensed consolidated financial statements include the accounts of ASO, Inc. and its subsidiaries, New Academy Holding Company, LLC ("NAHC"), Academy Managing Co., LLC, Associated Investors, LLC, Academy, Ltd., the Company's operating company, and Academy International Limited. NAHC, Academy Managing Co., LLC, and Associated Investors, LLC are intermediate holding companies. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements 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. 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 the possibility of additional unforeseen effects from the COVID-19 pandemic, these estimates remain challenging, and actual results could differ materially from our estimates. Reclassifications Within the merchandise division sales table presented in Note 3, certain products and categories were recategorized amongst various categories and divisions, respectively, to better align with our current merchandising strategy and view of the business. As a result, we have reclassified sales between divisions in the thirteen weeks ended May 1, 2021 for comparability purposes. This reclassification is in divisional presentation only and did not impact the overall net sales balances previously disclosed. Share Repurchases On September 2, 2021, the Board of Directors of the Company authorized a share repurchase program (the "2021 Share Repurchase Program") under which the Company may purchase up to $ 500 million of its outstanding shares during the three-year period ending September 2, 2024. Under the 2021 Share Repurchase Program, repurchases can be made using a variety of methods, which may include open market purchases, block trades, privately negotiated transactions and/or a non-discretionary trading plan, all in compliance with the rules of the SEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the 2021 Share Repurchase Program will be determined by the Company in its discretion and will depend on a variety of factors, including legal requirements, price and economic and market conditions. The 2021 Share Repurchase Program does not obligate the Company to acquire any particular number of common shares, and the program may be suspended, extended, modified or discontinued at any time. During the thirteen weeks ended April 30, 2022, we repurchased and concurrently retired 2,272,349 shares of ASO, Inc. common stock for an aggregate amount of $ 88.5 million pursuant to the 2021 Share Repurchase Program. The Company allocates the excess of the repurchase price over the par value of shares acquired to Retained Earnings and Additional Paid-in Capital. The portion allocated to Additional Paid-in Capital is determined by dividing the number of shares to be retired by the number of shares issued multiplied by the balance of Additional Paid-in Capital as of the retirement date. As of April 30, 2022, approximately $ 100.2 million remained available for share repurchases pursuant to our 2021 Share Repurchase Program (see Note 13). Recent Accounting Pronouncements Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The adoption of this guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the expedients and exceptions provided by this amendment as it relates to our transition from LIBOR to another reference rate to determine the impact. 9 3. Net Sales Revenue from merchandise sales is recognized, net of sales tax, when the Company’s performance obligation to the customer is met, which is when the Company transfers control of the merchandise to the customer. Store merchandise sales are recognized at the point of sale and e-commerce sales are recognized upon delivery to the customer. The following table sets forth the approximate amount of sales by merchandise divisions for the periods presented (amounts in thousands): Thirteen Weeks Ended April 30, 2022 May 1, 2021 Merchandise division sales (1) Outdoors $ 457,854 $ 485,661 Sports and recreation 354,049 402,424 Apparel 342,368 375,757 Footwear 303,132 310,447 Total merchandise sales (2) 1,457,403 1,574,289 Other sales (3) 10,327 6,044 Net Sales $ 1,467,730 $ 1,580,333 (1) Certain products and categories were recategorized amongst various categories and divisions, respectively, to better align with our current merchandising strategy and view of the business. As a result, we have reclassified sales between divisions in the thirteen weeks ended May 1, 2021 for comparability purposes. This reclassification is in divisional presentation only and did not impact the overall net sales balances previously disclosed (see Note 2). (2) E-commerce sales consisted of 9.5 % and 7.4 % of merchandise sales for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively. (3) Other sales consisted primarily of the sales return allowance, gift card breakage income, credit card bounties and royalties, shipping income, net hunting and fishing license income and other items. We sell gift cards in stores, online and in third-party retail locations. A liability for gift cards, which is recorded in accrued expenses and other liabilities on our balance sheets is established at the time of sale and revenues are recognized as the gift cards are redeemed in stores or on our website. The following is a reconciliation of the gift card liability (amounts in thousands): Thirteen Weeks Ended April 30, 2022 May 1, 2021 Gift card liability, beginning balance $ 86,568 $ 74,253 Issued 18,209 18,442 Redeemed ( 30,278 ) ( 28,490 ) Recognized as breakage income ( 1,010 ) ( 963 ) Gift card liability, ending balance $ 73,489 $ 63,242 10 4. Long-Term Debt Our debt consisted of the following (amounts in thousands) as of: April 30, 2022 January 29, 2022 May 1, 2021 ABL Facility, due November 2025 $ — $ — $ — Term Loan, due November 2027 297,000 297,750 399,000 Notes, due November 2027 400,000 400,000 400,000 Total debt 697,000 697,750 799,000 Less current maturities ( 3,000 ) ( 3,000 ) ( 4,000 ) Less unamortized discount on Term Loan ( 2,353 ) ( 2,463 ) ( 3,714 ) Less deferred loan costs (1) ( 8,322 ) ( 8,702 ) ( 10,251 ) Long-term debt, net $ 683,325 $ 683,585 $ 781,035 (1) Deferred loan costs are related to the Term Loan and Notes. As of April 30, 2022, January 29, 2022 and May 1, 2021, the balance in deferred loan costs related to the ABL Facility (as defined below) was approximately $ 4.0 million, $ 4.3 million and $ 5.2 million, respectively, and was included in other noncurrent assets on our consolidated balance sheets. Total amortization of deferred loan costs was $ 0.7 million and $ 0.7 million for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively. Total expenses related to accretion of original issuance discount were $ 0.1 million and $ 0.1 million for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively. The expenses related to amortization of deferred loan costs and accretion of original issuance discount are included in interest expense, net on the consolidated statements of income. Term Loan We refer to the 2020 Term Loan and the Amendment collectively as the "Term Loan". On November 6, 2020, Academy, Ltd. entered into a seven-year $ 400.0 million senior secured term loan (the "2020 Term Loan") with Credit Suisse AG, Cayman Island Branch ("Credit Suisse"), as the administrative agent and collateral agent and the several other lenders and parties. The 2020 Term Loan will mature on November 6, 2027. The 2020 Term Loan bore interest, at Academy, Ltd.’s election, at either (1) LIBOR rate with a floor of 0.75 %, plus a margin of 5.00 %, or (2) a base rate equal to the highest of (a) the federal funds rate plus 0.50 %, (b) Credit Suisse’s "prime rate", or (c) the one-month LIBOR rate plus 1.00 %, plus a margin of 4.00 %. Quarterly principal payments of approximately $ 1.0 million were required through September 30, 2027, with the balance due in full on the maturity date of November 6, 2027. On May 25, 2021, Academy, Ltd. entered into Amendment No. 4 (the “Amendment”) to the Second Amended and Restated Credit Agreement, dated as of November 6, 2020, among Academy, Ltd., as Borrower, Credit Suisse AG, Cayman Islands Branch, as the administrative agent and collateral agent, the several lenders party thereto and the several other parties named therein (as previously amended, the “Existing Credit Agreement” and as amended by the Amendment, the “Amended Credit Agreement”). Pursuant to the terms of the Amendment, Academy, Ltd. (i) reduced the applicable margin on LIBOR borrowings under the Existing Credit Agreement from 5.00 % to 3.75 % and (ii) utilized cash on hand to repay $ 99.0 million of outstanding borrowings under the Existing Credit Agreement, leaving an outstanding principal balance of $ 300.0 million under the Amended Credit Agreement. Quarterly principal payments of $ 750.0 thousand are required through September 30, 2027 and borrowings under the Amended Credit Agreement will continue to mature on November 6, 2027. All other material terms and provisions of the 2020 Term Loan remain substantially the same as the terms and provisions in place immediately prior to the effectiveness of the Amendment. As of April 30, 2022, the weighted average interest rate was 4.50 %, with interest payable monthly. The terms and conditions of the Amendment also require that the outstanding balance under the Loan is prepaid under certain circumstances. As of April 30, 2022, no prepayment was due under the terms and conditions of the Term Loan. Notes On November 6, 2020, Academy, Ltd. issued $ 400.0 million of 6.00 % senior secured notes which are due November 15, 2027 (the "Notes"), pursuant to an indenture, dated as of November 6, 2020 (the "Indenture") with The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent. The Notes require cash interest payments semi-annually in arrears on May 15 and November 15 of each year at a rate of 6.00 % per year. 11 ABL Facility On November 6, 2020, Academy, Ltd., as borrower, and the guarantors, amended the previously existing secured asset-based revolving credit facility by entering into an amendment to the First Amended and Restated ABL Credit Agreement, dated as of July 2, 2015, with JPMorgan Chase Bank, N.A. as the administrative agent and collateral agent, letter of credit issuer and swingline lender and the several lenders party thereto, which ABL amendment, among other things, extended the maturity of Academy, Ltd.’s asset-based revolving credit facility thereunder to November 6, 2025 (the "ABL Facility"). The ABL Facility is used to provide financing for working capital and other general corporate purposes, as well as to support certain letters of credit requirements, and availability is subject to customary borrowing base and availability provisions. During the normal course of business, we periodically utilize