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) October 28, 2023 January 28, 2023 October 29, 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 274,827 $ 337,145 $ 318,167 Accounts receivable - less allowance for doubtful accounts of $ 3,102 , $ 2,004 and $ 1,449 , respectively 17,706 16,503 15,998 Merchandise inventories, net 1,492,219 1,283,517 1,495,464 Prepaid expenses and other current assets 110,823 47,747 44,241 Assets held for sale — 1,763 1,763 Total current assets 1,895,575 1,686,675 1,875,633 PROPERTY AND EQUIPMENT, NET 429,648 351,424 354,014 RIGHT-OF-USE ASSETS 1,126,825 1,100,085 1,100,522 TRADE NAME 578,071 577,716 577,571 GOODWILL 861,920 861,920 861,920 OTHER NONCURRENT ASSETS 29,231 17,619 12,804 Total assets $ 4,921,270 $ 4,595,439 $ 4,782,464 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 820,428 $ 686,472 $ 840,585 Accrued expenses and other current liabilities 232,046 240,169 259,179 Current lease liabilities 117,141 109,075 88,447 Current maturities of long-term debt 3,000 3,000 3,000 Total current liabilities 1,172,615 1,038,716 1,191,211 LONG-TERM DEBT, NET 583,364 584,456 682,803 LONG-TERM LEASE LIABILITIES 1,095,812 1,072,192 1,093,909 DEFERRED TAX LIABILITIES, NET 264,565 259,043 242,843 OTHER LONG-TERM LIABILITIES 11,827 12,726 12,779 Total liabilities 3,128,183 2,967,133 3,223,545 COMMITMENTS AND CONTINGENCIES (NOTE 10) 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; 74,143,759 ; 76,711,720 and 77,959,530 issued and outstanding as of October 28, 2023, January 28, 2023 and October 29, 2022, respectively. 741 767 779 Additional paid-in capital 239,447 216,209 203,734 Retained earnings 1,552,899 1,411,330 1,354,406 Stockholders' equity 1,793,087 1,628,306 1,558,919 Total liabilities and stockholders' equity $ 4,921,270 $ 4,595,439 $ 4,782,464 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 NET SALES $ 1,397,777 $ 1,493,925 $ 4,364,463 $ 4,648,570 COST OF GOODS SOLD 915,136 971,454 2,851,261 3,008,612 GROSS MARGIN 482,641 522,471 1,513,202 1,639,958 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 345,910 342,949 1,039,312 998,209 OPERATING INCOME 136,731 179,522 473,890 641,749 INTEREST EXPENSE, NET 10,930 12,163 33,473 34,240 OTHER (INCOME), NET ( 4,146 ) ( 2,538 ) ( 11,482 ) ( 4,676 ) INCOME BEFORE INCOME TAXES 129,947 169,897 451,899 612,185 INCOME TAX EXPENSE 29,969 38,156 100,876 141,837 NET INCOME $ 99,978 $ 131,741 $ 351,023 $ 470,348 EARNINGS PER COMMON SHARE: BASIC $ 1.34 $ 1.67 $ 4.63 $ 5.67 DILUTED $ 1.31 $ 1.62 $ 4.51 $ 5.54 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 74,461 79,085 75,809 82,901 DILUTED 76,057 81,379 77,893 84,910 See Condensed Notes to Consolidated Financial Statements 4 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts in thousands, except per share data) Additional Paid-In Capital Retained Earnings Total Stockholders' Equity Common Stock Shares Amount Balances as of January 28, 2023 76,712 $ 767 $ 216,209 $ 1,411,330 $ 1,628,306 Net income — — — 93,970 93,970 Equity compensation — — 11,382 — 11,382 Repurchase of common stock for retirement ( 750 ) ( 8 ) ( 2,450 ) ( 47,806 ) ( 50,264 ) Settlement of vested Restricted Stock Units, net of shares withheld 93 1 ( 2,470 ) — ( 2,469 ) Stock option exercises, net of shares withheld 385 4 6,962 — 6,966 Cash dividends declared, $ 0.09 per share — — — ( 6,929 ) ( 6,929 ) Balances as of April 29, 2023 76,440 $ 764 $ 229,633 $ 1,450,565 $ 1,680,962 Net income — — — 157,075 157,075 Equity compensation — — 8,501 — 8,501 Repurchase of common stock for retirement ( 1,994 ) ( 20 ) ( 7,087 ) ( 100,242 ) ( 107,349 ) Settlement of vested Restricted Stock Units, net of shares withheld 41 0 ( 268 ) — ( 268 ) Issuance of common stock under employee stock purchase plan 67 1 2,886 — 2,887 Stock option exercises, net of shares withheld 292 3 3,124 — 3,127 Cash dividends declared, $ 0.09 per share — — — ( 6,896 ) ( 6,896 ) Balances as of July 29, 2023 74,846 $ 748 $ 236,789 $ 1,500,502 $ 1,738,039 Net income — — — 99,978 99,978 Equity compensation — — 6,245 — 6,245 Repurchase of common stock for retirement ( 864 ) ( 9 ) ( 3,038 ) ( 40,863 ) ( 43,910 ) Settlement of vested Restricted Stock Units, net of shares withheld 53 1 ( 1,606 ) — ( 1,605 ) Stock option exercises, net of shares withheld 109 1 1,057 — 1,058 Cash dividends declared, $ 0.09 per share — — — ( 6,718 ) ( 6,718 ) Balances as of October 28, 2023 74,144 $ 741 $ 239,447 $ 1,552,899 $ 1,793,087 5 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts in thousands, except per share data) Additional Paid-In Capital Retained Earnings 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 Net income — — — 188,801 188,801 Equity compensation — — 6,158 — 6,158 Repurchase of common stock for retirement ( 5,551 ) ( 55 ) ( 13,391 ) ( 186,665 ) ( 200,111 ) Settlement of vested Restricted Stock Units 29 0 ( 0 ) — — Issuance of common stock under employee stock purchase plan 93 1 2,796 — 2,797 Stock option exercises 83 1 1,388 — 1,389 Cash dividends declared, $ 0.075 per share — — — ( 6,271 ) ( 6,271 ) Balances as of July 30, 2022 79,725 $ 797 $ 196,510 $ 1,323,964 $ 1,521,271 Net income — — — 131,741 131,741 Equity compensation — — 5,829 — 5,829 Repurchase of common stock for retirement ( 2,176 ) ( 22 ) ( 5,477 ) ( 95,325 ) ( 100,824 ) Settlement of vested Restricted Stock Units 3 0 ( 0 ) — — Stock option exercises 408 4 6,872 — 6,876 Cash dividends declared, $ 0.075 per share — — — ( 5,974 ) ( 5,974 ) Balances as of October 29, 2022 77,960 $ 779 $ 203,734 $ 1,354,406 $ 1,558,919 See Condensed Notes to Consolidated Financial Statements 6 ACADEMY SPORTS AND OUTDOORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 351,023 $ 470,348 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 79,394 78,852 Non-cash lease expense 4,945 635 Equity compensation 26,128 15,486 Amortization of deferred loan and other costs 2,019 2,328 Deferred income taxes 5,522 25,631 Gain on disposal of property and equipment ( 363 ) — Changes in assets and liabilities: Accounts receivable, net ( 1,203 ) 3,720 Merchandise inventories, net ( 208,702 ) ( 323,656 ) Prepaid expenses and other current assets ( 59,234 ) 798 Other noncurrent assets ( 12,471 ) ( 8,987 ) Accounts payable 128,301 95,183 Accrued expenses and other current liabilities ( 5,508 ) ( 39,196 ) Income taxes payable ( 7,910 ) ( 12,332 ) Other long-term liabilities ( 899 ) 359 Net cash provided by operating activities 301,042 309,169 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 151,963 ) ( 79,454 ) Purchases of intangible assets ( 354 ) ( 357 ) Proceeds from the sale of property and equipment 2,126 — Net cash used in investing activities ( 150,191 ) ( 79,811 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of Term Loan ( 2,250 ) ( 2,250 ) Proceeds from exercise of stock options 13,444 11,559 Proceeds from issuance of common stock under employee stock purchase program 2,887 2,797 Taxes paid related to net share settlement of equity awards ( 6,635 ) ( 1,078 ) Repurchase of common stock for retirement ( 200,072 ) ( 389,436 ) Dividends paid ( 20,543 ) ( 18,781 ) Net cash used in financing activities ( 213,169 ) ( 397,189 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 62,318 ) ( 167,831 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 337,145 485,998 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 274,827 $ 318,167 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 26,785 $ 25,362 Cash paid for income taxes $ 105,833 $ 129,588 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES: Non-cash capital expenditures $ 15,391 $ 7,576 Right-of-use assets obtained in exchange for new operating leases $ 110,450 $ 94,845 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. All of the Company's sales and business operations occur at Academy, Ltd., and Academy, Ltd. is also the borrower and/or issuer of the Company's long-term debt and lessee of facilities. Our fiscal year represents the 52 or 53 weeks ending on the Saturday closest to January 31. The Company is a leading full-line sporting goods and outdoor recreational products retailer in the United States in terms of net sales. As of October 28, 2023, we operated 275 "Academy Sports + Outdoors" retail locations in 18 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. 