Sportsman’s Warehouse Holdings, Inc. — Form 10-Q
Period: Fiscal third quarter ended November 2, 2019 (13 weeks), with year-to-date results for the 39 weeks ended November 2, 2019. Comparisons are to the corresponding periods ended November 3, 2018. The filing’s period is 2019 Q3, notwithstanding the request metadata stating 2018 Q3. Dollar amounts below are in millions unless noted.
Business context and financial results
The company operates outdoor sporting goods stores and an e-commerce platform as one reportable segment. At quarter-end it operated 103 stores in 27 states. Fiscal 2019 to date included three store openings and the acquisition of eight Field & Stream stores.
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $242.5 | $223.1 | $628.2 | $606.4 |
| Gross profit / margin | $84.2 / 34.7% | $77.6 / 34.8% | $211.6 / 33.7% | $205.4 / 33.9% |
| Operating income / margin | $15.9 / 6.5% | $17.5 / 7.9% | $20.3 / 3.2% | $27.1 / 4.5% |
| Net income | $10.5 | $12.4 | $10.5 | $13.1 |
| Diluted EPS | $0.24 | $0.29 | $0.24 | $0.31 |
| Adjusted EBITDA / margin | $23.2 / 9.6% | $22.6 / 10.1% | $39.4 / 6.3% | $46.5 / 7.7% |
Material changes, cash flow, debt and liquidity
- Q3 sales rose 8.7%; same-store sales increased 4.8%. Year-to-date sales rose 3.6%, while same-store sales increased 0.6%.
- Q3 net income fell about 15% year over year despite higher sales; year-to-date net income fell about 20%. SG&A grew 13.8% in Q3 and 7.3% year to date, outpacing sales growth. SG&A was 28.2% of Q3 sales versus 26.9% a year ago. Management cited new and acquired stores, pre-opening and acquisition costs, and minimum-wage increases affecting 51 stores.
- Year-to-date operating cash flow was $57.8, versus cash used of $14.4 in the prior-year period. Management attributed the change mainly to lower inventory purchases and higher accounts payable. Investing cash outflow was $41.7, including acquisition-related spending and capital expenditures; financing cash outflow was $16.0. Cash at quarter-end was $1.7.
- At November 2, the company reported $141.6 of gross revolver borrowings, $78.7 available to borrow, and $1.7 of standby letters of credit. The balance sheet presents $130.8 of revolving credit, net of lockbox balances. Term-loan principal was $30.0. The facilities mature May 23, 2023; the company said it was in compliance with covenants.
- Current assets were $351.3 and current liabilities $346.7. Operating lease liabilities totaled $240.1, alongside a $212.0 right-of-use asset. These balances reflect adoption of the lease accounting standard and should be considered when assessing obligations.
Outlook, commentary and risks
- Management stated that cash, operating cash flow and revolver availability should fund operations for at least the next 12 months. It expected fiscal 2019 net capital expenditures of $22–$25, while reporting approximately $32.2 of year-to-date capital expenditures net of $9.5 of acquired-inventory cash spending; the filing does not fully clarify the relationship between those figures.
- The company targets annual square-footage growth above 5%, but may vary that pace based on opportunities. Management noted seasonal sales strength in the third and fourth quarters and exposure to weather, consumer demand, competition, regional conditions, and regulation of firearms and ammunition.
- The eight-store Field & Stream acquisition closed October 11 for approximately $28.7, subject to adjustment. The remaining approximately $9.5 payable was due in January 2020; management expected to fund it with revolver borrowings. Acquired stores contributed $3.8 of sales through quarter-end, with an immaterial net-income impact. Purchase accounting remained preliminary.
- Interest-rate exposure is variable-rate debt; management estimated a 100-basis-point rate increase would raise annual interest expense by approximately $1.3, assuming revolver balances remained outstanding for a full year.
- The company disclosed litigation connected to the Route 91 Harvest Festival shooting involving a subsidiary. It intends to defend the case; potential loss could not be reasonably estimated. Management reported no other material change in its risk-factor assessment and no ordinary-course legal loss considered probable and reasonably estimable.
Key facts for investors to verify
- Whether same-store sales and margins hold up through the seasonal fourth quarter, and whether higher SG&A continues to outpace revenue growth.
- The final purchase-price allocation, integration progress and performance of the eight acquired stores, including funding of the January 2020 payment.
- Revolver availability, seasonal working-capital needs, covenant compliance and the effects of floating interest rates.
- The basis and scope of the fiscal 2019 capital-expenditure forecast compared with reported year-to-date spending.
- Developments in the Route 91 litigation and any resulting change in the company’s assessment of potential exposure.