By Thomas J. Ryan

<span style="color: #a3a2a2;">A little over three years after completing its mega-acquisition of Cabela’s, Bass Pro is looking to shake up the Hunt & Fish channel again with its agreement to acquire the smaller Sportsman’s Warehouse chain. The acquisition could provide Bass Pro with a prime opportunity to capitalize on unprecedented demand for the Hunt & Fish categories coming out of the pandemic.

As part of the agreement, Great American Outdoors Group, the newly named parent company of Bass Pro Shops, Cabela’s, White River Marine Group, and its nature-based hospitality business, agreed to acquire Sportsman’s Warehouse for $18.00 per share in cash, valuing Sportsman’s Warehouse at about $800 million.

The price represents a 42 percent premium versus Sportsman’s Warehouse’s closing price of $12.65 on December 21, just before the deal was announced.

Great American Outdoors is the dominant player in the Hunt & Fish space, with sales of approximately $7.1 billion in the twelve months ended September 26, according to Standard & Poors. In the overall sporting goods space, that puts Great American Outdoors just behind Dick’s Sporting Goods, which does about $8.8 billion in annual sales.

Great American Outdoors operates 169 stores across Bass Pro and Cabela’s and generates more than 500 million visits to its websites annually. Both Bass Pro and Cabela’s are known for their destination stores that double as entertainment venues and include aquariums, waterfalls, hiking trails, game ranges and taxidermied animals. The stores generally range from 100,000 to 200,000 square feet. In Memphis, TN, Bass Pro’s largest store reaches 535,000 square feet while Cabela’s largest in Hamburg, PA tops 250,000 square feet.

Sportsman’s Warehouse operates 112 store locations focusing on the Western U.S, and sales are expected to be $377 million this year. The stores are considerably smaller and more value-driven to present new opportunities for Great American Outdoors to reach customers in smaller markets. The locations range from 15,000 to 65,000 square feet, with an average size of approximately 40,000 square feet. The retailer is testing a smaller-format retail concept and indoor range, at about 7,500 square feet, called Legacy Shooting Center.

Highly Complementary Business Philosophies
In a statement, Great American Outdoors, which is privately-held, and Sportsman’s Warehouse cited “similar histories and highly complementary business philosophies and geographic footprints” as the merger’s major drivers.

“Both entities share a passion with their customers for fishing, camping, hunting, boating, and other outdoor activities,” according to a statement. “Likewise, both are highly acclaimed retailers with well-deserved reputations for a broad offering of outstanding brand names and proprietary products, superior customer service, deeply knowledgeable team members, and an unwavering passion for conservation. Uniting together represents an unprecedented “win-win” opportunity for outdoor enthusiasts.”

The release promised Sportsman’s Warehouse customers “widely expanded product offerings,” including Bass Pro fishing tackle and Cabela’s hunting gear. Sportsman’s Warehouse will also gain access to Great American Outdoors’ lineup of boat brands, side-by-sides and ATVs (all-terrain vehicles), including Tracker, Nitro, Ranger, and Ascend Kayaks.

Store fulfillment is expected to benefit from the combined company’s network of distribution centers and stores. Expanded online services and selection, localized merchandise, and “low prices – guaranteed,” with a price-match guarantee were also offered as benefits to Sportsman’s Warehouse customers.

Finally, conservation, a major focus for Great American Outdoors founder and group leader,  Johnny Morris, is expected to gain a boost as the two retailers combine efforts.

“Today is a happy day for our companies, outdoor enthusiasts and for the cause of conservation,” said Morris in a statement. “As outdoor sports specialists with an unwavering dedication to people who fish, hunt and enjoy the outdoors, we greatly admire the passionate team at Sportsman’s Warehouse for their commitment to their customers and the sports we all love. By combining our best practices, we aim to give our customers a best-of-the-best experience while further uniting them to support conservation.”

Sportsman’s Warehouse CEO Jon Barker said in a statement, “We are excited to be joining the Great American Outdoors Group. This merger brings together the greatest brands in the outdoor industry. As we look to the future, the combined entities provide our passionate associates with greater opportunities to serve the outdoor enthusiast. I couldn’t be more proud of the nearly 8,000 Sportsman’s Warehouse associates and their success in building our brand over the last 33 years. We look forward to a smooth transition and building our partnership.”

