Sportsman’s Warehouse Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended February 1, 2020 (52 weeks), with fourth-quarter results compared with FY2018 Q4. The company operates outdoor sporting goods stores and e-commerce as one reportable segment. FY2019 ended before the COVID-19 disruption described in the filing.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $886.4 million | $849.1 million |
| Gross profit / margin | $296.6 million / 33.5% | $284.9 million / 33.6% |
| Operating income / margin | $33.5 million / 3.8% | $44.0 million / 5.2% |
| Net income / diluted EPS | $20.2 million / $0.46 | $23.8 million / $0.55 |
| Adjusted EBITDA / margin | $59.0 million / 6.7% | $68.5 million / 8.1% |
| Operating cash flow | $77.9 million | $32.2 million |
FY2019 revenue grew 4.4%, primarily from new and acquired stores; same-store sales declined 0.9%. Gross margin edged down as freight costs rose and vendor incentives declined. SG&A increased 9.2% to $263.2 million, reflecting store growth, payroll and other operating costs, including minimum-wage increases. Lower interest expense—down 39.4% to $8.0 million after refinancing and debt reduction—partly offset operating-cost pressure.
In Q4 FY2019, sales were $258.2 million versus $242.7 million, while net income was $9.7 million versus $10.6 million and diluted EPS was $0.22 versus $0.25. The filing attributes annual same-store sales pressure to a shorter, more competitive holiday season and legislative changes in Washington and California; firearm and ammunition same-store sales fell 3.0% and 0.5%, respectively.
Cash, debt and liquidity
- Cash at February 1, 2020 was $1.7 million. Operating cash flow was $77.9 million; investing cash outflow was $49.1 million and financing cash outflow was $28.7 million. Operating cash flow benefited mainly from lower inventory purchases and increased accounts payable.
- At year-end, revolving borrowings were $123.5 million gross ($116.1 million reported on the balance sheet after lock-box offsets); the company reported $44.3 million available borrowing capacity. The $40 million term loan had a $30 million principal balance. The facility and term loan mature in May 2023; the term loan carries a stated rate of LIBOR plus 5.75% (7.31% effective at year-end).
- Current assets were $291.6 million and current liabilities $264.8 million. The company was in compliance with credit-facility covenants at February 1, 2020. Debt is secured by substantially all company and subsidiary assets.
- Following adoption of lease accounting, the balance sheet included $224.5 million of operating lease right-of-use assets and $251.7 million of lease liabilities. The adoption materially changed reported assets and liabilities; prior-year figures were not restated.
Outlook, risks and unusual items
- Management planned to open 7–9 stores in FY2020, target annual square-footage growth of 4%–6%, and spend $25–$35 million on gross capital expenditures. These are plans, not guarantees.
- In October 2019, the company acquired eight Field & Stream stores for approximately $28.7 million. They contributed $24.3 million in sales and approximately $2.2 million in net income from acquisition through year-end. One additional Kentucky store acquisition closed in March 2020; another Michigan store deal was delayed amid COVID-19.
- COVID-19 developments after year-end included reduced store hours, customer limits, supply interruptions—particularly for China-sourced camping and fishing products—and a significant increase in demand for firearms, ammunition and personal-protection products. Management said the resulting mix skewed toward lower-margin products. As of April 9, 2020, the filing cited $12.1 million cash and approximately $84 million available revolver capacity; the pandemic’s duration and financial effect were uncertain.
- Key risks include discretionary-spending and weather sensitivity, concentration in the Western U.S., competition, firearm and ammunition regulation, vendor and supply-chain disruption, variable-rate debt and covenant headroom, and dependence on a single distribution center. A 1% increase in the applicable variable debt rate was estimated to add approximately $1.3 million of annual interest expense.
- The company disclosed a material weakness in IT general controls over user access and change management affecting systems used in financial reporting. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; the auditor issued an adverse ICFR opinion. No financial-statement misstatement was identified, and the financial statements received an unqualified audit opinion. Management expected remediation before FY2020 year-end.
- A wrongful-death and negligence lawsuit related to the 2017 Route 91 shooting names a company subsidiary among defendants. The company intends to defend the case; the filing says potential loss cannot presently be reasonably estimated. No cash dividends were paid, and none were expected in the foreseeable future.
Most important facts to verify
- Whether COVID-19 store restrictions, demand shifts and supply disruptions materially affected later-period margins, cash flow and borrowing availability.
- Progress in remediating the IT-control material weakness and any subsequent control or reporting issues.
- Same-store sales, gross-margin trends, and the economics and integration of the acquired Field & Stream stores.
- Current revolver availability, covenant compliance, debt costs and lease obligations.
- Developments and any estimated exposure in the Route 91 litigation and the status of the delayed store acquisition.