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 28, 2023, as filed with the Securities and Exchange Commission on March 16, 2023 (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 and thirty-nine weeks ended October 28, 2023 are not necessarily indicative of the results that will be realized for the fiscal year ending February 3, 2024 or any other period. The balance sheet as of January 28, 2023 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. 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. 8 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, 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 and thirty-nine weeks ended October 29, 2022 for comparability purposes. This reclassification is in divisional presentation only and did not impact the overall net sales balances previously disclosed. Change in Accounting Principle Effective January 29, 2023, the Company changed the method of accounting for its inventories from the last-in-first-out (“LIFO”) method to the weighted average cost method. The Company believes that this inventory method change is preferable because we believe it improves comparability with industry peers and is a more accurate representation of merchandise inventories, net and cost of goods sold. Due to historical price deflation on the Company’s merchandise purchases, the Company was in a position where the LIFO merchandise inventories value exceeded the cost of its inventory for all periods presented in the consolidated financial statements. In considering the lower of cost or market principle, merchandise inventories valued at LIFO, including necessary valuation adjustments, approximated the cost of such inventories using the weighted average inventory method. As such, there is no impact to the prior periods from the retrospective presentation of the change. The following tables show the pro forma effect to our consolidated financial statements as if the Company had remained on LIFO (amounts in thousands): Thirteen Weeks Ended October 28, 2023 Thirty-Nine Weeks Ended October 28, 2023 As Reported Effect of Change Pro Forma LIFO As Reported Effect of Change Pro Forma LIFO Consolidated Statements of Income: Cost of goods sold $ 915,136 $ 383 $ 915,519 $ 2,851,261 $ 4,443 $ 2,855,704 Gross margin 482,641 ( 383 ) 482,258 1,513,202 ( 4,443 ) 1,508,759 Operating income 136,731 ( 383 ) 136,348 473,890 ( 4,443 ) 469,447 Income before income taxes 129,947 ( 383 ) 129,564 451,899 ( 4,443 ) 447,456 Income tax expense 29,969 ( 98 ) 29,871 100,876 ( 933 ) 99,943 Net income 99,978 ( 285 ) 99,693 351,023 ( 3,510 ) 347,513 Earnings per common share: Basic $ 1.34 $ ( 0.00 ) $ 1.34 $ 4.63 $ ( 0.05 ) $ 4.58 Diluted $ 1.31 $ ( 0.00 ) $ 1.31 $ 4.51 $ ( 0.05 ) $ 4.46 9 October 28, 2023 As Reported Effect of Change Pro Forma LIFO Consolidated Balance Sheet: Merchandise inventories, net $ 1,492,219 $ ( 4,443 ) $ 1,487,776 Total current assets 1,895,575 ( 4,443 ) 1,891,132 Total assets 4,921,270 ( 4,443 ) 4,916,827 Accrued expenses and other current liabilities 232,046 ( 18,733 ) 213,313 Total current liabilities 1,172,615 ( 18,733 ) 1,153,882 Deferred tax liabilities, net 264,565 17,800 282,365 Total liabilities 3,128,183 ( 933 ) 3,127,250 Retained earnings 1,552,899 ( 3,510 ) 1,549,389 Stockholders' equity 1,793,087 ( 3,510 ) 1,789,577 Total liabilities and stockholders' equity 4,921,270 ( 4,443 ) 4,916,827 Thirty-Nine Weeks Ended October 28, 2023 As Reported Effect of Change Pro Forma LIFO Consolidated Statements of Cash Flows: Net income $ 351,023 $ ( 3,510 ) $ 347,513 Deferred income taxes 5,522 17,800 23,322 LIFO charge — 4,443 4,443 Income taxes payable ( 7,910 ) ( 18,733 ) ( 26,643 ) Net cash provided by operating activities 301,042 — 301,042 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. On June 2, 2022, the Board of Directors of the Company authorized a new share repurchase program (the "2022 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 and the 2021 Share Repurchase program are collectively referred to as the "Share Repurchase Programs". Under the Share Repurchase Programs, repurchases can be made using a variety of methods, which may