Sportsman’s Warehouse Holdings, Inc., despite posting a year-over-year sales decline for the third quarter, is one of the few retailers beating estimates on the top- and bottom-line in the quarter, surpassing revenue estimates by nearly $24 million and beating EPS estimates by 6 cents a share in the period. The results sent SPWH shares up 2.2 percent in after-hours trading Tuesday evening after shares rose 6.5 percent for the day before earnings were reported. Still, the retailer has a lot of room to grow as shares are still down more than 40 percent for the year, but it is also clear from comments made by management on the company’s quarterly conference call with analysts that they have a plan and executing on that plan is starting to pay some dividends.
“When we started this strategic journey early in 2024, we laid out a plan that included the refinement of our merchandising and inventory. This process started with the rationalization and cleanup of SKUs,” offered company CEO Paul Stone. “Last quarter, we strategically expanded our inventory to ensure our stores were stocked with the products our customers wanted most for our two largest seasons: Hunting and Holiday. We implemented new and targeted promotions and ad campaigns aligned with normal seasonal demand to drive customer traffic and increase transactions. We continue to see a customer that is shopping for value, and we will further refine our marketing efforts and product sell campaigns to align with these consumer behaviors.”
Total sales for the third quarter were down 4.8 percent to $324.3 million, compared to $340.6 million in the third quarter of fiscal year 2023. Same-store sales decreased 5.7 percent year-over-year, the second straight quarter of improved same-store sales trends and a sequential improvement of 320 basis points versus the prior quarter. E-commerce-driven sales also comped positive in the quarter.
The net sales decrease was reportedly due primarily to the continued impact of consumer inflationary pressures on discretionary spending, resulting in a decline in store traffic and lower demand across most product categories, particularly in Ammunition, Apparel and Footwear. The decrease was said to be partially offset by year-over-year sales growth in three key departments.
Stone highlighted that the Fishing and Camping departments, along with the Gift Bar category, which includes optics, electronics, and cutlery, all comped positive for the quarter. Fishing comped up 13 percent year-over-year.
“We also outpaced the adjusted mix in Q3 as we continue to lean into Firearms and solidify our position as a leader in this category,” Stone said. “It’s important to note that we were lapping some unique events from last year that impacted our year-over-year comparisons.”
Stone added that strong performance in those three categories underscores the importance of being in stock the entire season, describing it as a muscle that they continue to develop as they work to transform Sportsman’s Warehouse.
“As we deepen the partnership with our key vendors, we are using data and analytics to assist us in being ready for the outdoor seasons, including key micro seasons that are geographically unique,” he noted.
CFO Jeff White said the retailer lacked event-driven demand during the quarter, primarily from the footwear and apparel clearance and liquidation events last year, as well as the spike in firearms and ammunition demand from the tragic events in Israel leading to the war and social unrest in October last year.
“This tough comp led to a decline on a year-over-year basis in these categories,” White added.
“In the three departments where we saw growth, we worked strategically over the last year to meet the needs of our customers and reduce non-performing inventory,” White added. “This has been part of our ongoing merchandising and inventory productivity strategy. To provide our customers with the core goods they are looking for at the right time of year.”
As a reminder, the company powered guidance last quarter after reporting second quarter was hurt by tight inventories.
Income Statement Summary
Gross margin for the third quarter was 31.8 percent of net sales, compared to 30.3 percent in the prior-year Q3 period.
“Gross margins for the quarter came in below where we expected due to category and product mix, as well as from customers shopping and buying more of our value and promotional products. The category mix shift was driven by higher-than-expected penetration of Firearms and Ammo in October, which carries a lower overall gross margin,” White explained. He said they also underperformed expectations in sales and penetration in the Apparel and Footwear departments, two of the retailer’s highest margin categories.
“Given the current consumer environment and the emphasis on value and promotion driven shopping, we were more aggressive with our sales driving initiatives, which pressured gross margins this quarter,” added CEO Stone. “Additionally, we made a commitment to end each season with clean merchandise, ensuring that our stores remain fresh, highlighting newness, and staying relevant with our customers. While this approach requires a price markdown cadence, it allows us to significantly minimize excess seasonal inventory and reinvest those dollars into our core products.”
