Sportsman’s Warehouse Holdings, Inc. — Form 10-K summary
Period: Fiscal year ended February 2, 2019 (52 weeks), compared with fiscal 2017 ended February 3, 2018 (53 weeks). The request metadata says “2017 Q4,” but the supplied filing is the annual report for fiscal 2018; fiscal 2018 fourth-quarter results are also summarized below. Unless stated otherwise, amounts are in millions of dollars.
Business context and reporting period
Sportsman’s Warehouse operates outdoor sporting goods stores and an e-commerce channel. At year-end it had 92 stores in 23 states, primarily in the Western U.S. and Alaska, and reported one operating segment. It opened five stores in fiscal 2018. Hunting and shooting represented 48.3% of annual sales.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $849.1 | $809.7 | +4.9% |
| Same-store sales | +1.5% | -6.5% | Improved |
| Gross profit / margin | $284.9 / 33.6% | $273.9 / 33.8% | Profit +4.0%; margin -0.2 pts |
| Operating income / margin | $44.0 / 5.2% | $46.6 / 5.7% | -5.5% |
| Net income | $23.8 | $17.7 | +33.9% |
| Diluted EPS | $0.55 | $0.42 | +$0.13 |
| Adjusted EBITDA / margin | $68.5 / 8.1% | $72.8 / 9.0% | -5.9%; margin -0.9 pts |
| Cash from operations | $32.2 | $30.8 | +$1.4 |
| Capital expenditures, gross | $17.2 | $41.2 | Lower; fewer store openings |
Fiscal 2018 fourth-quarter sales were $242.7 million and net income was $10.6 million, versus $243.2 million and $5.9 million, respectively, in fiscal 2017’s 14-week fourth quarter.
Liquidity, debt, and capital
- Year-end cash was $1.5 million; current assets were $293.6 million and current liabilities $240.7 million (current ratio approximately 1.22).
- At February 2, 2019, the revolving facility had $151.3 million outstanding before $7.0 million in lock-box deposits reduced the balance-sheet amount to $144.3 million. The company reported $19.3 million of additional borrowing availability, subject to the borrowing base, and $1.7 million of standby letters of credit.
- The new term loan had $36.0 million outstanding ($35.6 million net of debt issuance costs); it carries interest at LIBOR plus 5.75%, with an effective rate of 8.16% at year-end. The revolver’s weighted-average rate was 4.18%. The facilities mature May 23, 2023, are secured by substantially all assets, and include covenants; the company reported compliance at year-end.
- Operating cash flow was $32.2 million, investing cash outflow $16.3 million, and financing cash outflow $16.1 million. Cash interest paid was $13.2 million.
Material changes, outlook, and risks
- Sales growth reflected new and ramping stores and a 1.5% same-store sales increase. Firearms same-store sales rose 5.8%; ammunition declined 0.3%. Warmer fall weather and Western wildfires weighed on camping and clothing sales.
- Gross margin eased amid higher freight costs and a shift toward lower-margin hunting and shooting products. SG&A rose 6.0%, including new-store and e-commerce costs, minimum-wage increases affecting 58 stores, and $2.6 million of former CEO compensation expense.
- Net income benefited from lower income-tax expense: the effective tax rate fell to 22.9% from 46.0%, including a $1.3 million discrete net tax benefit in fiscal 2018. The company also recorded a $2.6 million former-CEO retirement adjustment in its Adjusted EBITDA reconciliation.
- In May 2018, the company refinanced its prior term loan with a new $40 million term loan and an expanded revolver commitment of up to $250 million, subject to a borrowing base. The refinancing contributed to lower interest expense, partly offset by a $1.6 million write-off of prior financing fees and debt discount.
- Management planned three store openings and approximately 3% square-footage growth in fiscal 2019, prioritizing debt reduction; its longer-term target was annual square-footage growth above 5%. Planned fiscal 2019 gross capital expenditures were $18–$23 million. Management said available cash, operating cash flow, and revolver capacity should fund operations for at least 12 months.
- Key risks include firearm and ammunition regulation and demand, discretionary consumer spending, Western-region concentration, competition and online execution, weather, minimum-wage and labor costs, reliance on one distribution center, vendor supply disruption (including Remington’s bankruptcy), and debt/covenant and borrowing-base constraints.
- Operating leases represented substantial commitments: $283.7 million of undiscounted minimum payments at year-end. Adoption of lease accounting in fiscal 2019 was expected to add approximately $205–$225 million of lease liabilities and $175–$195 million of right-of-use assets, with a $9.3 million opening-retained-earnings adjustment.
- The company paid no dividends and did not expect to pay cash dividends in the foreseeable future. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal controls because the company qualified as an emerging growth company.
Important facts for investors to verify
- Whether positive same-store sales and sales growth continue after accounting for new-store contributions and fiscal 2017’s extra week.
- Whether margins and Adjusted EBITDA recover as freight, product mix, wage, and expansion costs evolve.
- Actual revolver availability under the borrowing-base formula, debt repayment progress, interest expense, and covenant headroom.
- Fiscal 2019 store-opening and capital-spending delivery, and the effects of lease-accounting adoption on reported assets, liabilities, and earnings.
- Exposure to firearm-related regulation and demand, regional weather and economic conditions, key-vendor disruption, and the single-distribution-center dependency.