Business context and reporting period
Sportsman’s Warehouse Holdings, Inc. operates outdoor sporting goods stores and an e-commerce platform as one reporting segment. This 10-Q covers the 13 weeks ended May 2, 2020, the first quarter of fiscal 2020, and compares with the 13 weeks ended May 4, 2019. The request metadata says “2019 Q1,” but the filing itself reports fiscal 2020 Q1. At quarter-end, the company operated 105 stores in 27 states.
Financial performance and liquidity
- Sales: $246.8 million, up 41.8% from $174.0 million; same-store sales increased 28.6%.
- Profitability: Gross profit was $74.8 million versus $54.2 million. Gross margin declined to 30.3% from 31.1%. SG&A rose 26.4% to $75.2 million, but decreased as a share of sales to 30.5% from 34.2%. Operating loss was $0.4 million versus $5.4 million; net loss was $1.1 million, or $0.03 per share, versus $5.5 million, or $0.13 per share.
- Adjusted EBITDA: $8.2 million (3.3% margin), compared with $0.4 million (0.2%). This non-GAAP measure included adjustments for $1.1 million of hazard pay, $1.0 million of store-closure costs, and other items.
- Cash flow: Operating cash flow was $31.3 million versus $3.4 million, primarily reflecting increased accounts payable. Investing cash outflow was $5.9 million; financing cash outflow was $5.0 million. Cash at quarter-end was $22.1 million, up from $1.7 million at fiscal year-end.
- Debt and availability: Revolver borrowings were $132.9 million gross, with $60.3 million available and $1.7 million of standby letters of credit. The balance sheet reports $118.4 million of revolving debt after deposit-account offsets. Term-loan principal was $26.0 million; total principal borrowings were approximately $158.9 million. Both facilities mature May 23, 2023. The company reported compliance with its covenants.
- Other obligations: Operating lease liabilities totaled $246.6 million. The company expects fiscal 2020 net capital expenditures of $22–$28 million; approximately $4.8 million were incurred in the quarter, net of acquired inventory cash payments.
Material changes versus the prior comparable period
- Sales growth was led by hunting and shooting, whose share of sales rose to 65.6% from 53.6%. Firearms and ammunition sales increased by $31.0 million and $30.1 million, respectively.
- Same-store hunting sales increased 59.7%; camping increased 16.6% and fishing 8.5%. Clothing and footwear same-store sales fell 30.2% and 21.6%, respectively.
- Management attributed the lower gross margin to a sales mix weighted toward lower-margin firearms and ammunition and a shift toward e-commerce sales.
- Interest expense declined to $1.5 million from $2.1 million, which the company attributed primarily to debt paydown.
Outlook, commentary, risks and unusual items
- Management said elevated demand for firearms, ammunition and personal-protection products began in mid-March and continued through the filing date. It cited COVID-19-related consumer behavior, competitor exits from key categories and the upcoming presidential election as factors supporting sales. The company also reported softer apparel and footwear demand and some China-related supply interruptions affecting camping and fishing products.
- At filing, none of the 105 stores remained closed or under significant local or state operating restrictions. Management cautioned that the pandemic’s duration, severity, effects on customers and vendors, and government responses were uncertain and could materially affect results and liquidity.
- Management expected cash on hand, operating cash flow and revolver availability to fund operations for at least the next 12 months. Fiscal 2020 capital-expenditure expectations were $22–$28 million. The company’s stated store square-footage growth target was 4%–6% annually, subject to opportunities; no earnings or sales guidance was provided.
- The company acquired a Kentucky Field & Stream store for approximately $2.1 million during the quarter and closed a Michigan store acquisition for $2.4 million on May 14, 2020, funded with revolver borrowings. A further approximately $1.0 million of Kentucky purchase consideration was due in June.
- One store closure generated approximately $1.0 million of costs and impairments; COVID-related hazard pay was $1.1 million. SG&A also included $0.8 million of asset write-offs tied to the closure.
- Disclosure controls were deemed ineffective as of May 2, 2020 because of a previously disclosed material weakness in internal control over financial reporting. Management expected remediation before fiscal 2020 year-end, subject to successful operation and testing of controls.
- A wrongful-death and negligence lawsuit related to the Route 91 Harvest Festival shooting names a company subsidiary. The company intends to defend the case; it said potential losses could not be reasonably estimated. Management did not identify other legal matters with probable, reasonably estimable material losses.
Important facts for investors to verify
- Whether elevated pandemic-related demand persists, and how product mix, apparel and footwear weakness, and supply disruptions affect sales and gross margin.
- Revolver availability and borrowing-base headroom, covenant compliance, and the effects of seasonal inventory and payables on cash flow.
- Delivery of the stated $22–$28 million capital-expenditure plan and integration and performance of acquired stores.
- Progress in remediating the material weakness and any subsequent disclosure-control findings.
- Developments in the Route 91 litigation and any change in the company’s ability to estimate potential exposure.