Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended August 2, 2014 (13 weeks), with year-to-date results for the 26 weeks ended that date. The filing covers fiscal 2014, notwithstanding the request metadata’s “2013 Q2.” Unless stated otherwise, financial amounts below are in millions of dollars. The company operated 54 stores at quarter-end; it opened another store on August 16.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $159.5 | $155.9 | $291.9 | $292.4 |
| Gross profit / margin | $52.8 / 33.1% | $52.2 / 33.5% | $93.0 / 31.8% | $95.1 / 32.5% |
| Operating income / margin | $12.3 / 7.8% | $16.1 / 10.4% | $12.1 / 4.2% | $26.7 / 9.2% |
| Interest expense | $4.1 | $3.4 | $9.4 | $6.6 |
| Net income / diluted EPS | $5.1 / $0.12 | $7.7 / $0.23 | $1.7 / $0.04 | $12.1 / $0.36 |
| Adjusted EBITDA / margin | $16.0 / 10.0% | $17.9 / 11.5% | $22.8 / 7.8% | $32.3 / 11.1% |
Q2 sales rose 2.3%, primarily from new stores, while same-store sales fell 6.1% (down 1.4% excluding firearms and ammunition). First-half sales were down 0.2%; same-store sales fell 11.6% (down 1.5% excluding firearms and ammunition). Hunting and shooting demand weakened significantly: same-store sales in that department declined 15.0% in Q2 and 23.6% in the first half. Camping, clothing, and footwear performed better.
Gross margin declined year over year in both periods. Management cited the loyalty program, lower margins in firearms and ammunition amid increased market supply, and, for the first half, a return to the normal marketing calendar. SG&A increased with store growth and included IPO-related bonuses and stock-based compensation. First-half net income also reflects higher interest expense; the company attributed that increase to its August 2013 refinancing and larger debt balance during the period.
Cash flow, balance sheet, and liquidity
- First-half cash flow: Operating activities used $18.1 million, versus $21.1 million used in the prior-year period. Investing activities used $19.6 million, including $19.6 million of capital expenditures; prior-year investing cash use was $59.7 million, including the $47.8 million store acquisition. Financing activities provided $38.0 million. Cash ended at $1.7 million.
- Working capital: Inventory was $207.4 million at August 2, up from $161.3 million at fiscal year-end. The company reported current assets of $229.2 million and current liabilities of $153.1 million.
- Debt: Balance-sheet carrying amounts included $62.9 million on the revolving line and $156.9 million of term debt, including current and long-term portions. Gross revolving borrowings were $71.1 million before $8.2 million in lock-box deposits; term-loan principal outstanding was $159.4 million. IPO proceeds were used to repay $73.3 million of term debt.
- Availability and covenants: Revolving facility availability was $23.0 million, with $0.4 million in standby letters of credit. The company said it was in compliance with revolving-credit and term-loan covenants. Both facilities are secured and include restrictive covenants.
- Interest exposure: The revolving facility’s weighted-average rate was 1.91%. Term-loan rates were 7.25% and 12.0% while LIBOR remained below the contractual 1.25% floor. Management estimated a 100-basis-point rate increase would add about $0.6 million to annual revolver interest expense, assuming the balance remained outstanding for a full year.
Material developments, outlook, and risks
- The company completed its IPO in April 2014 and a partial over-allotment sale in May, raising approximately $73.3 million in net proceeds for term-debt repayment. IPO-related items included $2.2 million of executive bonuses and accelerated restricted-stock vesting that generated $1.2 million of compensation expense.
- Seven stores opened in the first half, and an eighth opened after quarter-end. Management said it did not expect further openings in 2014 and planned to open 8–13 stores annually in the following several years. Its stated new-store targets are a minimum 10% four-wall Adjusted EBITDA margin and minimum pre-tax return on invested capital of 50% excluding initial inventory costs, or 20% including them, in the first full year.
- Management expected fiscal 2014 capital expenditures of approximately $23.2 million; $19.6 million had been incurred by quarter-end, with approximately $3.6 million expected for the rest of the year. It believed cash, operating cash flow, and revolver availability would fund operations for at least 12 months.
- Sales are seasonal, generally higher in the third and fourth fiscal quarters. Management noted exposure to weather, consumer demand, regional conditions, competition, execution of store expansion, and regulation of firearms and ammunition. Results may also be affected by new-store opening costs and the weaker firearms-demand comparison following unusually strong prior-period demand.
- The company reported no material change in its previously disclosed risk-factor assessment, no material development in disclosed legal proceedings, and no material expected adverse effect from ordinary-course legal matters. It reported no off-balance-sheet arrangements and no material impairment charge in the periods discussed.
Key facts for investors to verify
- Whether same-store sales and firearms/ammunition demand stabilized after the steep first-half declines.
- Whether new stores generate sales and returns consistent with management’s targets, and whether planned store growth pressures margins or cash flow.
- Inventory levels, working-capital needs, and seasonal borrowing under the revolver, including the availability of the borrowing base.
- Debt repayment capacity, interest costs, covenant compliance, and the effect of floating rates and term-loan interest-rate floors.
- The impact of IPO-related compensation and other adjustments when assessing GAAP earnings versus Adjusted EBITDA.