include open market purchases, block trades, privately negotiated transactions, accelerated share repurchase programs 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 Share Repurchase Programs are determined by the Company in its discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions. The Share Repurchase Programs do not obligate the Company to acquire any particular number of common shares, and the programs may be suspended, extended, modified or discontinued at any time. 10 The following table summarizes our share repurchases for the periods presented: Thirteen Weeks Ended Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Shares repurchased 863,631 2,176,463 3,607,705 9,999,704 Aggregate amount paid (amounts in millions) (1) $ 43.9 $ 100.8 $ 201.5 $ 389.4 (1) Includes estimated excise tax fees of $ 0.3 million and $ 1.5 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively. As of October 28, 2023, we no longer had availability under the 2021 Share Repurchase Program, and we had $ 99.4 million available for share repurchases pursuant to the 2022 Share Repurchase Program. Supplier Finance Programs In September 2022, the FASB issued ASU 2022-04: Liabilities - Supplier Finance Programs Disclosure of Supplier Finance Program Obligations. This pronouncement requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period and potential magnitude. The Company adopted the new guidance as of January 29, 2023. We have previously entered into a supply chain financing arrangement with a third-party financial institution, whereby certain suppliers have the ability to settle outstanding payment obligations earlier than the due date required by our original supplier terms. Subsequently, we settle invoices with the financial institution within 45 days, which approximates our original supplier terms. The Company does not have an economic interest in suppliers’ voluntary participation, does not provide any guarantees or pledge assets under these arrangements, and our rights and obligations to our suppliers, including amounts due, are not impacted. Our liability associated with these arrangements, which is presented within accounts payable on the consolidated balance sheets, was $ 6.9 million, $ 9.0 million and $ 6.8 million as of October 28, 2023, January 28, 2023 and October 29, 2022, respectively. Recent Accounting Pronouncements Reference Rate Reform In March 2020, the FASB issued ASU 2020-04: 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. In December 2022, the FASB issued ASU 2022-06 which extended the effectiveness of this guidance to December 31, 2024. The Company elected to utilize these optional expedients in connection with the amendments to our ABL Facility and Term Loan, which transitioned the facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”) on March 30, 2023 and August 1, 2023, respectively (see Note 4). 11 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Merchandise division sales (1) Outdoors $ 440,330 $ 472,961 $ 1,261,700 $ 1,423,496 Sports and recreation 266,870 274,315 1,000,154 1,028,786 Apparel 373,991 401,891 1,165,663 1,207,979 Footwear 308,785 336,297 913,077 961,940 Total merchandise sales (2) 1,389,976 1,485,464 4,340,594 4,622,201 Other sales (3) 7,801 8,461 23,869 26,369 Net Sales $ 1,397,777 $ 1,493,925 $ 4,364,463 $ 4,648,570 (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 and thirty-nine weeks ended October 29, 2022, 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 9.4 % and 9.0 % of merchandise sales for the thirteen and thirty-nine weeks ended October 28, 2023, respectively, and 9.5 % and 9.7 % for thirteen and thirty-nine weeks ended October 29, 2022, respectively. (3) Other sales consisted primarily of the gift card breakage income, credit card bounties and royalties, shipping income, net hunting and fishing license income, sales return allowance 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 consolidated 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Gift card liability, beginning balance $ 74,750 $ 69,959 $ 90,650 $ 86,568 Issued 18,855 18,288 61,968 63,164 Redeemed ( 20,835 ) ( 21,023 ) ( 77,626 ) ( 