Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Period: Fiscal second quarter ended July 29, 2017 (13 weeks), with first-half comparisons for the 26 weeks ended July 29, 2017. The request metadata says “2016 Q2,” but the filing is for fiscal 2017 Q2; comparative periods ended July 30, 2016. Amounts below are USD millions unless stated otherwise.
Business context
The company operates sporting goods stores and an e-commerce platform as one reportable segment. It reported 83 stores as of July 29, 2017; management’s overview stated 85 stores as of the filing date after two additional openings. Fiscal 2017 has 53 weeks and ends February 3, 2018. Sales are seasonal, generally strongest in the third and fourth quarters.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales | $191.5 | $189.8 | $348.4 | $341.4 |
| Gross profit | $68.6 | $66.2 | $117.2 | $114.7 |
| Gross margin | 35.8% | 34.9% | 33.6% | 33.6% |
| SG&A | $54.4 | $49.5 | $106.8 | $95.6 |
| Income from operations | $14.2 | $16.7 | $10.5 | $19.0 |
| Net income | $6.6 | $8.3 | $2.0 | $8.6 |
| Diluted EPS | $0.15 | $0.20 | $0.05 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $20.4 | $22.3 | $24.6 | $29.7 |
| Adjusted EBITDA margin | 10.7% | 11.7% | 7.1% | 8.7% |
Q2 sales rose 0.9%, but same-store sales fell 9.0%; first-half sales increased 2.0% while same-store sales fell 8.0%. New stores drove reported growth. Q2 gross margin improved 90 basis points, primarily from a sales mix shift toward clothing, footwear and camping, partly offset by promotional pressure. SG&A rose 9.8% in Q2 and 11.6% in the first half, outpacing sales growth and reducing operating income and net income.
Hunting and shooting was the principal weakness: Q2 same-store sales declined 18.8%, including firearm sales down 17.4% and ammunition down 26.1%. Management attributed softer demand partly to expectations of less restrictive firearm regulation. Clothing and footwear same-store sales increased 5.9% and 2.0% in Q2, respectively. E-commerce sales were $2.0 million in Q2, up 6.9%, and $3.8 million in the first half, up 15.9%.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $18.1 million, versus positive $0.4 million a year earlier, primarily reflecting a $55.9 million inventory build for the holiday season and lower accrued expenses, partly offset by higher accounts payable.
- First-half investing cash outflow was $31.3 million, including $31.9 million of capital expenditures. Financing cash inflow was $49.4 million, largely from $40.8 million of net revolver borrowings and a $10.1 million increase in book overdrafts.
- Cash was $1.8 million at July 29, 2017. The revolver showed $101.7 million outstanding on the balance sheet; gross borrowings were $110.9 million before $9.2 million of lock-box deposits. The company reported $22.9 million available to borrow and $1.2 million in standby letters of credit.
- Term-loan principal was $135.9 million, with a December 3, 2020 maturity and quarterly principal payments of $0.4 million. The term loan rate was LIBOR plus 6.25%, subject to a 1.25% LIBOR floor. Revolver borrowings had a 3.03% weighted-average rate at quarter-end.
- On May 18, the term-loan amendment increased permitted leverage ratios and raised the interest margin by 25 basis points. The company said it complied with the covenants on both facilities as of July 29. On July 24, the revolver commitment was increased by $15 million to $150 million, subject to the borrowing base.
Outlook, risks and notable items
- Management expects fiscal 2017 capital expenditures of $34–$38 million and deemed sale-leaseback proceeds and landlord incentives of $16–$18 million. It said cash, operating cash flow and revolver availability should fund operations for at least 12 months.
- The company’s long-term target remains annual square-footage growth above 10%, but management expects 3%–7% growth for fiscal 2018 as it shifts some cash use toward debt reduction.
- Management expects industry inventory oversupply and high promotional activity to pressure margins through the rest of fiscal 2017, partly offset by a better product mix. Minimum-wage increases were expected to raise costs at 56 stores.
- First-half SG&A included $1.7 million of professional fees related to a Gander Mountain asset bid; the company withdrew from the auction. First-half effective tax rate rose to 47.3% from 29.9%, mainly due to a discrete tax expense related to restricted-stock-unit vesting.
- Floating-rate debt exposes the company to interest-rate risk. Management estimated a 100-basis-point rate increase would add about $1.0 million to annual interest expense on the revolver balance assumed outstanding for a full year.
- The company disclosed an ongoing appeal in the Lacey Marketplace litigation, but management said loss was not probable based on the latest judgment in its favor. It reported no other legal matter expected to have a material adverse effect.
- The company expects lease accounting changes to have a material impact on its financial statements when adopted. It did not anticipate significant changes to revenue recognition, but expected expanded disclosures.
Important facts for investors to verify
- Whether same-store sales and firearm/ammunition demand stabilize, and whether new-store growth can offset comparable-sales declines.
- Inventory levels, promotional activity and resulting gross-margin trends, particularly during the seasonally important second half.
- Revolver availability under the borrowing base, covenant headroom, debt-reduction progress and exposure to higher rates.
- Whether planned capital spending and store openings remain consistent with the stated cash and debt priorities.
- The eventual outcome of the Lacey Marketplace appeal and the balance-sheet effects of the new lease standard.