Sportsman’s Warehouse, Inc. said its business remained under pressure during the fourth quarter with net sales coming in at the low end of its guided range. Still, earnings per share exceeded the top end of the company’s guidance range, while both inventory and debt levels finishing the year better than expected.

“We will continue to prioritize the pay down of debt with free cash flow generation as we move through 2024, commented company CEO Paul Stone on a conference call with analysts. “We view 2024 as a year to reset the organization and return the business to profitability, creating a strong foundation for anticipated profitable growth in 2025.”

Wall Street reacted positively to the planned changes and the earnings beat as SPWH shares surged 21 percent on Thursday to close at $3.79 a share.

Stone said that the company’s strategy is on resetting and rebuilding the fundamentals of great retail, which for Sportsman’s Warehouse are great gear and exceptional service. He also gave a nod to the new hires made on the executive team in early tenure.

“Given the importance of technology, culture and operating great stores, we made some leadership changes in these areas bringing in best-in-class talent for our key roles,” Stone noted. “We now have an experienced retail team, including veteran outdoor retail professionals who each have a track record of successful execution with organizations like Walmart and Sam’s, Target, Academy Sports and Cabela’s.” He said he has worked with many of the new execs at other high-performing organizations.

“We speak the same language, know what’s expected, and we’re already moving very quickly,” Stone added.

“Other areas where our strategic efforts will be highly focused in 2024 include creating stronger channel capabilities, making improvements to our loyalty program and precise execution of our digital and traditional marketing strategies,” he said.

Fourth Quarter Highlights
Fourth quarter net sales were $370.4 million, a decrease of 2.3 percent, compared to $379.3 million in the 13-week fourth quarter period in fiscal year 2022. Company CFO Jeff White said the 2023 Q4 results came in at the low end of the company’s estimates.

“Our net sales remain pressured from a challenging macroeconomic environment and persistently high inflation weighing on our consumer discretionary spending through the holiday season,” White said on the call. Those headwinds were partially offset by the opening of 15 new stores over the last year and $15.4 million from the additional week of sales.

Fourth quarter ame-store sales decreased 12.8 percent on a 13-week comparable basis, compared with the prior-year fourth quarter.

From a department perspective, White said the Hunting was the best performing category during the fourth quarter, down 3.9 percent on a 14-week basis compared to the prior-year period.

“This outperformance versus the run rate of the company was driven by items that correlated with holiday gift giving, such scopes and optics,” White added. “All other departments were down double digits in the quarter, reflecting the tough macroeconomic environment and underscoring the importance of having the right inventory for the right location and season so we can provide a better overall shopping experience for our customers.”

The CFO said that during the holiday season, customers came in specifically for the promotions with very little attachment to other items in the store, highlighting the continuing inflationary pressure on the retailer’s  core customer base.

Gross profit was $99.4 million or 26.8 percent of net sales, in Q4, compared to $122.8 million, or 32.4 percent of net sales, in the comparable prior-year period. The decrease in gross margin was said to be attributed to lower overall product margins due to aggressive promotional activity to reduce distressed inventory, primarily in our clothing and footwear categories.

“This decrease was primarily driven by the promotional efforts to move through distressed apparel and footwear inventory as well as lower gross margins on ammunition,” White detailed. “However, while down significantly compared with the prior year, gross margin in the quarter came in better than we expected as we did not have to be as aggressive as planned with our markdown to move through the distressed inventory.”

White estimated that the EPS impact from the gross margin decline related to the markdowns was between 30 cents and  40 cents per share in the 2023 fourth quarter.

Selling, general and administrative (SG&A) expenses were $107.3 million, or 29.0 percent of net sales, in Q4, compared to $106.7 million, or 28.1 percent of net sales, in the fourth quarter of fiscal 2022.

“This increase was primarily due to higher rent and depreciation expense from the addition of 15 new stores opened during 2023 and the stores refreshed over the last two years,” White said. “While SG&A was up as a percentage of sales on a year-over-year basis, SG&A dollars were down 9.8 percent on a per store basis versus Q4 of 2022. The most significant year-over-year decrease was in payroll, which was down approximately $3.9 million from last year or a decrease of 17.4 percent on a per store basis.”