80,668 ) Recognized as breakage income ( 921 ) ( 680 ) ( 3,143 ) ( 2,520 ) Gift card liability, ending balance $ 71,849 $ 66,544 $ 71,849 $ 66,544 12 4. Long-Term Debt Our debt consisted of the following (amounts in thousands) as of: October 28, 2023 January 28, 2023 October 29, 2022 ABL Facility, due November 2025 $ — $ — $ — Term Loan, due November 2027 192,500 194,750 295,500 Notes, due November 2027 400,000 400,000 400,000 Total debt 592,500 594,750 695,500 Less current maturities ( 3,000 ) ( 3,000 ) ( 3,000 ) Less unamortized discount on Term Loan ( 1,124 ) ( 1,340 ) ( 2,135 ) Less deferred loan costs (1) ( 5,012 ) ( 5,954 ) ( 7,562 ) Long-term debt, net $ 583,364 $ 584,456 $ 682,803 (1) Deferred loan costs are related to the Term Loan and Notes. As of October 28, 2023, January 28, 2023 and October 29, 2022, the balance in deferred loan costs related to the ABL Facility (as defined below) was approximately $ 2.3 million, $ 3.2 million and $ 3.5 million, respectively, and was included in other noncurrent assets on our consolidated balance sheets. Total amortization of deferred loan costs was $ 0.6 million and $ 1.8 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively, and $ 0.7 million and $ 2.0 million for the thirteen and thirty-nine weeks ended October 29, 2022, respectively. Total expenses related to accretion of original issuance discount was $ 0.1 million and $ 0.2 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively, and $ 0.1 million and $ 0.3 million for the thirteen and thirty-nine weeks ended October 29, 2022, 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"). 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. Under the Amendment, the Term Loan bore interest, at Academy, Ltd.'s election, at either (1) LIBOR rate with a floor of 0.75 %, plus a margin of 3.75 %, 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 %. On May 17, 2023, Academy, Ltd. entered into a Conforming Changes 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 and the several lenders party thereto and the several other parties named therein, which updated the Term Loan benchmark base interest rate from LIBOR to Adjusted Term SOFR (as defined in the Conforming Changes Amendment to the Second Amended and Restated Credit Agreement). The transition of our Term Loan to Adjusted Term SOFR became effective on August 1, 2023. Borrowings under the Term Loan bear interest, at our election, at either (1) Adjusted Term SOFR with a floor of 0.75 % rate plus a margin of 3.75 % or (2) a base rate equal to the highest of (a) the federal funds rate plus 0.50 %, (b) the U.S. "prime rate" announced by the administrative agent, or (c) the one-month Adjusted Term SOFR with a floor of 0.75 % rate, plus a margin of 3.75 %. As of October 28, 2023, the weighted average interest rate was 9.18 %, with interest payable monthly. Quarterly principal payments of $ 750.0 thousand are required through September 30, 2027 and borrowings mature on November 6, 2027. The terms and conditions of the Term Loan also require that the outstanding balance under the Term Loan is prepaid under certain circumstances. As of October 28, 2023, 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. 13 ABL Facility We refer to the 2020 ABL Facility and the amendments thereto collectively as the "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 November 6, 2020, 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 "2020 ABL Facility"). On March 30, 2023, Academy, Ltd., as borrower, and the guarantors, amended the 2020 ABL Facility by entering into an amendment to the First Amended and Restated ABL Credit Agreement, dated as of July 2, 2015, with JP Morgan Chase Bank, N.A. as the ABL Agent and the several lenders party thereto, which ABL amendment updated its benchmark base interest rate from LIBOR to Adjusted Term SOFR. 