Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 3, 2014, the first quarter of fiscal 2014, and compares results with the 13 weeks ended May 4, 2013. The request metadata labels this “2013 Q1,” but the filing itself reports fiscal 2014 Q1. Financial statement amounts below are in millions unless stated otherwise.
Business context
The company operates sporting goods stores, reported as one operating segment. It had 50 stores in 18 states at May 3, 2014; management also described five fiscal-2014 store openings to date, including two opened after quarter-end. The business is seasonal, with higher sales generally in the third and fourth quarters.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $132.4 | $136.5 |
| Gross profit / margin | $40.1 / 30.3% | $42.9 / 31.4% |
| SG&A | $40.3 | $32.3 |
| Operating income (loss) | $(0.2) | $10.6 |
| Interest expense | $5.3 | $3.2 |
| Net income (loss) | $(3.4) | $4.5 |
| Adjusted EBITDA | $6.8 | $14.4 |
| Operating cash flow | $(19.2) | $(11.9) |
| Capital expenditures | $8.8 | $5.9 |
- Same-store sales fell 18.1%; excluding firearms and ammunition, they declined 1.6%. Hunting and shooting same-store sales fell 30.8%, while clothing and footwear same-store sales rose 10.7% and 12.0%, respectively.
- Cash was $1.8 at May 3, 2014. Merchandise inventory rose $41.0 during the quarter to $202.3, reflecting seasonal purchases, new-store inventory, and special opportunity buys; accounts payable increased $23.4.
- Funded debt was $212.9 before unamortized discount, versus $262.9 at February 1, 2014. The balance-sheet carrying amount was $210.3. Revolver borrowings were approximately $50.0, with $37.4 of net borrowing availability. The company reported covenant compliance under both credit facilities.
- Total assets were $272.7 and total liabilities were $324.9 at May 3, 2014; stockholders’ deficit was $52.1.
Material changes and unusual items
- Sales declined 3.0%, mainly because firearms and ammunition demand normalized after unusually strong prior-year demand. New and acquired stores partially offset the decline; e-commerce sales fell 26.3% to $1.4.
- Gross margin declined 1.1 percentage points. Management cited the return to its normal promotional calendar, loyalty-program effects, and prolonged winter weather that delayed markdowns of winter clothing.
- SG&A rose 25.1%, including $2.2 of executive bonuses triggered by the IPO and $1.7 of non-cash stock compensation, of which $1.2 related to accelerated vesting. Higher new-store payroll and rent also contributed.
- The April 2014 IPO generated $70.3 of net proceeds for the company, used to repay term debt. A further approximately $3.0 of company proceeds from a partial over-allotment exercise in May was also applied to term debt. The IPO included shares sold by existing holders as well as newly issued company shares.
Outlook, risks, and contingencies
- Management expected fiscal-2014 capital expenditures of approximately $23.2, with about $14.4 remaining after Q1, primarily for store expansion, IT, distribution-center equipment, and remodeling. It planned three additional store openings in the remainder of fiscal 2014 and targeted annual growth of 8–13 stores over the following years.
- Management said cash, operating cash flows, and revolver availability should fund operations for at least the next 12 months. This outlook is subject to seasonal working-capital needs and execution of the store-growth plan.
- Key risks include consumer spending and regional economic conditions, concentration in the Western U.S., weather, competition, firearms and ammunition demand and regulation, inventory management, store-expansion execution, and reliance on a single distribution center. Floating-rate borrowings expose the company to rate changes; management estimated a 100-basis-point increase would add about $0.2 of annual interest expense on the revolver balance used in its sensitivity analysis.
- Pending litigation includes a Spokane landlord suit seeking, among other relief, approximately $4.5 in future rent, and a separate consolidated landlord action seeking unspecified damages. The company disputed the claims and intended to defend them; management did not expect ordinary-course legal matters to have a material adverse effect.
- No cash dividends were anticipated for the foreseeable future. Management reported disclosure controls were effective as of May 3, 2014 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and same-store sales stabilize as the prior-year firearms-demand comparison eases, and whether clothing and footwear growth continues.
- Whether inventory levels and seasonal cash use convert into sales without material markdowns, and whether revolver availability remains adequate.
- How much debt repayment resulted from the IPO and over-allotment, and the ongoing interest burden and covenant headroom under the term loan and revolver.
- Progress on planned store openings, capital spending, and the company’s stated new-store return targets.
- Developments in the landlord litigation and in firearms-related laws or regulations that could affect sales or costs.