Stone said they continue to clean up small pockets of localized inventory, which is also impacting gross margins in the fourth quarter.
“By doing this, we create a more steady and predictable pattern of markdowns as we move through the different seasons,” he said. “While we expect pressure on gross margins to persist in Q4, we look to grow top line and improve our margins next year.”
The CEO added that a key strategic objectives is the continued investment, fill down, and implementation of IT systems and tools.
“Once in place, these tools will assist in our improvement of overall in-stock, gross margin, and inventory productivity. These investments are a key part of resetting and rebuilding our business fundamentals to enhance our operational effectiveness,” Stone said.
Selling, general, and administrative (SG&A) expenses were $100.0 million, or 30.8 percent of net sales, compared to $100.1 million, or 29.4 percent of net sales in the third quarter of fiscal year 2023. White said Q3 was the first quarter where the retailer comped its cost reduction initiatives implemented last year “as evident in the smaller year-over-year decline versus previous quarters.”
The absolute dollar decrease was said to be primarily related to ongoing cost reduction efforts and a decision to not open new stores during fiscal year 2024, partially offset by increases in rent and depreciation expenses. The increase as a percentage of net sales was largely due to lower net sales.
“That said, payroll, pre-opening, and depreciation expenses were all down on a year-over-year basis. These were offset, however, by the settlement of an outstanding lawsuit in the State of California,” he noted.
The net loss for the third quarter was $0.4 million, or a loss of 1 cent per diluted share, compared to net loss of $1.3 million, or a loss of 4 cents per diluted share, in the prior-year Q3 period.
Adjusted net income in the third quarter of 2024 amounted to $1.3 million, or 4 cents per diluted share, compared to Adjusted net loss of $0.2 million, or 1 cent per diluted share, in the third quarter last year.
Adjusted EBITDA for the third quarter was $16.4 million, compared to $16.2 million in the prior-year Q3 period.
Balance Sheet Summary
Inventory was $438.1 million at quarter-end, compared to $446.3 million at the end of the third quarter of 2023. On a per-store basis, inventory was down 2.5 percent versus last year’s third quarter.
“In the third quarter, we made strategic investments in our inventory to drive sales in an effort to: one, ensure a solid in-stock position on our core products; two, add newness in our stores; and three, effectively support the hunting and holiday selling seasons,” White said. “As expected, this created a seasonal peak for our inventory levels as we ended the third quarter. We are confident that we will end fiscal 2024 with an inventory balance less than $350 million as we continue to execute on our holiday strategy and clean up pockets of unproductive localized inventory across our stores.”
SPWH ended the third quarter with a total debt balance of $154 million and total liquidity of $151 million and ~$148 million available under its credit facilities for borrowing.
“We expect the outstanding balance on our line of credit to end the year below $130 million as we continue to reduce inventory and closely manage expenses,” White offered. “Careful management of the balance sheet remains the priority and although the company is not yet generating profits, we still expect positive free cash flow for the full-year 2024. Any excess cash will go directly to that pay down.”
Outlook
The company adjusted its guidance for fiscal year 2024 and expects net sales to be in the range of $1.18 billion to $1.20 billion, up from the guidance provided on the Q2 call for net sales of $1.13 billion to $1.17 billion.
Adjusted EBITDA is forecast to be in the range of $23 million to $29 million, compared to prior guidance for a range of $20 million to $35 million. The low end of the adjusted EBITDA range still assumes positive free cash flow for the full year.
Total inventory to be below $350 million at year-end.
The company now expects capital expenditures for 2024 to be in the range of $17 million to $20 million, down from prior expectations for CapEx between $20 million and $25 million, with the spend primarily consisting of technology investments relating to merchandising and store productivity.
No new store openings for the remainder of fiscal year 2024 are currently anticipated. The retailer plans to open one new store in fiscal year 2025.
“Looking ahead, as we move through the holiday season, we remain optimistic about our growth potential and the strategies in place to achieve our short- and long-term objectives,” concluded Stone. “We will continue to emphasize newness and value as we look to win the balance of the holiday season.”
Image courtesy Sportsman’s Warehouse
