Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended November 3, 2018 (13 weeks), and year to date (39 weeks). The filing’s fiscal 2017 comparatives ended October 28, 2017. Although the request metadata says “2017 Q3,” the filing itself reports fiscal 2018 Q3. Fiscal 2018 ends February 2, 2019. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and financial performance
The company operates sporting-goods stores and an e-commerce platform as one reportable segment. It had 92 stores in 23 states, including five stores opened in fiscal 2018 through November 3.
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $223.1 | $218.1 | $606.4 | $566.5 |
| Gross profit / margin | $77.6 / 34.8% | $77.0 / 35.3% | $205.4 / 33.9% | $194.2 / 34.3% |
| Operating income / margin | $17.5 / 7.8% | $19.5 / 9.0% | $27.1 / 4.5% | $30.0 / 5.3% |
| Net income | $12.4 | $9.8 | $13.1 | $11.9 |
| Diluted EPS | $0.29 | $0.23 | $0.31 | $0.28 |
| Adjusted EBITDA / margin | $22.6 / 10.1% | $25.1 / 11.5% | $46.5 / 7.7% | $49.8 / 8.9% |
Cash flow, 39 weeks: Operating activities used $14.4, versus $7.6 provided in the prior period; investing activities used $13.5, versus $33.1; financing activities provided $28.0, versus $25.7. Ending cash was $1.9. Capital expenditures were $15.2.
Balance sheet at November 3, 2018: Current assets were $385.1, including inventory of $369.1; current liabilities were $341.7. Revolver borrowings were reported at $181.6 net of lock-box cash offsets; the note reports gross revolver loans of $190.9 and $9.3 in offsetting depository accounts. Term-loan principal was $38.0 ($37.6 carrying value after issuance costs). Cash was $1.9.
Changes versus comparable periods
- Q3 sales rose 2.3%, but same-store sales fell 0.5%. Newer stores contributed to the sales increase. YTD sales rose 7.1%, including 0.8% same-store growth.
- Q3 gross margin declined 0.5 percentage points and operating margin declined 1.2 points. YTD gross margin declined 0.4 points and operating margin declined 0.8 points.
- Q3 net income rose 26%, helped by a lower effective tax rate and lower interest expense, despite lower operating income. YTD net income rose 11%; interest expense increased 4.4%, partly due to a $1.6 debt-financing-cost and discount write-off.
- Operating cash flow weakened primarily because the company built inventory ahead of holiday demand and anticipated tariffs. Inventory increased to $369.1 from $270.6 at fiscal year-end.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2018 capital expenditures of $17–$18 million, funded through operating cash flow and the revolving facility. It planned no further store openings in fiscal 2018, and targeted 3%–5% square-footage growth in fiscal 2019 while shifting some cash use toward debt reduction. No financial earnings or sales guidance was provided.
- Management said cash on hand, operating cash generation and available revolver capacity should fund operations for at least 12 months. Actual borrowing availability is subject to a borrowing-base calculation and a minimum availability covenant of 10% of the gross borrowing base; the filing does not give a clear amount of remaining availability.
- Gross margin faced pressure from higher freight costs and a sales mix shift toward lower-margin hunting and shooting products. Management attributed weaker clothing demand partly to warmer-than-normal weather and western U.S. forest fires; minimum-wage increases, new-store costs and e-commerce investment also pressured expenses.
- The May 2018 amended credit agreement increased revolving capacity from $150 million to $250 million, subject to the borrowing base, and added a $40 million term loan. Both mature May 23, 2023; the term loan bears interest at LIBOR plus 5.75% and requires quarterly $2 million principal payments. The company reported covenant compliance at quarter-end.
- Debt carries floating rates. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $2.5 million, based on revolver borrowings outstanding at quarter-end. No interest-rate hedges were in place.
- Adoption of ASC 606 in fiscal 2018 changed gift-card and loyalty-reward breakage accounting and reduced accumulated deficit by $2.6 million at adoption. Management expected adoption of the new lease standard in fiscal 2019 to materially increase reported assets and liabilities.
- Legal matters were described as ordinary-course matters, with no loss considered probable and reasonably estimable at a material level. The company reported no material change in risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether holiday-season sales convert the unusually large inventory build into cash and whether tariff-related purchases affect future margins.
- Current revolver availability under the borrowing base, compliance with the 10% minimum-availability covenant, and the effect of floating rates on interest expense.
- Whether same-store sales and operating margins stabilize, given weaker Q3 same-store sales and lower gross and operating margins.
- The scale and timing of the balance-sheet impact from lease-standard adoption and the company’s planned debt reduction and store expansion.