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 October 28, 2023, we had outstanding letters of credit of approximately $ 11.6 million, all of which were issued under the ABL Facility, and we had no borrowings outstanding under the ABL Facility, leaving an available borrowing capacity under the ABL Facility of $ 988.4 million. Borrowings under the ABL Facility bear interest, at our election, at either (1) Adjusted Term SOFR 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 Adjusted Term SOFR 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 October 28, 2023, 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 may 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 October 28, 2023. 5. 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. 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). 14 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 October 28, 2023, January 28, 2023 and October 29, 2022, we held $ 224.0 million, $ 95.6 million and $ 264.7 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 October 28, 2023, January 28, 2023, and October 29, 2022 the estimated fair value of the Term Loan and Notes was $ 0.6 billion, $ 0.6 billion and $ 0.7 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. 6. Property and Equipment Property and equipment consists of the following (amounts in thousands) as of: October 28, 2023 January 28, 2023 October 29, 2022 Leasehold improvements $ 542,698 $ 484,930 $ 476,670 Equipment and software 671,939 641,387 624,915 Furniture and fixtures 383,507 360,099 352,501 Construction in progress 63,563 23,159 37,267 Land 3,698 3,698 3,698 Total property and equipment 1,665,405 1,513,273 1,495,051 Accumulated depreciation and amortization ( 1,235,757 ) ( 1,161,849 ) ( 1,141,037 ) Property and equipment, net $ 429,648 $ 351,424 $ 354,014 Depreciation expense was $ 27.4 million and $ 79.4 million in the thirteen and thirty-nine weeks ended October 28, 2023, respectively, and $ 27.0 million and $ 78.9 million in the thirteen and thirty-nine weeks ended October 29, 2022, respectively. 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (amounts in thousands) as of: October 28, 2023 January 28, 2023 October 29, 2022 Accrued interest $ 13,395 $ 7,015 $ 13,340 Accrued personnel costs 33,014 57,504 57,979 Accrued professional fees 1,417 3,943 1,762 Accrued sales and use tax 17,441 9,302 15,025 Accrued self-insurance 15,694 20,941 15,677 Deferred revenue - gift cards and other 74,171 92,603 69,727 Income taxes payable 2,128 6,195 5,848 Property taxes 48,160 15,921 46,806 Sales return allowance 5,200 6,100 6,100 Other 21,426 20,645 26,915 Accrued expenses and other current liabilities $ 232,046 $ 240,169 $ 259,179 15 8. 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. On June 1, 2023, our stockholders approved the First Amendment to the 2020 Omnibus Incentive Plan, which, among other changes, increased the number of shares available for issuance thereunder by 2,600,000 shares. As of October 28, 2023, there were 4,256,743 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 October 28, 2023, there were 1,650,543 shares authorized and available for future issuance under the ESPP. Equity compensation expense was $ 6.2 million and $ 26.1 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively. Equity compensation expense was $ 5.8 million and $ 15.5 million for the thirteen and thirty-nine weeks ended October 29, 2022, respectively. These costs are included in selling, general and administrative expenses in the consolidated statements of income. 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 a time-weighted average of the historical volatility for the Company and 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 thirty-nine weeks ended October 28, 2023: Expected life in years 6.0 Expected volatility 45.7 % to 50.8 % Weighted-average volatility 47.9 % Risk-free interest rate 3.7 % to 4.4 % Dividend yield 0.6 % The following table presents the Award grants during the thirty-nine weeks ended October 28, 2023: Service Options Service Restricted Stock Units Performance Restricted Stock Units Number of shares 252,798 361,008 241,229 Weighted average grant date fair value per Award $ 27.69 $ 60.32 $ 58.03 Weighted average exercise price per Award $ 58.26 N/A N/A 16 The following table presents the unrecognized compensation cost as of October 28, 2023: Service Options Service Restricted Stock Units Performance Restricted Stock Units Remaining expense $ 12,716,241 $ 21,479,241 $ 10,017,247 Weighted average life remaining in years 2.2 2.2 2.2 9. 