The net loss for the fourth quarter was $8.7 million, compared to net income of $11.0 million in the the prior-year fourth quarter. Diluted loss per share was 23 cents in Q4, compared to diluted earnings per share of 29 cents in the comparable prior-year period.

Adjusted net loss was $7.5 million in Q4, compared to adjusted net income of $12.7 million in the fourth quarter of fiscal year 2022. Adjusted diluted loss per share was 20 cents in Q4, compared to adjusted diluted earnings per share of 33 cents for the comparable prior-year period

Adjusted EBITDA was $5.3 million, compared to $28.2 million in the comparable prior year period.

Full Year Results
Net sales declined 8.0 percent $1.29 billion in the 53-week fiscal 2023 period, compared with $1.40 billion in the 52-week fiscal 2022 period. Excluding the extra week, net sales in fiscal 2023 were $1.27 billion. The company’s net sales reportedly decreased primarily from the continued impact of consumer inflationary pressures and recessionary concerns on discretionary spending, resulting in a decline in store traffic and lower sales demand across all product categories. These headwinds were partially offset by the company’s opening of 15 new stores during fiscal year 2023.

Same-store sales decreased 14.4 percent in fiscal 2023 compared to fiscal year 2022, excluding the extra week of sales in fiscal 2023. This decrease was said to be due to lower sales in all product categories.

Gross margin was 29.8 percent of net sales in 2023, as compared 32.9 percent of net sales for 2022. These decreases were said to be primarily driven by reduced product margins in the ammunition category within the Hunting and Shooting department, lower margins in the Apparel and Footwear departments, resulting from increased promotional efforts to reduce inventory and decreases in net sales and same-store sales.

SG&A expenses increased to $408.8 million, or 31.7 percent of net sales, in 2023, compared with $402.2 million, or 28.7 percent of net sales, in 2022. This increase was said to be primarily due to higher depreciation and rent expenses due to the addition of 15 new stores, partially offset by lower total payroll and other operating expenses.

The net loss for the year was $29.0 million, or a loss of 77 cents per diluted share, compared to net income of $40.5 million, or EPS of $1.00 per diluted share, in fiscal year 2022.

Adjusted net loss was $24.1 million, or a loss of 64 cents per diluted share, in 2023, compared to adjusted net income of $43.0 million, or EPS of $1.06 per diluted share, in fiscal 2022.

Adjusted EBITDA was $24.6 million compared to $97.9 million in fiscal year 2022.

Balance Sheet and Capital Allocation
The company ended the year with net debt of $122.9 million, comprised of $3.1 million of cash on hand and $126.0 million of borrowings outstanding under the company’s revolving credit facility. Total liquidity was $91.4 million at year-end, comprised of $88.3 million of availability on the revolving credit facility and $3.1 million of cash on hand.

White said that by reducing inventory nearly $90 million in the quarter, the company generated excess cash flow, allowing it to pay down debt by over $59 million.

“For the full year 2023, we incurred approximately $60 million of net capital expenditures, primarily related to the construction of our 15 new stores and ongoing fleet maintenance,” White noted. “We used our cash flow generated during the fourth quarter to pay down debt and we’ll continue to emphasize debt pay-down as our primary use of free cash flow until we reduce our leverage ratio.”

Inventory Management and Spring Reset
Inventory at the end of the year was $354.7 million, a decrease of $44.4 million, or approximately 20 percent, on a per store basis. Compared to the end of the third quarter, inventory was reportedly down nearly $92 million. White alluded to commentary from the third quarter call where he outlined a strategy to further promote and mark down distressed portions of the apparel and footwear inventory in an effort to end the year in a much healthier position.

The inventory reduction efforts was said to be $10 million better than planned. For the full year of 2023, Stone estimated that the EPS impact from the clearing of distressed inventory was between 60 cents and 80 cents per share.

