Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 31, 2015 (13 weeks), with year-to-date results for the 39 weeks ended October 31, 2015. The filing identifies this as fiscal 2015 Q3, despite the request metadata stating 2014 Q3. Dollar figures below are in millions unless stated otherwise.
Business context and results
The company operated 64 outdoor sporting goods stores in 19 states, in one reportable segment. It opened nine stores during the first 39 weeks of fiscal 2015, increasing gross selling area by 9.8%. Sales are seasonal, typically strongest in the third and fourth fiscal quarters.
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Net sales | $199.7 | $182.5 | $517.2 | $474.4 |
| Gross profit / margin | $66.6 / 33.3% | $60.7 / 33.2% | $167.7 / 32.4% | $153.6 / 32.4% |
| Operating income / margin | $19.2 / 9.6% | $18.6 / 10.2% | $37.2 / 7.2% | $30.7 / 6.5% |
| Net income | $9.5 | $8.9 | $16.4 | $10.6 |
| Diluted EPS | $0.23 | $0.21 | $0.39 | $0.27 |
| Adjusted EBITDA / margin | $24.1 / 12.1% | $21.8 / 12.0% | $46.9 / 9.1% | $44.6 / 9.4% |
Financial position, cash flow and debt
- At October 31, 2015, cash was $1.9; inventory was $253.9, versus $185.9 at January 31, 2015. Current assets were $264.5 and current liabilities $172.7.
- For the 39 weeks, operating cash flow was $3.9, compared with cash use of $13.8 in the prior-year period. Inventory absorbed $68.0 of cash, partly offset by a $33.4 increase in accounts payable.
- Investing cash outflow was $22.1, including $29.8 of capital expenditures, partly offset by $7.8 of sale-leaseback proceeds. Financing cash inflow was $18.4. Ending cash was $1.9.
- Term-loan principal outstanding was $158.4; revolving loans were $57.0 gross, with $7.3 of lock-box deposits offset against the balance-sheet presentation. The filing reports $49.7 of revolving debt on the balance sheet and $63.7 available to borrow at quarter-end.
- Total liabilities were $357.5 and stockholders’ deficit was $14.0. The company reported compliance with debt covenants. The revolver matures in December 2019; the term loan matures in December 2020.
Material changes and management commentary
- Q3 sales grew 9.4%, primarily from new stores; same-store sales were flat. Year-to-date sales grew 9.0%, also driven by new stores; same-store sales were flat.
- Q3 gross margin edged up 0.1 percentage point, while SG&A rose to 23.7% of sales from 23.0%, including $0.7 of secondary-offering costs and expenses associated with additional stores. Operating margin consequently declined 0.6 percentage point.
- Year-to-date SG&A declined to 25.2% of sales from 25.9%. Comparisons include a $4.0 reversal of the prior litigation accrual and a $2.2 IPO-related bonus in the prior-year period. Year-to-date Adjusted EBITDA margin was 9.1%, down from 9.4%.
- Interest expense decreased year over year, which management attributed to lower debt and lower rates following the December 2014 term-loan refinancing and an August 2015 revolver amendment.
- The company expects fiscal 2015 gross capital expenditures of $35–$37 million and says cash, operating cash flows, and revolver availability should fund operations for at least 12 months. It intends to grow its store base by more than 10% annually over the next several years.
Risks, contingencies and unusual items
- The Lacey Marketplace jury had awarded $11.9 against defendants in March 2015. A $4.0 accrual was recorded for fiscal 2014; after a July 2015 judgment in the company’s favor, it reversed the accrual. Plaintiffs appealed, so the matter remains unresolved; management assessed loss as not probable at the reporting date.
- The September 2015 secondary offering involved existing shareholders; the company received no proceeds and incurred $0.7 of offering expenses.
- Key risks cited include consumer-spending and regional economic conditions, Western U.S. concentration, competition, changing customer preferences, weather, store-expansion execution, and regulation of firearms and ammunition.
- Debt carries floating interest rates, and the company did not report using interest-rate hedges. Management estimated a 100-basis-point rate increase would raise annual interest expense by about $0.5 million on the revolver balance. Term-loan interest is 7.25% while LIBOR remains below its 1.25% floor.
- Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether flat same-store sales persist and how new stores contribute to comparable growth and profitability.
- Inventory growth, seasonal working-capital needs, and the company’s ability to sustain positive operating cash flow while expanding.
- Remaining borrowing-base availability and compliance with minimum-availability and term-loan financial covenants.
- Progress and potential outcome of the Lacey Marketplace appeal, including whether any litigation accrual becomes necessary.
- Actual fiscal-year capital expenditures and store-opening pace versus management’s stated expectations.