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 target which has yet to be achieved. 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 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Net income $ 99,978 $ 131,741 $ 351,023 $ 470,348 Weighted average common shares outstanding - basic 74,461 79,085 75,809 82,901 Dilutive effect of Service Restricted Stock Units 177 144 301 123 Dilutive effect of Performance Restricted Stock Units 155 105 159 96 Dilutive effect of Service Options 1,176 1,840 1,478 1,581 Dilutive effect of Performance Unit Options 88 205 119 209 Dilutive effect of ESPP Shares — — 27 — Weighted average common shares outstanding - diluted 76,057 81,379 77,893 84,910 Earnings per common share - basic $ 1.34 $ 1.67 $ 4.63 $ 5.67 Earnings per common share - diluted $ 1.31 $ 1.62 $ 4.51 $ 5.54 Anti-dilutive stock-based awards excluded from diluted calculation 253 7 135 59 10. Commitments and Contingencies Technology Related and Other Commitments As of October 28, 2023, we have obligations under technology-related, construction and other contractual commitments in the amount of $ 68.4 million. Of such commitments, approximately $ 36.4 million is payable in the next 12 months. 17 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 against us, 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 consolidated 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, defenses, 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. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business. On May 9, 2023, the U.S. Customs and Border Protection (the "CBP") notified us we owed additional duties relating to certain products that we imported from China that CBP believes are subject to certain anti-dumping and/or countervailing duties. We do not believe that these products are subject to such duties and are contesting CBP’s determination vigorously. While we contest CBP’s determination, we were required to deposit with CBP an amount of duties relating to these products, which are included in prepaid expenses and other current assets on the Company’s consolidated balance sheet while this matter is pending. We do not believe this matter will have a material adverse effect on our financial position, results of operations or cash flows. However, the ultimate outcome of this matter cannot be determined at this time, and we cannot assure you that we will be successful in contesting CBP's determination or that we will not need to accrue or pay additional amounts in the future. There have been no material developments during the fiscal quarter ended October 28, 2023, with respect to any of the matters discussed under the heading "Legal Proceedings" in the Annual Report. We are not currently party to any other legal proceedings that we believe would have a material adverse effect on our financial position, results of operations or cash flows. 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 October 28, 2023, we have $ 13.8 million in related commitments through 2027, of which $ 5.1 million is payable in the next 12 months. 18 11. Subsequent Events Our management evaluated events or transactions that occurred after October 28, 2023 through November 30, 2023, the issuance date of the consolidated financial statements, and identified the following matters to report: On November 29, 2023, the Company's Board of Directors declared a quarterly cash dividend with respect to the fiscal quarter ended October 28, 2023, of $ 0.09 per share of the Company's common stock, payable on January 10, 2024, to stockholders of record as of the close of business on December 13, 2023. On November 29, 2023, 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 November 29, 2026 (the "2023 Share Repurchase Program"). Under the 2023 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 2023 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 2023 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 2023 Share Repurchase Program and the 2022 Share Repurchase Program is $ 699.4 million. 19