Sportsman’s Warehouse Holdings, Inc. — Form 10-Q Summary
Period: Fiscal second quarter ended August 4, 2018 (13 weeks), and first half ended August 4, 2018 (26 weeks). The request metadata says “2017 Q2,” but the filing is for 2018 Q2; comparatives are the periods ended July 29, 2017. Amounts below are in millions unless stated otherwise.
Business context and results
The company operates 91 outdoor-sports retail stores in 23 states and an e-commerce platform as one reportable segment. It opened four stores during fiscal 2018 to date. Hunting and shooting represented 39.7% of second-quarter sales and 47.4% of first-half sales.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $203.3 (+6.2%) | $191.5 | $383.3 (+10.0%) | $348.4 |
| Same-store sales | +0.2% | — | +1.7% | — |
| Gross profit / margin | $72.3 / 35.6% | $68.6 / 35.8% | $127.8 / 33.3% | $117.2 / 33.6% |
| SG&A / share of sales | $59.1 / 29.1% | $54.4 / 28.4% | $118.3 / 30.9% | $106.8 / 30.6% |
| Operating income / margin | $13.2 / 6.5% | $14.2 / 7.4% | $9.5 / 2.4% | $10.5 / 3.0% |
| Net income | $6.6 | $6.6 | $0.7 | $2.0 |
| Diluted EPS | $0.15 | $0.15 | $0.02 | $0.05 |
| Adjusted EBITDA / margin | $19.0 / 9.3% | $20.4 / 10.7% | $23.8 / 6.2% | $24.6 / 7.1% |
Cash flow, debt and liquidity
- First-half operating cash use was $11.2 million, versus $18.1 million a year earlier; investing cash use was $10.6 million versus $31.3 million. Financing provided $22.7 million, compared with $49.4 million.
- Cash was $2.7 million at August 4, 2018. Current assets were $346.7 million and current liabilities $318.9 million. Inventory was $329.1 million, up from $270.6 million at fiscal year-end.
- Reported revolving-line borrowings were $173.8 million, net of lock-box balances; gross revolver borrowings were $183.9 million. The company also had a $40.0 million term loan. The amended facility increased revolving capacity from $150 million to $250 million, subject to a borrowing base, and both facilities mature May 23, 2023.
- The term loan bears interest at LIBOR plus 5.75%; quarterly $2.0 million principal payments begin October 31, 2018. The company reported compliance with covenants, including minimum availability of 10% of the gross borrowing base. It stated that available cash, operating cash flows and revolver availability should fund operations for at least 12 months.
- Capital expenditures were $10.6 million in the first half; fiscal 2018 expected capex was $17–$20 million. A 100-basis-point rate increase was estimated to add about $2.5 million to annual interest expense, assuming current revolver borrowings remained outstanding for a year.
Material changes, outlook and risks
- Sales growth was driven mainly by newer stores: stores opened in fiscal 2017 and not yet in the same-store base contributed $10.1 million to Q2 growth and $25.6 million to first-half growth. Same-store gains were modest in Q2.
- Management cited firearm and ammunition market-share gains as support for hunting sales. Warmer spring weather and extensive Western wildfires weighed on camping and related demand. A shift toward lower-margin hunting and shooting products pressured gross margin, partly offset by higher vendor incentives.
- Management expects industry inventory oversupply to sustain elevated promotions and margin pressure through the rest of fiscal 2018. Wage increases affecting 43 stores and new-store costs are expected to raise SG&A. The company expects about 5% square-footage growth in fiscal 2018, below its longer-term target of more than 10%, as it redirects some cash toward debt reduction; one additional store opening was announced.
- First-half operating income and net income declined despite higher sales. SG&A included $2.6 million of former-CEO retirement compensation; interest expense included a $1.6 million write-off of prior-loan financing fees and discount. The prior term loan was refinanced in May 2018.
- ASC 606 was adopted February 4, 2018 using the modified retrospective method; the cumulative adjustment reduced accumulated deficit by $2.6 million. The new lease standard is planned for adoption in Q1 2019 and is expected to materially increase balance-sheet assets and liabilities.
- 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 of store expansion. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Clarify the filing-period discrepancy: this is the 2018 second-quarter filing, not 2017 Q2.
- Track same-store sales, new-store contribution, promotional intensity and gross-margin trends, particularly given the hunting-heavy sales mix.
- Monitor inventory levels, seasonal operating cash use, borrowing-base availability and debt-service capacity.
- Reconcile the tax-rate disclosures: the financial-statement note reports a 56.2% first-half effective tax rate, while MD&A states 59.8%; the filing does not provide a clear reconciliation.
- Assess the effect of lease-standard adoption and confirm performance against the $17–$20 million capex plan and stated store-opening outlook.