Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended August 1, 2015, not 2014 Q2. The comparable periods ended August 2, 2014. Amounts below are in millions unless noted.
Business context and reporting period
The company operates outdoor sporting goods stores in one reportable segment. It had 61 stores in 19 states as of August 1, 2015; management reported 62 stores after an additional opening on August 15. Fiscal 2015 is a 52-week year ending January 30, 2016. Sales are typically weighted toward the third and fourth quarters.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $173.0 | $159.5 | $317.5 | $291.9 |
| Gross profit / margin | $58.0 / 33.5% | $52.8 / 33.1% | $101.2 / 31.9% | $93.0 / 31.8% |
| Operating income / margin | $16.8 / 9.7% | $12.3 / 7.8% | $18.0 / 5.7% | $12.1 / 4.2% |
| Net income | $8.2 | $5.1 | $6.8 | $1.7 |
| Diluted EPS | $0.19 | $0.12 | $0.16 | $0.04 |
| Adjusted EBITDA / margin | $17.3 / 10.0% | $16.0 / 10.0% | $22.7 / 7.2% | $22.8 / 7.8% |
Q2 sales increased 8.5%; same-store sales rose 0.5%. First-half sales increased 8.8%, principally from stores opened within the past year. The filing describes same-store sales as flat in its first-half discussion, while later referring to flat sales during Q2; investors should verify the intended first-half comparison.
Q2 operating margin improvement reflected higher gross margin and lower SG&A as a percentage of sales. Gross margin benefited particularly from camping, a higher-margin category. First-half adjusted EBITDA was nearly flat despite sales growth, and its margin declined 0.6 percentage points.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $0.7, versus negative $18.1 in the prior-year period. Seasonal inventory investment used $49.5 of cash; growth in accounts payable partly offset it.
- Capital expenditures were $19.4 in the first half. Management expected full-year fiscal 2015 capital expenditures of $30–$35.
- Cash was $0.6 at August 1. The company used $19.4 in investing activities and generated $19.0 in financing activities, including $6.5 of net revolver borrowings.
- The revolving facility has a $135.0 commitment, subject to borrowing-base limits. Gross revolver borrowings were $56.7; the balance-sheet amount of $48.4 is net of $8.3 held in lock-box/depository accounts. Management reported $64.0 available to borrow and covenant compliance at quarter-end.
- Term-loan principal was $158.8, with $157.4 reported net of unamortized discount. The term loan matures in December 2020; the revolver matures in December 2019. The company reported compliance with both facilities’ covenants.
- On August 26, 2015, the revolver was amended, reducing its applicable interest-rate margin by 0.25 percentage points; the company paid a $0.1 amendment fee. Management said cash, operating cash flows and revolver availability should fund operations for at least 12 months.
Changes, outlook, risks and unusual items
- Seven stores opened during fiscal 2015 through August 1, with one additional store opened August 15. Management expected two more openings in 2015 and stated an intention to grow the store base by more than 10% annually over the next several years.
- On July 30, 2015, the court granted the company judgment as a matter of law in the Lacey Marketplace litigation. The plaintiff appealed. The company reversed its prior $4.0 litigation accrual in Q2, reducing SG&A and increasing reported earnings; the appeal remains pending.
- Q2 SG&A was $41.2, including the $4.0 reversal. Excluding that benefit, management said SG&A increased $4.7 year over year, mainly due to additional stores and related payroll, depreciation, rent and operating expenses.
- Interest expense declined 16.0% in Q2 and 26.2% in the first half, which management attributed to refinancing, lower debt and lower rates. The term loan carries a 6.00% margin over LIBOR subject to a 1.25% LIBOR floor; the company said LIBOR had remained below that floor.
- Key risks include consumer spending and economic conditions, regional concentration in the Western U.S., competition, changing customer preferences, weather, execution of expansion, and regulation affecting firearms and ammunition. Management reported no material changes to the risks in its latest Form 10-K.
- Management cautioned that interim results are not necessarily indicative of the full year and highlighted seasonal sales patterns, weather sensitivity and possible temporary profit pressure from new-store openings.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request: this filing reports fiscal Q2 2015, not Q2 2014.
- Clarify the filing’s wording around flat first-half same-store sales versus the stated 0.5% Q2 increase.
- Track the Lacey Marketplace appeal and any change in the company’s assessment of potential loss.
- Reconcile revolver availability and gross borrowings with the balance-sheet figure net of lock-box deposits; monitor borrowing-base and minimum-availability requirements.
- Assess whether expansion spending and seasonal inventory needs remain supportable given low cash balances and operating cash outflow.
- Distinguish GAAP earnings from Adjusted EBITDA, including the effect of the $4.0 litigation-accrual reversal and other excluded items.