Sportsman’s Warehouse has been experiencing a moderation in demand over the last few quarters after doubling its business over a three-year period, with “significant inflation” identified as the primary reason for the weakening demand. Sales in the first quarter were said to be also impacted by unfavorable weather conditions in the Western U.S. as record levels of rain and snow pressured the spring camping and fishing seasons, causing demand for products in those categories to be softer than expected. The declines related to those headwinds were partially offset by the opening of 11 new stores over the last year.
“If we look beyond weather, the business continues to experience pressure from the difficult macroeconomic conditions, and we are not seeing the increase in store traffic we had expected with softness throughout our spring-related merchandising categories,” shared Jeff White, company CFO, on a conference call with analysts. “Because of these trends, we are closely managing our spring assortment and merchandising efforts, while making the necessary adjustments to ensure our inventories stay seasonally relevant and our in-stocks for turning merchandise remain healthy.”
SPWH reported sales declined 13.6 percent to $267.5 million in the first quarter ended April 29, in line with prior company guidance in the range of $265 million to $270 million, and same-store sales declined 17.8 percent, in line with expectations for a decline in the negative 19 percent to 17 percent range year-over-year.
White said the hunting department outperformed most other categories, driven by strong firearm sales during the quarter.
“Our industry-leading firearms assortment, coupled with best-in-class omni-channel capabilities allowed us to better service our customers and win at the point of sale,” White offered. “Within the hunting department, we did see reduced ammunition sales and lower margins on ammunition compared with last year. We expected to comp during Q1 2023 as we lap the industry returning to an in-stock position in Q1 2022, driving customers to pull forward purchases.”
White went into more detail about sales of firearms accessories and the weakness in other non-firearms categories.
“In terms of firearms and the attachment of accessories onto the firearm, we’re still seeing a very good attachment rate for items specifically relating to the firearm purchase,” he suggested. “So a holster, a security product, ammunition to the extent that they need it to go use. Where we’re seeing the customer back off from purchases is the attachment rate to other items within the store. So the consumers coming in, they’re purchasing the firearm, they’re approaching the associated accessory with that firearm, but then they are not shopping other areas of the store, such as camping, fishing, apparel, footwear, places like that where we used to see a higher attachment rate.”
Still, White noted that the firearms category did not comp positive, but it outperformed the rest of the company in terms of comps for the quarter.
White said the industry is very full and robust in terms of in-stocks in ammunition.
“The consumer is no longer buying excess boxes of ammo,” he suggested. “They’re coming in and buying what they use. They’re able to find anything that they want at this point, and they’re able to find copious quantities of it on the shelves. So there’s really no reactionary behavior from the consumer.”
Gross margin was 29.9 percent of sales in the quarter, a decrease of 210 basis points versus the prior-year first quarter. The decrease in gross margins was said to be primarily due to a reduction in sales mix in the camping and fishing departments, which carry a higher margin profile and lower comparable product margins, mainly in ammunition.
“The big driver on the margin degradation is going to be in terms of ammunition,” White detailed further. “We knew eventually, we are going to see some degradation in ammunition margin, but it was not going to stay at the levels that it was at during COVID. We are now seeing that in the market, but we’re still seeing a margin that is much higher than what it was pre-COVID. So there is an expected change in the margin profile on ammunition, and that took a larger basis-point decline in overall gross margin in Q1, just given softness in some of the other categories like fishing and camping, which tend to carry higher gross margins.”
Selling, general and administrative (SG&A) expenses in the first quarter were $99.0 million, or 37.0 percent of sales, compared to $96.1 million, or 31.0 percent of sales, in the 2022 first quarter, with the higher percentage due primarily to higher rent, depreciation and pre-opening expenses from the addition of 11 new stores opened over the last year.
The company reported a net loss of $15.6 million in the first quarter. Adjusted diluted EPS was a loss of 39 cents, in line with company guidance calling for a loss of 40 cents to 35 cents.
White said the key drivers for the EPS loss for the quarter included the reduction in sales due to weather and lower penetration in the camping and fish departments that was responsible for 18 cents of the loss per share for the period. The expense burden of new store openings reportedly reduced EPS by an additional 3 cents per share during the quarter on a year-over-year basis and an increase in interest expense reduced EPS by another 4 cents a share on a year-over-year basis.
