Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half of fiscal 2019, ended August 3, 2019; comparable periods ended August 4, 2018. The request metadata says “2018 Q2,” but the filing itself is for 2019 Q2.
Business context and financial performance
The company operates outdoor sporting goods stores and an e-commerce platform as one reportable segment. It had 94 stores in 24 states as of August 3, 2019, including two stores opened during fiscal 2019 to date.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $211.8 million | $203.3 million | $385.8 million | $383.3 million |
| Gross profit / margin | $73.2 million / 34.6% | $72.3 million / 35.6% | $127.4 million / 33.0% | $127.8 million / 33.3% |
| Operating income / margin | $9.8 million / 4.6% | $13.2 million / 6.5% | $4.4 million / 1.1% | $9.5 million / 2.4% |
| Net income | $5.5 million | $6.6 million | $39,000 | $722,000 |
| Adjusted EBITDA / margin | $15.8 million / 7.5% | $19.0 million / 9.3% | $16.2 million / 4.2% | $23.8 million / 6.2% |
Cash flow, first half: Operating activities provided $35.4 million, versus $11.2 million used in the prior-year period. Investing activities used $14.5 million, principally for stores and the new corporate headquarters; financing activities used $21.1 million. Cash declined $72,000 to $1.5 million. Capital expenditures were $14.5 million; management expected fiscal-year net capital expenditures of $16–20 million.
Debt and liquidity: At August 3, gross revolving borrowings were $137.3 million and term-loan principal was $32.0 million. The balance sheet presents the revolver at $127.1 million after lockbox/depository offsets. The company reported $51.6 million available under the revolver and $1.7 million of standby letters of credit. The facility and term loan mature May 23, 2023; the company reported compliance with covenants. Cash was $1.5 million. Operating lease liabilities totaled $213.6 million, newly recognized under ASC 842.
Changes versus comparable periods
- Quarterly sales rose 4.2%; same-store sales increased 1.7%. First-half sales rose 0.6%, while same-store sales declined 1.8%.
- Quarterly sales growth included $5.9 million from newer stores and stronger firearm and ammunition demand. First-half newer stores contributed $10.8 million.
- Gross margin declined 1.0 percentage point in Q2 and 0.3 point in the first half. Management cited lower-margin product mix and promotional activity.
- SG&A rose 7.4% in Q2 and 4.0% in the first half; as a share of sales it increased to 30.0% and 31.9%, respectively. New-store costs and minimum-wage increases affecting 51 stores contributed.
- Interest expense fell 45.7% in Q2 and 43.5% in the first half, primarily following the 2018 refinancing and shift toward lower-rate revolver borrowing.
- First-half operating cash flow improved substantially, which management attributed mainly to more efficient inventory purchasing and higher accounts payable.
Outlook, commentary, risks and unusual items
- Management planned one additional store opening in fiscal 2019, for three total openings that year; expected square-footage growth was approximately 3%, below its longer-term target of more than 5%, as the company prioritized debt reduction.
- Management said cash on hand, operating cash flow and revolver availability should fund operations for at least the next 12 months. Sales are seasonal, typically stronger in the third and fourth quarters; weather can materially affect demand.
- Risks highlighted include consumer spending and economic conditions, firearms and ammunition regulation, competition, regional concentration in the Western U.S., changing customer preferences, weather and new-store execution. Floating-rate debt exposes the company to interest-rate risk; a 100-basis-point increase was estimated to add about $1.3 million of annual interest expense.
- A subsidiary was named as a defendant in litigation related to the Route 91 Harvest Festival shooting, filed July 2, 2019. The company intends to defend the case; potential loss could not be reasonably estimated. Management stated other legal matters were not believed probable and reasonably estimable at a material level.
- Adoption of ASC 842 in fiscal 2019 brought operating lease assets and liabilities onto the balance sheet and increased opening retained earnings by approximately $9.3 million, net of tax. This accounting change is a significant balance-sheet comparison item.
- Q2 Adjusted EBITDA included $266,000 of executive transition costs; first-half 2018 included $2.6 million of former-CEO retirement costs. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.
Important facts for investors to verify
- Confirm the period: the filing covers fiscal 2019 Q2, despite the request metadata’s 2018 Q2 label.
- Track same-store sales, gross margin and SG&A trends, particularly as seasonal quarters approach.
- Review revolver availability, borrowing-base limits, covenant compliance and floating-rate exposure alongside low reported cash.
- Monitor the firearms-related lawsuit; the filing provides no estimable loss range.
- Distinguish ASC 842 lease liabilities and non-GAAP Adjusted EBITDA from funded debt and GAAP operating performance.
- The filing’s first-half effective tax rate is reported as 172.4% in the tax note and MD&A, while the MD&A gives a different prior-year comparison than the tax note; verify the intended prior-year rate if material to analysis.