Shareholder And Antitrust Approval Awaits
Sportsman’s Warehouse’s board unanimously approved the merger agreement. The transaction, which is expected to close in the second half of 2021, will be completed through a cash merger and is subject to approval by Sportsman’s Warehouse’s shareholders, as well as regulatory approvals and other customary closing conditions. The transaction is not subject to any financing condition. The entities will continue to operate independently until the transaction closes.

A go-shop period to entertain other offers will run until January 31, 2021. If the deal falls through, Sportsman’s Warehouse may be required to pay a termination fee in the range of $9 million to $23 million, or Great American Outdoors Group may be required to pay Sportsman’s Warehouse a termination fee of $55 million.

Approval from federal antitrust regulators is expected given the approval of the $4 billion Cabela’s deal. Walmart, Dick’s Sporting Goods, Academy Sports & Outdoors, Gander Mountain, Sportsman’s Guide, and Scheels are among the chains’ larger competitors.

Shareholder approval is also expected.

Ryan Sigdahl, an analyst at Craig-Hallum Capital Group, said in a note that although he believes Sportsman’s Warehouse shares are worth more than $18 each, the deal “appears to be fair,” and it’s “sensible” that Sportsman’s Warehouse moves to private ownership. He thinks few other public companies will be interested in acquiring Sportsman’s Warehouse due to investor concerns over environmental, social and governance (ESG) issues given Sportsman’s Warehouse’s position as a leading firearms retailer. Firearms and ammunition represent about 30 percent of Sportsman’s Warehouse’s sales.

In a note, Peter Keith, an analyst at Piper Sandler, said the deal looks like a “win-win” for Sportsman’s Warehouse shareholders and Great American Outdoors. He said Sportsman’s Warehouse shareholders would be able to sell their shares at a 52-week high. Shares closed Tuesday at $17.66 and had started the year at $8.03.

Keith assessed the valuation as a “healthy premium” to 3-to-5 year P/E mean of 9-to-10 times and EV/EBITDA mean of 6 to 7.5 times.

Opportunity To Grow Sportsman’s Warehouse
Both analysts saw an opportunity for Great American Outdoors to expand Sportsman’s Warehouse with a chance to take advantage of strengthening outdoor recreation trends during the pandemic and Sportsman’s Warehouse’s recent momentum.

Sigdahl said Great American Outdoors appears to be “the most strategic buyer” as the combination “creates a nationwide outdoor sporting goods leader.” “Attractive synergies” should result from the merger, including reducing Sportsman’s Warehouse’s expenses as a public company, he added.

Sigdahl told SGB Executive that he doesn’t suspect the combination would result in store closings as the stores have little overlap and are positioned differently. He said, “Sportsman’s Warehouse are smaller stores focused more on value with concrete floors so they can complement each other.”

Moreover, Sigdahl sees opportunities to expand Sportsman’s Warehouse to more than 300 locations across a variety of combinations. He cited the benefit of increased participation in outdoor recreation and he sees market share opportunities being created as firearms and ammunition categories are being de-emphasized by Dick’s Sporting Goods, Walmart and Gander Outdoors, formerly Gander Mountain, under the ownership of Camping World.

Sigdahl also noted it’s a better environment to complete such a merger than in 2017 when the Cabela’s deal was challenged by excess inventories and a downturn in demand due in part to politics. Said Sigdahl, ”It’s a more favorable environment with less completion and much more demand for outdoor recreation.”

Piper Sandler’s Keith said that for Great American Outdoors, Sportsman’s Warehouse represents a “terrific asset that has an attractive, long-term growth runway.” He also suspects the acquisition will pack a number of operating synergies and gives Great American Outdoors “a new growth platform” to expand with strategic locations in the 30,000-square-foot range.

He noted that under Barker’s leadership over the last three years, Sportsman’s Warehouse has significantly upgraded its omnichannel capabilities, elevated senior management roles, introduced multiyear growth initiatives, acquired 12 Field & Stream stores, and significantly de-levered its balance sheet to position the chain for growth over the next decade.

Keith also said the timing appears ideal for Great American Outdoors to take advantage of favorable trends in the hunt & fish space to gain share.

