Business context and reporting period
Sportsman’s Warehouse Holdings, Inc. operates sporting-goods stores and an e-commerce business as one reportable segment. This filing covers the 13-week third quarter and 39 weeks ended October 28, 2017, compared with the periods ended October 29, 2016. Fiscal 2017 has 53 weeks and ends February 3, 2018. The filing describes 86 stores at quarter-end and 87 by the filing date after a November opening.
Note: the request metadata identifies 2016 Q3, but the supplied filing is for fiscal 2017 Q3.
Financial performance
Amounts below are in USD millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $218.1 | $217.2 | $566.5 | $558.6 |
| Gross profit / margin | $77.0 / 35.3% | $74.3 / 34.2% | $194.2 / 34.3% | $188.9 / 33.8% |
| Operating income | $19.5 | $20.5 | $30.0 | $39.6 |
| Net income / diluted EPS | $9.8 / $0.23 | $10.5 / $0.25 | $11.9 / $0.28 | $19.1 / $0.45 |
| Adjusted EBITDA / margin | $25.1 / 11.5% | $26.1 / 12.0% | $49.8 / 8.8% | $55.9 / 10.0% |
Quarterly sales rose 0.4%; year-to-date sales rose 1.4%. Same-store sales fell 7.0% in Q3 and 7.6% year to date, while new-store sales supported reported growth. E-commerce sales increased 21.9% to $2.7 million in Q3 and 18.2% to $6.5 million year to date. SG&A rose 6.9% in Q3 and 10.0% year to date; as a share of sales it increased to 26.3% and 29.0%, respectively. Year-to-date operating income and net income declined despite higher sales and gross margin.
For the 39 weeks, operating cash flow was $7.6 million, versus cash used of $15.1 million a year earlier. Investing used $33.1 million, chiefly for capital expenditures; financing provided $25.7 million. Cash was $2.2 million at October 28. Inventory was $318.3 million, up from $246.3 million at fiscal year-end, and accounts payable was $69.5 million, versus $31.5 million.
At quarter-end, term-loan principal was $135.5 million and revolving borrowings were reported as $87.3 million gross, with $46.5 million available to borrow. The balance sheet presents revolving debt net of $8.8 million held in lock-box accounts. Term-loan interest was LIBOR plus 6.25%, subject to a 1.25% LIBOR floor; the revolving facility’s weighted-average rate was 2.76%. The company reported compliance with debt covenants. A 100-basis-point rate increase was estimated to add about $1.0 million of annual interest expense on revolving borrowings.
Material changes, outlook and risks
- Hunting and shooting sales declined $7.0 million in Q3 and $14.7 million year to date; management attributed weaker firearm and ammunition demand partly to expectations of less regulation. Q3 same-store sales fell 14.0% in hunting and shooting; year-to-date declines were 12.7% for firearms and 20.4% for ammunition.
- Gross margin improved as sales shifted from lower-margin hunting and shooting to higher-margin clothing, footwear and camping. Management cautioned that industry inventory oversupply and elevated promotions were expected to pressure margins through the rest of fiscal 2017.
- Year-to-date SG&A included $1.7 million of professional fees related to a Gander Mountain asset bid that the company ultimately did not pursue. New-store costs, advertising and minimum-wage increases also contributed to expense growth.
- The company opened 12 stores during fiscal 2017 to date and targets annual square-footage growth above 10% over time, but expects approximately 3% growth in fiscal 2018 as it shifts some cash toward debt reduction. Fiscal 2017 capital expenditures were expected to total $40–$43 million; management believed available cash, operating cash flow and revolver availability would fund operations for at least 12 months.
- Results are seasonal, with sales typically concentrated in the third and fourth quarters; weather can materially affect demand. Other stated risks include consumer spending, competition, regional concentration in the western U.S., product preferences and firearm-related regulation.
- A Washington litigation matter remained on appeal, with oral argument scheduled for December 5, 2017. Management said it did not believe other legal matters were probable and reasonably estimable at a material level. The company reported effective disclosure controls and no material change in internal control during the quarter.
- Management expected lease-accounting changes to have a material financial-statement impact when adopted. The company planned to adopt the new revenue standard using the modified retrospective method and did not anticipate significant changes to revenue recognition, but expected expanded disclosures.
Key facts investors should verify
- Reconcile the filing’s different revolver figures: $87.3 million gross borrowings in the credit-facility note and MD&A versus $83.5 million in the contractual-obligations discussion; also distinguish gross borrowings from the balance-sheet amount net of lock-box cash.
- Confirm store count and timing: 86 stores are reported at October 28, while the overview reports 87 by the November filing date.
- Assess whether same-store sales weakness, especially in firearms and ammunition, continues and whether new-store growth can offset it.
- Monitor inventory, promotional activity, gross-margin trends, working-capital funding and the ability to reduce debt while limiting planned store expansion.
- Review covenant headroom, variable-rate exposure, the appealed litigation, and the anticipated impact of lease-accounting adoption.