Business context and reporting period
Sportsman’s Warehouse Holdings, Inc. operates outdoor sporting goods stores and an e-commerce platform. At May 4, 2019, it had 92 stores in 23 states and one reportable segment. This 10-Q covers the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. Although the request metadata says “2018 Q1,” the filing is for fiscal 2019 Q1.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $174.0 million | $180.1 million |
| Gross profit / margin | $54.2 million / 31.1% | $55.6 million / 30.9% |
| SG&A | $59.5 million | $59.2 million |
| Operating loss | $5.4 million | $3.7 million |
| Interest expense | $2.1 million | $3.6 million |
| Net loss / diluted loss per share | $5.5 million / $0.13 | $5.8 million / $0.14 |
| Adjusted EBITDA / margin | $0.4 million / 0.2% | $4.8 million / 2.7% |
Operating cash flow was $3.4 million, versus cash used of $9.0 million a year earlier; investing used $3.1 million and financing used $0.2 million. Cash ended at $1.7 million. Management attributed improved operating cash flow primarily to lower inventory purchases and reduced prepaid assets.
At May 4, 2019, current assets were $303.6 million and current liabilities were $288.0 million. The balance sheet reported a $141.6 million revolving-credit balance, net of lockbox deposits; gross revolving loans were $150.0 million, with $8.4 million in deposits offset against them. Term-loan principal was $34.0 million, of which $7.9 million was current. Operating lease liabilities totaled $219.5 million, recognized following adoption of ASC 842. The company said it was in compliance with credit agreement covenants.
Material changes versus the prior comparable period
- Sales declined 3.4%; same-store sales fell 5.7%. Hunting and shooting were the main weakness, while footwear and clothing grew.
- Gross margin improved 0.2 percentage points, but SG&A rose as a share of sales from 32.9% to 34.2%, contributing to a wider operating loss.
- Net loss narrowed modestly, aided by lower interest expense following the May 2018 credit-facility refinancing.
- Adjusted EBITDA fell to $0.4 million from $4.8 million. Current-period adjusted EBITDA includes $0.35 million of executive-transition costs; the prior period included a $2.65 million former-CEO retirement adjustment.
- ASC 842 adoption added operating lease assets and liabilities to the balance sheet and increased opening retained earnings by approximately $9.3 million, net of tax. Comparative periods were not restated.
Outlook, risks and contingencies
Management planned three store openings in fiscal 2019 and expected approximately 3% square-footage growth, below its longer-term target of more than 5%, partly as it shifted cash use toward debt reduction. Fiscal 2019 capital expenditures were expected to be $18 million to $23 million; $3.4 million had been spent in Q1. Management said cash, operating cash flow and revolver availability should fund operations for at least 12 months.
Management cited lower firearm and ammunition sales against a difficult prior-year comparison, and unusually high Western snowpack delaying fishing and camping seasons. It also noted minimum-wage increases affecting 51 stores and the seasonal concentration of sales in the third and fourth quarters. Risks include consumer spending and economic conditions, firearm and ammunition regulation, regional concentration, competition, changing customer preferences, weather and execution of expansion plans. Debt carries floating interest rates; a 100-basis-point increase was estimated to raise annual interest expense by approximately $1.5 million. The company reported no material off-balance-sheet arrangements and no legal matter considered probable and reasonably estimable to have a material impact. It stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and same-store sales recover, particularly in hunting and shooting, and whether weather-related demand normalizes.
- Current revolver availability and borrowing-base headroom; the filing’s stated $19.3 million availability is as of February 2, 2019, not May 4.
- Execution and returns from planned store openings, alongside the $18 million to $23 million capital expenditure outlook and debt-reduction priorities.
- The sustainability of operating cash flow and the effects of seasonal working-capital needs, lease obligations and variable interest rates.
- How recurring operating performance compares with Adjusted EBITDA, a non-GAAP measure that excludes specified expenses and is not a substitute for GAAP results or cash flow.