Business context and reporting period
Sportsman’s Warehouse Holdings, Inc. operates outdoor sporting goods stores as a single reportable segment. This filing covers the 13 and 39 weeks ended November 1, 2014, compared with periods ended November 2, 2013; the filing itself is for fiscal 2014 Q3, notwithstanding the request metadata’s “2013 Q3.” Amounts below are in millions unless stated otherwise.
The company operated 55 stores in 18 states and opened eight stores during the first 39 weeks, increasing gross square footage by 14%. Its business is seasonal, with sales typically higher in the third and fourth fiscal quarters.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $182.5 | $175.1 | $474.4 | $467.4 |
| Gross profit / margin | $60.7 / 33.2% | $55.2 / 31.5% | $153.6 / 32.4% | $150.3 / 32.2% |
| Operating income / margin | $18.6 / 10.2% | $17.0 / 9.7% | $30.7 / 6.5% | $43.6 / 9.4% |
| Net income / diluted EPS | $8.9 / $0.21 | $2.2 / $0.07 | $10.6 / $0.27 | $14.3 / $0.43 |
| Adjusted EBITDA / margin | $21.8 / 12.0% | $19.2 / 10.9% | $44.6 / 9.4% | $51.5 / 11.0% |
Q3 interest expense fell to $4.1 million from $13.3 million, principally because of lower debt following IPO-related repayments. For the 39-week period, interest expense was $13.5 million versus $19.9 million. Q3 SG&A rose 9.9% to $42.0 million; year-to-date SG&A rose 15.2% to $122.9 million, reflecting new stores, IPO-related bonuses and stock compensation, among other items.
For the 39 weeks, operating cash flow was negative $13.8 million, compared with negative $40.1 million in the prior-year period. Investing cash outflow was $23.5 million, including capital expenditures; financing cash inflow was $37.7 million. Cash at November 1 was $1.7 million. Merchandise inventory was $230.6 million, up from $161.3 million at February 1, 2014, reflecting seasonal working-capital needs.
At November 1, revolving borrowings were $70.1 million gross, or $62.9 million net of lock-box deposits; available revolving capacity was $24.0 million. Term debt was $158.8 million principal, or $156.4 million net of discount. The balance sheet reported a stockholders’ deficit of $35.0 million. The company said it was in compliance with its debt covenants and believed cash, operating cash flow and revolver availability would fund operations for at least 12 months.
Material changes versus prior comparable periods
- Q3 sales increased 4.3%, but same-store sales declined 6.2% (3.2% excluding firearms and ammunition). New stores contributed $18.1 million in additional quarterly sales.
- For the first 39 weeks, sales rose 1.5%, while same-store sales fell 9.5% (2.2% excluding firearms and ammunition). New stores contributed $50.8 million in additional sales.
- Hunting and shooting weakness—associated with lower demand and firearm pricing after prior-period elevated demand—was a major offset to growth in other departments. Q3 hunting and shooting same-store sales fell 10.8%; year-to-date they fell 19.0%.
- Q3 gross margin improved 170 basis points, partly because the prior-year quarter included liquidation of excess inventory. Year-to-date gross margin improved 20 basis points.
- Year-to-date net income and Adjusted EBITDA declined despite higher sales. Results included $2.2 million of IPO bonuses and $2.8 million of stock-based compensation; the latter included $1.2 million from accelerated vesting.
- The IPO and partial over-allotment generated $73.3 million of net proceeds, used to repay term debt. Shares outstanding increased, and year-to-date diluted EPS fell to $0.27 from $0.43.
Outlook, risks and unusual items
- Management expected no additional store openings in fiscal 2014 and said it intended to open 8–13 stores annually over the following several years. It forecast $5–$7 million of additional Q4 fiscal 2014 capital expenditures for fiscal 2015 store preparation and remodels.
- On December 3, 2014, after quarter-end, the company refinanced its term loan with a new $160 million secured facility maturing December 3, 2020. The new loan bears LIBOR (floor 1.25%) plus 6.00%; management said annual interest and principal obligations were expected to decline by $2.0 million and $0.8 million, respectively. The refinancing generated a reported $5.7 million expense for writing off financing fees, discount and a prepayment penalty. The revolver’s capacity increased from $105 million to $135 million and its maturity was extended to December 3, 2019.
- Key risks include consumer spending and economic conditions, geographic concentration in the Western U.S., competition, changing customer preferences, weather, and regulation affecting firearms and ammunition. Floating-rate borrowings expose the company to rate changes; a 100-basis-point increase was estimated to add about $0.6 million to annual revolver interest expense, based on the November 1 balance.
- The company reported no material change in previously disclosed risk factors, no material development in previously reported legal proceedings, and no material expected impact from ordinary-course claims. Management concluded disclosure controls were effective as of November 1, 2014.
Important facts for investors to verify
- Whether same-store sales and firearms/ammunition demand continued to weaken after Q3, and how much growth depends on new stores.
- Inventory levels, seasonal cash needs, revolver availability and covenant headroom, given negative year-to-date operating cash flow.
- The final economics and covenant terms of the December refinancing, including the $5.7 million charge and stated reductions in annual debt service.
- Whether planned store growth can meet management’s stated store-level return targets while controlling SG&A and capital spending.
- Adjusted EBITDA is a non-GAAP measure and excludes specified costs; assess it alongside GAAP earnings, cash flow and debt service.