letters of credit primarily for the purchase of import goods and in support of insurance contracts. As of April 30, 2022, we had outstanding letters of credit of approximately $ 21.4 million, of which $ 17.8 million were issued under the ABL Facility, and we had no borrowings outstanding under the ABL Facility, leaving the available borrowing capacity under the ABL Facility of $ 982.2 million. Borrowings under the ABL Facility bear interest, at our election, at either (1) LIBOR plus a margin of 1.25 % to 1.75 %, or (2) a base rate equal to the highest of (a) the federal funds rate plus 0.50 %, (b) JPMorgan Chase Bank, N.A.'s "prime rate", or (c) the one-month LIBOR rate plus 1.00 %, plus a margin of 0.25 % to 0.75 %. The ABL Facility also provides a fee applicable to the unused commitments of 0.25 %. The terms and conditions of the ABL Facility also require that we prepay outstanding loans under the ABL Facility under certain circumstances. As of April 30, 2022, no future prepayments of outstanding loans have been triggered under the terms and conditions of the ABL Facility. Covenants . The ABL Facility, Term Loan and Notes agreements contain covenants, including, among other things, covenants that restrict Academy, Ltd.'s ability to incur certain additional indebtedness, create or permit liens on assets, engage in mergers or consolidations, pay dividends, make other restricted payments, make loans or advances, engage in transactions with affiliates or amend material documents. Additionally, at certain times, the ABL Facility is subject to a minimum adjusted fixed charge coverage ratio. These covenants are subject to certain qualifications and limitations. We were in compliance with these covenants as of April 30, 2022. 5. Derivative Financial Instruments We have historically used interest rate swap agreements to hedge market risk relating to possible adverse changes in interest rates. All interest rate swaps had been designated as cash flow hedges of variable rate interest payments on borrowings under the Term Loan. As of April 30, 2022, we do not have any derivative financial instruments outstanding. For derivatives which were designated as hedging instruments, amounts included in Accumulated Other Comprehensive Income (Loss) ("AOCI") were reclassified to interest expense in the same period during which the hedged transaction affected earnings, which was as interest expense was recorded on the underlying Term Loan. The impact of gains and losses related to interest rate swaps that were deferred into AOCI and subsequently reclassified into expense are as follows (amounts in thousands): Thirteen Weeks Ended April 30, 2022 May 1, 2021 Accumulated Other Comprehensive Loss, beginning $ — $ ( 3,324 ) Increase to interest expense (net of tax impact of $ 270 for the thirteen weeks ended May 1, 2021) — 926 Accumulated Other Comprehensive Loss, ending $ — $ ( 2,398 ) 6. Fair Value Measurements Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of the assets and liabilities. 12 The fair value measurements are classified as either: • Level 1 which represents valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; • Level 2 which represents valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and • Level 3 which represents valuations based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy in which the fair value measurement is classified in its entirety, is based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers made into or out of the Level 1, 2 or 3 categories during any period presented. Periodically we make cash investments in money market funds comprised of U.S. Government treasury bills and securities, which are classified as cash and redeemable on demand. As of April 30, 2022, January 29, 2022 and May 1, 2021, we held $ 357.1 million, $ 401.0 million and $ 476.0 million in money market funds, respectively. The fair value of the Term Loan and Notes is estimated using a discounted cash flow analysis based on quoted market prices for the instrument in an inactive market and is therefore classified as Level 2 within the fair value hierarchy. As of April 30, 2022, January 29, 2022, and May 1, 2021 the estimated fair value of the Term Loan and Notes was $ 0.7 billion, $ 0.7 billion, and $ 0.8 billion respectively. As borrowings on the ABL Facility are generally repaid in less than 12 months, we believe that fair value approximates the carrying value. 7. Property and Equipment Property and equipment consists of the following (amounts in thousands) as of: April 30, 2022 January 29, 2022 May 1, 2021 Leasehold improvements $ 458,752 $ 456,918 $ 443,513 Equipment and software 607,752 602,289 565,873 Furniture and fixtures 339,265 336,679 322,326 Construction in progress 20,414 11,147 23,926 Land 3,698 3,698 3,698 Total property and equipment 1,429,881 1,410,731 1,359,336 Accumulated depreciation and amortization ( 1,090,352 ) ( 1,064,895 ) ( 993,331 ) Property and equipment, net $ 339,529 $ 345,836 $ 366,005 Depreciation expense was $ 25.6 million and $ 25.3 million in the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively, and is included in selling, general and administrative expenses on the consolidated statements of income. 13 8. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (amounts in thousands) as of: April 30, 2022 January 29, 2022 May 1, 2021 Accrued interest $ 12,804 $ 6,583 $ 14,003 Accrued personnel costs 42,859 115,073 60,830 Accrued professional fees 1,849 4,534 3,453 Accrued sales and use tax 18,276 13,054 29,493 Accrued self-insurance 14,420 15,824 14,125 Deferred revenue - gift cards and other 76,146 88,713 66,309 Income taxes payable 48,163 9,602 45,087 Property taxes 25,684 17,747 24,798 Sales return allowance 6,600 6,200 6,100 Other 27,598 25,877 23,394 Accrued expenses and other current liabilities $ 274,399 $ 303,207 $ 287,592 9. Share-Based Compensation On September 29, 2020, the ASO, Inc. Board of Directors adopted the 2020 Omnibus Incentive Plan (the "2020 Omnibus Incentive Plan"), which became effective on October 1, 2020. The 2020 Omnibus Incentive plan provides for the grant of certain equity incentive awards (each, an "Award"), such as options to purchase ASO, Inc. common stock (each, a "Stock Option") and restricted units that may settle in ASO, Inc. common stock (each, a "Restricted Stock Unit") to our directors, executives and eligible employees of the Company. Awards granted under the 2020 Omnibus Incentive Plan consist of Stock Options that vest upon the satisfaction of time-based requirements (each, a "Service Option"), Restricted Stock Units that vest upon the satisfaction of time-based requirements (each, a "Service Restricted Stock Unit") and Restricted Stock Units that vest upon the satisfaction of time and performance and/or market based requirements (each, a "Performance Restricted Stock Unit"). The plan reserved a total of 5,150,000 shares of common stock for issuance. As of April 30, 2022, there were 2,445,685 shares that were authorized and available for future issuance under the 2020 Omnibus Incentive Plan. On September 29, 2020, the ASO, Inc. Board of Directors adopted the 2020 Employee Stock Purchase Plan (the "ESPP"), which became effective on October 1, 2020. We have reserved a total of 2,000,000 shares under the ESPP and as of April 30, 2022, there were 1,885,546 shares authorized and available for future issuance under the ESPP. Equity compensation expense was $ 3.5 million and $ 5.9 million for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively. These costs are included in selling, general and administrative expenses in the statements of income. Distribution On August 28, 2020, New Academy Holding Company, LLC, the parent holding company for our operations prior to our initial public offering, paid a $ 257.0 million distribution to its members of record as of August 25, 2020. Cash payments ("Share-Based Award Payments") of $ 32.2 million for unvested Awards were paid upon vesting of such Awards, which was completed and paid in-full as of July 31, 2021. No further Share-Based Award Payments relative to the distribution are payable as of April 30, 2022. 14 Service Option Fair Value Assumptions The fair value for Service Options granted was estimated using a Black-Scholes option-pricing model. The expected lives of the Service Options granted were based on the "SEC simplified" method. Expected price volatility was determined based on the implied volatilities of comparable companies over a historical period that matches the expected life of the Award. The risk-free interest rate was based on the expected U.S. Treasury rate over the expected life. The dividend yield was calculated based on the most recent annualized quarterly dividend and the valuation date closing stock price. The assumptions used to calculate the fair value of Awards granted are evaluated and modified, as necessary, to reflect current market conditions and experience. The following table presents the assumptions and grant date fair values for Service Options granted in the thirteen weeks ended April 30, 2022: Expected life in years 6.2 Expected volatility 43 % Weighted-average volatility 43.0 % Risk-free interest rate 2.4 % to 2.8 % Dividend yield 0.8 % The following table presents the Award grants during the thirteen weeks ended April 30, 2022: Service Options Service Restricted Stock Units Performance Restricted Stock Units Number of shares 810,708 136,913 168,703 Weighted average grant date fair value per Award $ 16.33 $ 39.37 $ 39.18 Weighted average exercise price per Award $ 39.18 N/A N/A The following table presents the unrecognized compensation cost as of April 30, 2022: Service Options Service Restricted Stock Units Performance Restricted Stock Units Remaining expense $ 21,176,307 $ 14,048,722 $ 8,374,632 Weighted average life remaining in years 3.5 3.0 3.5 10. Earnings per Common Share Basic earnings per common share is calculated based on net income divided by the basic weighted average common shares outstanding during the period, and diluted earnings per common share is calculated based on net income divided by the diluted weighted average common shares outstanding. Diluted weighted average common shares outstanding is based on the basic weighted average common shares outstanding plus any potential dilutive effect of stock-based awards outstanding during the period using the treasury stock method, which assumes the potential proceeds received from the dilutive stock options are used to purchase treasury stock. Anti-dilutive stock-based awards do not include awards which have a performance or liquidity event target which has yet to be achieved. 