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As anticipated, Q2 was another difficult quarter for Academy Sports + Outdoors (ASO) as a combination of macroeconomic, weather-related, and company-specific headwinds caused the retailer to fall short of sales and comp expectations while downwardly revising most of its FY25 guidance. Similar to the past several quarters, reduced spending power from ASO's primary customer base -- households with incomes between $50,000-$150,000 -- weighed on demand, especially for big-ticket product categories like trampolines, pools, marine, and fitness.

• Making matters worse, the Texas-based company contended with several major weather events during the quarter, including tornados in Houston and Dallas, as well as Hurricane Beryl hitting in July.
• Meanwhile, in Georgia, ASO had troubles converting a distribution center to its new warehouse management system, resulting in out-of-stock situations across part of its store footprint. The primary issue was that the ramp up in productivity from the new system didn't keep pace with the accelerated throughput ASO needed to keep shelves fully stocked during the busier summer months. This situation cost the company approximately $32 mln in sales during Q2.
• As a result of the above headwinds, comps came in at -6.9%, missing expectations and representing a downturn from Q1's -5.7% comp. A decline in store traffic resulting in a 7.4% drop in transactions was the main driver behind the Q2 comp shortfall.
• There were some pockets of strength, though, during the quarter. For instance, the footwear category saw a 1% increase on a yr/yr basis, with solid results from brands such as NIKE (NKE), New Balance, and ASICS. Team sports, such as baseball, football, and pickleball also posted modest growth, but the declines in big-ticket items were too much to overcome.
• Looking ahead, ASO doesn't expect the macro-related headwinds to ease, prompting the company to lower its FY25 EPS guidance to $5.75-$6.50 from $6.05-$7.05, its sales outlook to $5.895-$6.075 bln from $6.07-$6.35 bln, and its comp forecast to -6% to -3% from -4% to +1%. The one silver lining is that ASO maintained its gross margin guidance of 34.3-34.7% as it continues to effectively manage inventory, which was flat on a yr/yr basis and down 5% in terms of units per store.
• Amid this difficult environment, ASO is still executing on its growth strategy which centers on both store and eCommerce expansion. The company said that it remains on track to open 15-17 new stores this fiscal year. On the omnichannel front, the eCommerce business posted its third consecutive quarter of positive growth and penetration increased by 30 bps yr/yr to 9.7%. ASO also rolled out a new loyalty program called "My Academy" and the early returns have been positive as daily sign-ups are over 3x the level it previously saw from customers opening a new Academy credit card.

Expectations were quite muted heading into the Q2 report. Although ASO's results and outlook were indeed soft, investors are hoping that the worst is now behind the company as its distribution center issues get resolved and as its new loyalty program provides a much-needed sales boost.