“While 2020 has seen unprecedented demand growth in the outdoor retail space as a result of COVID, the industry has also seen two notable structural changes in the last year,” said Keith. “First, the competitive backdrop has shifted significantly in a positive way for remaining outdoor retailers like Walmart, Dick’s and Gander Mountain all meaningfully de-emphasized exposure to the outdoor category. Second, participation rates across essentially all outdoor activities increased in 2020, after declining for the last 20+ years. While still early, this step-change may mark an inflection point in outdoor activities given a large number of new participants. Both of these structural changes should benefit the remaining outdoor retailers for years to come.”

Hunt, Fish And Outdoor Sales Booming Amid Pandemic
The acquisition comes as sales for both Sportsman’s Warehouse and Bass Pro have seen a strong uptick this year largely due to increasing interesting in hunting, fishing and outdoor activities seen as both a safe way to stay socially-distant and as a stress release.

In November, Standard & Poor’s raised its debt ratings on Bass Pro after noting the retailer’s performance has been “resilient” through the pandemic as it reported positive sales momentum continuing through the third quarter following the initial temporary store closures at the onset of the outbreak.

Sales increased by more than 9 percent while adjusted EBITDA rose 34 percent on a trailing-12-month basis through the end of September. S&P said Bass Pro used its cash flow generation, in part, to reduce its leverage.

S&P wrote in its report, “In our opinion, Bass Pro’s recent performance trends not only benefited from its market position as a destination-oriented retailer but also from pull-forward demand in many of its product verticals. This includes higher consumer spending on outdoor products, sporting goods, and firearms this year.”

S&P said it expected Bass Pro’s recent performance to moderate, but anticipates that Bass Pro will use its free operating cash flow to repay debt, which supports S&P’s deleveraging expectations.

Moody’s Investors Service also in early November lifted its debt rating outlook on Bass Pro to stable from negative for similar reasons. Moody’s also affirmed its Ba3 corporate family rating on Bass Pro. Moody’s wrote, “The change in outlook to stable from negative reflects Bass Pro’s strong performance and Moody’s expectation that despite a likely normalization in demand in the outdoor, firearms and sports categories in 2021 following the surge in 2020, credit metrics will remain in line with the Ba3 rating.”

Sportsman’s Warehouse reported earnings tripled in the third quarter on a 59.1 percent revenue gain. Barker told analysts on a conference call, “Multiple factors in Q3, led by elevated participation in outdoor activities, market share gains in firearms, the election cycle, and social unrest, resulted in very favorable financial results.”

Sportsman’s Warehouse’s quarterly growth marked a slowdown from the 80 percent year-over-year growth it saw in the second quarter, but Barker attributed the reduction to hurdles in catching up with out-of-stock products.

Strong results across publicly-held firms in the hunt & fish space including Vista Outdoor, Sturm-Ruger, Smith & Wesson, American Outdoor Brands also attest to the strength across more outdoor categories.

A few studies also back up the strong outdoor trends:

  • According to a KOA (Kampgrounds of America) study released in October, nearly 50 percent of campers surveyed indicated they went camping for the first time in 2020 or for the first time in recent years.
  • The Recreational Boating And Fishing Foundation reported 3 million more licenses were sold nationwide this year than last, a 40 percent increase.
  • FBI’s background check data indicates that a record number of firearms have been purchased in the calendar year 2020, with background checks through November 30 numbering 19 million. The National Shooting Sports Foundation (NSSF) estimates that 40 percent of those checks represent individuals who purchased a firearm for the first time, suggesting about 8 million new consumers entered the market this year.

Investors seem somewhat concerned that the surge in firearms sales this year has been at least partly driven by the civil unrest protests and anxiety over the pandemic rather than solely by a crop of new hunters discovering to the outdoors.

In upgrading Vista Outdoor on Tuesday to “Outperform” from “Market Perform,” however, Gautam Khanna said that current strong demand for ammunition is “apt to extend” due in part to President-Elect Joe Biden’s stricter gun control stance versus the Trump administration. He also cited NSSF’s report of 6.2 million new shooters that he expects will drive new ammo purchasers versus longstanding gun owners stockpiling. Other factors in the upgrade include low inventories in the marketplace and his feeling that the “cultural “Armageddon” mentality may linger given COVID outbreaks & civil unrest fears.”

Logo courtesy Sportsman’s Warehouse/Bass Pro Shops