15 Basic and diluted weighted average common shares outstanding and basic and diluted earnings per common share are calculated as follows (amounts in thousands except per share amounts): Thirteen Weeks Ended April 30, 2022 May 1, 2021 Net income $ 149,806 $ 177,796 Weighted average common shares outstanding - basic 86,658 92,088 Dilutive effect of Service Restricted Units and Service Restricted Stock Units 36 — Dilutive effect of Performance Restricted Stock Units and Liquidity Event Restricted Units 101 910 Dilutive effect of Service Options 1,607 2,095 Dilutive effect of Performance Unit Options and Performance Stock Options 212 1,379 Dilutive effect of ESPP Shares — — Weighted average common shares outstanding - diluted 88,614 96,472 Earnings per common share - basic $ 1.73 $ 1.93 Earnings per common share - diluted $ 1.69 $ 1.84 Anti-dilutive stock-based awards excluded from diluted calculation 311 303 11. Related Party Transactions On January 27, 2021, in connection with the Secondary Offering, the Company entered into an Underwriting Agreement with affiliates of KKR (as selling stockholders), the several other selling stockholders named therein, and the several underwriters named therein, including KCM (as underwriter). The Secondary Offering was completed on February 1, 2021. The Company did not pay KCM any fees in connection with this secondary offering. 12. Commitments and Contingencies Freight, Technology Related and Other Commitments As of April 30, 2022, we have obligations under freight, technology-related, construction and other contractual commitments in the amount of $ 73.9 million. Of such commitments, approximately $ 45.4 million is payable in the next 12 months. Financial Guarantees During the normal course of business, we enter into contracts that contain a variety of representations and warranties and provide general indemnifications. The maximum exposure under these arrangements is unknown as this would involve future claims that may be made against us that have not yet occurred. However, based on experience, we believe the risk of loss to be remote. Legal Proceedings We are a defendant or co-defendant in lawsuits, claims and demands brought by various parties relating to matters normally incident to our business. No individual case, or group of cases presenting substantially similar issues of law or fact, is expected to have a material effect on the manner in which we conduct our business or on our results of operations, financial position or liquidity. The majority of these cases are alleging product, premises, employment and/or commercial liability. Reserves have been established that we believe to be adequate based on our current evaluations and experience in these types of claim situations. However, the ultimate outcome of these cases cannot be determined at this time. We believe, taking into consideration our indemnities, insurance and reserves, the ultimate resolution of these matters will not have a material impact on our financial position, results of operations or cash flows. 16 Sponsorship Agreement and Intellectual Property Commitments We periodically enter into sponsorship agreements generally with professional sports teams, associations, events, networks, or individual professional players and collegiate athletic programs in exchange for marketing and advertising promotions. We also enter into intellectual property agreements whereby the Company receives the right to use third-party owned trademarks typically in exchange for royalties on sales. These agreements typically contain a one to three-year term and contractual payment amounts required to be paid by the Company. As of April 30, 2022, we have $ 19.5 million in related commitments through 2027, of which $ 6.8 million is payable in the next 12 months. 13. Subsequent Events Our management evaluated events or transactions that occurred after April 30, 2022 through June 7, 2022, the issuance date of the consolidated financial statements, and identified the following matters to report: On June 2, 2022, the Company's Board of Directors declared a quarterly cash dividend with respect to the fiscal quarter ended April 30, 2022, of $ 0.075 per share of the Company's common stock, payable on July 14, 2022, to stockholders of record as of the close of business on June 16, 2022. On June 2, 2022, the Company's Board of Directors authorized a new share repurchase program under which the Company may purchase up to $ 600 million of its outstanding shares during the three-year period ending June 2, 2025 (the "2022 Share Repurchase Program"). Under the 2022 Share Repurchase Program repurchases can be made using a variety of methods, which may include open market purchases, block trades, accelerated share repurchase programs, privately negotiated transactions and/or a non-discretionary trading plan, all in compliance with the rules of the SEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the 2022 Share Repurchase Program will be determined by the Company in its discretion and will depend on a variety of factors, including legal requirements, price and economic and market conditions. The 2022 Share Repurchase Program does not obligate the Company to acquire any particular number of common shares, and the program may be suspended, extended, modified or discontinued at any time. The total availability under the 2022 Share Repurchase Program and the 2021 Share Repurchase Program is approximately $ 700.2 million. 17