Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 weeks ended May 5, 2018 (fiscal Q1 2018), compared with the 13 weeks ended April 29, 2017. This differs from the request metadata identifying 2017 Q1.
Business context
The company operates outdoor sporting goods stores and an e-commerce platform as one reportable segment. At May 5, 2018, it operated 89 stores in 22 states. It opened two stores during the quarter and had approximately 3.5 million gross square feet.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $180.1 million | $156.9 million |
| Gross profit / margin | $55.6 million / 30.9% | $48.6 million / 31.0% |
| SG&A | $59.2 million | $52.4 million |
| Operating loss | $3.7 million | $3.8 million |
| Net loss | $5.8 million | $4.5 million |
| Diluted loss per share | $0.14 | $0.11 |
| Adjusted EBITDA and margin | $4.8 million / 2.7% | $4.2 million / 2.7% |
Sales increased 14.8%; same-store sales rose 3.4%, and e-commerce sales increased 75.1% to $3.3 million. Hunting and shooting was the largest department, accounting for 56.2% of sales. Gross margin slipped 0.1 percentage point: lower-margin hunting and shooting mix was offset by higher vendor incentives. SG&A rose in dollars but declined as a share of sales, to 32.9% from 33.4%. Interest expense increased 12.9% to $3.6 million, primarily due to higher rates and revolving borrowings. The income tax benefit was $1.4 million, compared with $2.4 million; the effective rate was 19.1%, versus 34.8%.
Operating cash flow was negative $9.0 million, compared with negative $8.9 million. Investing cash outflow was $4.5 million, versus $13.2 million, largely reflecting fewer store openings. Financing provided $14.1 million, and quarter-end cash was $2.4 million. Merchandise inventory was $306.2 million, up from $270.6 million at fiscal year-end.
At May 5, the balance sheet reported $66.9 million outstanding on the revolving line (net of lockbox deposits) and $134.7 million of term-loan principal. Total liabilities were $369.0 million and stockholders’ equity was $47.5 million. Management said available cash, operating cash flows and revolving-credit availability should fund operations for at least 12 months; the filing does not state the remaining borrowing availability at quarter-end.
Material changes and unusual items
- Sales growth reflected newer stores, including $14.7 million from fiscal 2017 openings not yet in the same-store base, $0.8 million from stores opened in the current quarter, and 3.4% same-store growth.
- Hunting same-store sales increased 8.1%, while camping and footwear declined 5.3% and 5.2%, respectively. Management attributed hunting strength partly to the political environment and competitor firearm policies, and weaker camping and footwear demand to warmer-than-normal spring weather.
- SG&A included $2.6 million of former CEO retirement-related compensation expense, including accelerated vesting and payments under the retirement agreement.
- The company adopted ASC 606 using the modified retrospective method. The adoption decreased accumulated deficit by $2.6 million at February 4, 2018, primarily reflecting revised gift-card and loyalty-reward breakage accounting. Reported first-quarter breakage revenue was not materially different from the prior accounting method.
- On May 23, 2018, after quarter-end, the company refinanced: revolving availability increased from $150 million to $250 million, with an additional $40 million term loan; both mature May 23, 2023. Proceeds were used to repay the prior term loan. The new term loan bears interest at LIBOR plus 5.75% and requires quarterly principal payments of $2 million beginning October 31, 2018. The company reported covenant compliance as of May 23.
Outlook, risks and contingencies
For fiscal 2018, management expects approximately 3% square-footage growth, below its longer-term target of more than 10%, as it prioritizes debt reduction. It planned five store openings for the year, compared with 12 in fiscal 2017, and forecast capital expenditures of $20 million to $26 million. Management expects industry inventory oversupply to sustain high promotions and pressure margins through the rest of fiscal 2018; minimum-wage increases affecting 43 stores are expected to raise SG&A. Sales are seasonal, typically stronger in the third and fourth quarters, and weather can materially affect demand.
Key risks include consumer spending and economic conditions, regulation of firearms and ammunition, regional concentration in the Western U.S., competition, changing customer preferences, weather, and execution in new markets. The company has floating-rate borrowings and did not then use interest-rate swaps; it estimated a 100-basis-point rate increase would add approximately $2.0 million to annual interest expense based on quarter-end revolving borrowings. Management reported no legal matters expected to have a material adverse effect and no material change in previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm the intended reporting period: this filing reports fiscal Q1 2018, not 2017 Q1.
- Review the post-quarter refinancing’s actual borrowing base availability, debt balances, interest costs and covenant headroom.
- Track whether same-store sales and e-commerce growth persist, particularly given department-level weakness and the hunting-heavy sales mix.
- Assess margin performance amid inventory promotions, and distinguish reported earnings from Adjusted EBITDA, which excludes CEO retirement and other specified costs.
- Compare store-opening and capital-spending plans with execution, cash generation and debt-reduction progress.