Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Period clarification: The filing is for the 13 and 39 weeks ended October 29, 2016 (fiscal 2016 third quarter), not 2015 Q3 as indicated in the request metadata. Comparatives are the corresponding periods ended October 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
The company operates sporting goods stores and reported one operating segment. It had 75 stores in 20 states at quarter-end, after opening 11 stores during fiscal 2016 to date. The business is seasonal, with sales typically strongest in the third and fourth quarters.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $217.2 | $192.1 | $558.6 | $498.2 |
| Gross profit / margin | $74.3 / 34.2% | $66.6 / 34.6% | $188.9 / 33.8% | $167.7 / 33.7% |
| Operating income / margin | $20.5 / 9.5% | $19.2 / 9.9% | $39.6 / 7.1% | $37.2 / 7.5% |
| Net income | $10.5 | $9.5 | $19.1 | $16.4 |
| Diluted EPS | $0.25 | $0.23 | $0.45 | $0.39 |
| Adjusted EBITDA / margin | $26.1 / 12.0% | $24.1 / 12.6% | $55.9 / 10.0% | $46.9 / 9.4% |
Q3 sales rose 13.0%; same-store sales increased 2.1%. Year-to-date sales rose 12.1%; same-store sales increased 1.1%. Sales growth primarily reflected new stores. Q3 firearms and ammunition demand benefited partly from customer expectations about possible regulation and from fall hunting season. E-commerce sales were $2.2 million in Q3 and $5.5 million year to date.
Q3 gross margin declined 40 basis points, primarily because firearms and ammunition—lower-margin products—made up a larger share of sales. Year-to-date gross margin improved 10 basis points, attributed to increased vendor incentives. Q3 SG&A was 24.7% of sales, unchanged year over year; year-to-date SG&A was 26.7%, versus 26.2% (26.8% versus 27.0% excluding the prior-year litigation accrual reversal). Year-to-date Adjusted EBITDA comparisons include the $4.0 million prior-year reversal of a litigation accrual.
Cash flow, debt, and liquidity
- For the 39 weeks, operating cash flow was negative $15.1 million, versus positive $3.9 million a year earlier. The main driver was an $86.3 million inventory build, including inventory for new stores and the holiday season.
- Investing cash flow was negative $28.0 million, including $30.8 million of property and equipment purchases. Financing cash flow was positive $43.7 million, principally reflecting $60.1 million of net revolving-credit borrowings. Period-end cash was $2.7 million.
- At October 29, 2016, the balance sheet showed $85.3 million outstanding on the revolving line and $134.0 million of long-term debt net of discount and issuance costs. The company separately reported $137.1 million of term-loan principal and $94.9 million of revolving loans before lock-box offsets. Revolver availability was $25.4 million; the facility limit is $135 million, subject to borrowing-base limits.
- The term loan matures in December 2020 and the revolver in December 2019. The company made $19.7 million of mandatory and voluntary term-loan prepayments during the period, alongside required payments, and incurred a $0.15 million prepayment penalty. It reported compliance with debt covenants.
- Management said cash, operating cash flows, and revolver availability should fund operations for at least the next 12 months. The company expects fiscal 2016 capital expenditures of $35–$40 million; approximately $29.8 million had been incurred through the 39-week period.
Outlook, risks, and unusual items
- No specific earnings or sales forecast was provided. Management intends to grow its store base by more than 10% annually for the next several years and expects ongoing SG&A increases with expansion.
- Key risks include consumer spending and economic conditions, concentration in the Western U.S., competition, changing customer preferences, weather, execution in new markets, and firearm and ammunition regulation. Floating-rate debt also exposes the company to interest-rate changes; management estimated a 100-basis-point increase would add about $0.9 million to annual interest expense on the revolver balance used in its sensitivity analysis.
- The company revised prior-period presentation of state licenses, duck stamps, and mandated background-check revenue from gross to net because it acted as agent. The revision reduced comparative sales and cost of goods sold but did not affect gross profit, net income, or EPS; management concluded the prior statements were not materially misstated.
- The Lacey Marketplace litigation remains on appeal after a court ruling in the company’s favor and reversal of its prior $4.0 million accrual. Management did not consider a loss probable and reasonably estimable; it reported no material litigation developments in the quarter.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-store sales and firearm-related demand persist after the period’s reported regulatory expectations and seasonal hunting demand.
- Inventory levels, holiday sell-through, and the effect of working-capital needs on cash generation and revolver use.
- New-store returns and execution against the stated store-growth and capital-expenditure plans.
- Debt availability, borrowing-base constraints, covenant compliance, and sensitivity to floating interest rates.
- Developments in the Lacey Marketplace appeal and the impact of the gross-to-net revenue presentation when comparing reported sales.