SPWH ended the first quarter with $469.5 million in inventory, compared to $399.1 million at year-end 2022. Despite the addition of 15 new stores during 2023, the retailer expects 2023 year-end inventory to be flat to last year at approximately $400 million as they improve their turns and gain efficiency with better regional and seasonal assortments. This equates to a purchase reduction of inventory of approximately 10 percent.
“We expect this to be the high point for inventory for the year as this includes most of the buildup needed for balance of our new stores to be opened this year and much of the seasonal products for the summer and early fall selling season,” white explained.
Net debt at quarter-end was $147.3 million, comprised of $3.0 million of cash and cash equivalents and $150.3 million of borrowings outstanding under the company’s revolving credit facility.
Total liquidity was $153.5 million as of the end of the first quarter, comprised of $150.5 million of availability on the revolving credit facility and $3.0 million of cash and cash equivalents.
During the quarter, Sportsman’s Warehouse continued their execution on organic growth and opened five new stores as they continued to expand their store footprint.
“We have six stores slated to grand open in the second quarter and four stores on track to open early in the third quarter as we enter the hunting and the holiday season,” said White. “It’s critical that we continue to stay diverse and flexible in our approach but disciplined in our financial hurdles, a 10 percent four wall EBITDA and 20 percent ROIC as we navigate through the macroeconomic pressures we are seeing in the business.”
As the primary vehicle for deploying capital, White said new store openings have proven to be a strong way to generate positive return by generating over 110 percent ROIC over the last five years when compared to the total capital invested.
“These returns are achieved through our new stores reaching profitability on average in five to six months even with including the pre-and grand opening costs associated with that store,” he explained. “We continue to believe in new store growth due to the considerable white space opportunities driven by increased firearm ownership, outdoor participation and a reduction in the competitive landscape.”
White also said they continue to invest in their omni-channel platform, adding incremental functionalities as a way to drive additional sales through reaching new consumers outside their current geographic areas and making the experience for customers as seamless as possible.
“This allows us to leverage our fleet wide inventory and increase assortment through introduction of new relevant products to our website,” he said. “We will continue to use enhanced digital marketing efforts to reach new customers and entice existing customers to shop our website. The website now penetrates in the mid- to high-teens and is one part of the business that is comping positive year-over-year on both a quarterly and annual basis.”
Looking ahead to the second quarter, Sportsman’s Warehouse is estimating second order net sales to be in the range of $310 million to $340 million and same-store sales are anticipated to be in the range of down 17 percent to down 9 percent. White said the guidance takes into consideration a 3 percent to 4 percent same-store sales headwind versus Q2 of last year, driven by the political rhetoric surrounding a mass shooter event. He said the low end of the sales forecast range assumes a further down trend from current business patterns. The mid-point right now is said to be in line with what they are seeing in current business trends.
“We gave a large range on the guidance just because we have seen some areas start to turn in camping and fishing penetration, but not at the rate that we were hoping or expecting them to turn,” White added during the Q&A period of the call. “And so with the guidance that we gave, we’ve kind of figured in the downside risk and then the upside opportunity if those trends start to change in the business, and we get further penetration into fishing and camping and other seasonal merchandise.”
For the second quarter, SPWH is forecasting a return to profitability, despite same-store sales declining 17 percent to 9 percent year-over-year. EPS for the second quarter of 2023 is expected to be in the range of 2 cents to 15 cents a share.
“Over the last year, we started reducing our costs in many of our stores, particularly focused on store labor,” White detailed. “This effort resulted in a year-over-year cost reduction of 6 percent on a per store basis. Unfortunately, we continue to see pressures on the business from the macroeconomic environment and a demand slowdown in our camping and fishing categories, reducing the amount of traffic to our stores. In response to this continued softening, during the second quarter, we will further implement a company-wide cost reduction effort to align our expenses with the current sales trends. It is critical that we maintain financial discipline and rigor as we navigate the current consumer headwind.”
The middle point of the guidance assumes that the retailer’s current penetration trends in areas like camp and fish continue for the rest of the quarter.
“If we start to penetrate higher in those categories, those carry overall accretive margins to the overall gross margin,” White said. “So we will see better profitability from a gross margin perspective. If the current trend continues, where we penetrate heavily into firearms, then we’re going to see a continuation of some of the margin difficulties we saw in Q1.”
