Sportsman’s Warehouse Holdings Inc. lowered its EPS guidance for the full year due to expectations that the heightened promotional climate and price-compression in ammunition will not let up in the fourth quarter.

The hunt & fish chain also reported third-quarter earnings that arrived at the low end of guidance while its sales came in largely in line with targets.

In the quarter, sales inched up 0.4 percent to $218.1 million. Same-store sales slumped 7 percent. Under its guidance, the company had expected sales in the range of $220 million to $225 million based on a same-store sales decline in the range of 6 percent to 8 percent.

Net income slid 6.7 percent to $9.8 million, or 23 cents a share, hitting the low end of its guidance calling for EPS between 23 cents and 26 cents.

Adjusted EBITDA was $25.1 million compared to $26.1 million in the same period a year ago.

On a conference call with analysts, John Schaefer, CEO, said the same-store decline was due to continued softness in firearm demand, which declined to 12.4 percent for the quarter, and ammunition demand, which was 19.4 percent.

The hunt & fish chain “anniversaried difficult comparisons from the election run up last year,” the CEO noted.

The weakness in firearms is reflected in NICS data. For the quarter, NICS demand in the states in which Sportsman’s Warehouse operates decreased 15.2 percent, while firearm unit sales decreased only 3.4 percent.

More encouragingly, Schaefer noted that the chain’s non-MSR rifle and shotgun sales increased 6.6 percent on a same-store sales basis. He said, “We believe this reflects the more consistent trends within this area of firearms.”

The ammunition decline was attributed largely to “customers’ reluctance to purchase ammunition at full price, which has risen rather dramatically over the past seven years.”

Schaefer said the company is working with vendors to “bring ammunition sales back into historical alignment with firearm demand” and he expects to see “better pricing for the consumer beginning in early 2018.”

In other categories, footwear and clothing categories, its highest-margin categories, turned in a respectable performance. Footwear increased 1 percent on a same-store basis. Apparel decreased 1.1 percent but was facing a 5.2 percent gain in the year-ago quarter and is up 4.1 percent on a two year-stack basis.

The fishing category increased 4.3 percent on a same-store basis and benefited from water flows returning to normal levels. Camping inched up 0.2 percent despite being impacted by the wild ires in the West, particularly in Northern California.

Footwear, clothing, fishing and camping all improved margins in the period.

The company estimated that 90 basis points of the same-store decline reflected competitor-store openings that leads to a short-term impact before it diminishes within 18 months. Some lingering challenges at its oil and gas market stores provided a 36 basis point tailwind to its comp.

Gross profit increased 3.6 percent to $77 million compared to $74.3 million in the third quarter of fiscal year 2016. During the third quarter of fiscal year 2017, gross profit as a percentage of net sales increased 110 basis points to 35.3 percent from 34.2 percent in the prior-year period, due to product margin expansion as well as mix shift away from firearms and ammunition toward higher-margin products.

SG&A increased 6.9 percent to $57.4 million for the third quarter of fiscal year 2017 from $53.7 million in the third quarter of fiscal year 2016. As a percentage of net sales, SG&A expenses in the quarter increased approximately 160 basis points to 26.3 percent from 24.7 percent due to a combination of the higher wages due to increases in state minimum wages, as well as the impact of the fixed cost deleveraging.

The overall shortfall in sales reflected a delay in the opening of its Pueblo, CO store until the fourth quarter. With 11 of the 12 stores it plans to open this year having opened, the quarter saw square footage growth of 10.8 percent from the end of the third quarter of 2016.

Sportsman’s Warehouse will further moderate its expansion efforts in 2018 with five stores planned, the low end of the five to nine planned 2018 store openings it we had previously discussed. Said Schaefer, “With this prudent moderation, we plan to allocate more free cash flow to debt pay down in fiscal 2018.”

On a per store basis, inventory decreased 8.7 percent in line with adjustments to weakening demand in the shooting categories.

Schaefer said the company continues to make progress on its strategic priorities that include driving same-store sales through marketing its loyalty program and building its private label assortments.

Another key priority is elevating its omnichannel experience at the store as well as by increasing the pace of e-commerce development. E-commerce sales grew 21.9 percent to $2.7 million and investments are being made to expand assortments online as well as improve data analytics and enhance mobile capabilities.

Finally, a third key priority is paying down its term debt and reducing debt leverage. The company ended the quarter with a net debt to adjusted EBITDA ratio of 2.78 times, a sequential decrease of 0.28 from the end of the second quarter.

Schaefer also said he believes Sportsman’s Warehouse will continue to pick up share in a consolidating marketplace. The CEO stated, “Given the industry rationalization we’re seeing, especially in the mid-west, we continue to see significant opportunity to build on our market share gains through both our physical store presence and our ability to attract more online customers with buy online pick up in store.”

Looking ahead, Sportsman’s Warehouse said that while the challenging firearm comparisons pre-election will be behind the company, a heightened promotional environment and depressed pricing in the ammunition category are expected to remain in the fourth quarter, and the company adjusted its outlook.

Sales are now expected in the range of $807 million to $812 million based on a same-store sales decline in the range of 6 percent to 7 percent. EPS is expected to come in the range of 56 cents to 59 cents. Under its prior guidance, sales were expected to be in the range of $825 million to $835 million based on a same-store sales decline in the range of 5 percent to 6 percent. EPS was expected between 60 cents to 66 cents.

For the fourth quarter, sales are expected to be in the range of $240 million to $245 million based on a same-store sales decline in the range of 4 percent to 6 percent. Sales in the year-ago quarter were 221.4 million. EPS is projected in the range of 26 cents to 29 cents, slightly up from 25 cents a share.

Photo courtesy Sportsman’s Warehouse