“Successfully moving our seasonal and distressed inventory during the fourth quarter facilitated the better-than-planned inventory balance and debt pay down at year-end,” White offered. “This was important and provided us the open-to-buy dollars needed to lean into new merchandise to support our spring and early summer seasons to which we are already seeing success.”

Stone added that the company prioritized getting out of products and brands that do not resonate with our core customer.

“While we made good progress during the fourth quarter, we will continue to closely manage our inventory levels and merch mix,” Stone added. “This will ensure we have the right products in the right location at the right time, creating inventory efficiency, which allows us to better service our customers and improve our overall merchandise productivity.”

Stone said they significantly reduced older inventory to invest in newness and relevant seasonal products as they prepared and drive into their key spring outdoor season.

“We are currently seeing positive trends in Camp and Fish as we invested in newness and depth going into these early spring season,” the CEO offered.

“Another piece to our inventory management strategy includes rationalizing our SKUs and refining our product assortment,” Stone added. “This will allow us to drive the following: improved inventory productivity and turns, better depth of the key and never out items, new local and regional product offerings and improved overall in-stocks and customer shopping experience.”

Stone said the merchant team has successfully worked through this initiative in a number of product areas over the last few months.

“As we navigated through lowering Q4 inventory, we were very purposeful in how we prepared for our key spring season, particularly Fishing,” Stone said. “This is a category where we have a right to win, especially at the local and regional level. For the first time ever, our Fishing set was in place by mid-February with depth and critical items. I talked about 2024 being a reset year.

The CEO outlined the impact of the Spring Reset on the Fishing category.

“First, we rationalized the assortment. We’re moving 40 percent of the SKUs and 30 percent of the vendors,” he detailed. “Next, we re-assorted the category across all regions and stores with local relevance and accuracy. Then we invested in depth into key products and our local product offerings. And finally, we reset the sales forward to align our in-store presentation with the new assortment, including better productivity of our end caps and expanded feature space. It’s the execution of key initiatives such as this that gives me confidence we are moving the business in the right direction to once again merchandise and operate great stores.”

Stone said that along with with tight inventory management, Sportsman’s Warehouse expects to maintain both rigor and discipline on its variable SG&A cost.

“Last year, we eliminated about $25 million of indirect cost out of the business, and we’ll continue to manage these efforts carefully,” he explained. “My objective is to further select the assets of the business using 2024 as a reset year to get us back to operating profitably. We’re gaining our edge of being the best local and convenient choice is what separates Sportsman’s Warehouse from the competent. This means having a great year in providing exceptional service in each of our 146 stores every day. I firmly believe we are implementing the right strategies and making the necessary improvements to solidify the foundation of this company to return us to profitability and increase shareholder value.”

White added that inventory management will remain a primary focus as the company now expects to move more efficiently in and out of season and improve the productivity of its inventory as it continues to rationalize SKUs and vendors.

2024 Outlook
The company said it will be providing guidance on an annual basis in 2024, versus its past cadence of quarterly guidance, as it focuses its efforts on returning to profitability.

For fiscal year 2024, the SPWH expects net sales to be in the range of $1.15 billion to $1.23 billion and adjusted EBITDA to be in the range of $45 million to $65 million. The company also expects capital expenditures for 2024 to be in the range of $20 million to $25 million, primarily consisting of technology investments relating to merchandising and store productivity. No new store openings are currently anticipated.

The company said it has not reconciled expected adjusted EBITDA for fiscal year 2024 to GAAP net income because the company does not provide guidance for net (loss) income and is not able to provide a reconciliation to net (loss) income without unreasonable effort. The company said it is not able to estimate net (loss) income on a forward-looking basis without unreasonable efforts due to the variability and complexity with respect to the charges excluded from Adjusted EBITDA.

“To reiterate, our priority for 2024 is to use excess free cash flow to pay down our debt, decrease our leverage ratio and invest in needed technology. As we carefully manage inventory and variable expenses, we believe we can return the business to profitability,” the CFO concluded in his prepared remarks.

Image courtesy Sportsman’s Warehouse