Sportsman’s Warehouse reported fourth-quarter earnings that were slightly below guidance due to the slowdown in firearms sales following the presidential election. Due to tough year-ago comparisons amid the slowdown, the hunt & fish specialist also predicted a double-digit comp decline in the first quarter and a mid-single-digit comp decline for the year.
Shares of Sportsman’s Warehouse were down 39 cents, or 7.8 percent, to $4.64 on Friday.
Longer term, John Schaefer, CEO, was bullish that the chain will ultimately benefit from its everyday-value pricing approach, its bigger focus on firearms for recreational versus protection purposes than competitors and its convenient locations. Indeed, the retailer sees major opportunities to pick up market share in the years ahead with the ongoing consolidation in the hunt & fish channel marked by the pending merger of Cabela’s and Bass Pro as well as the bankruptcy of Gander Mountain.
“With the consolidating competitive landscape, we believe our results relative to our peers demonstrate that our customer base enjoys shopping in our stores,” said Schaefer. “We offer a differentiated shopping environment, convenience as a neighborhood store in larger markets, or big-box appeal in smaller markets where we provide a greater assortment than the mom-and-pop competition.”
In the fourth quarter, net income declined 7.9 percent to $105 million, or 25 cents a share, 2 cents below guidance due to weaker-than-expected top line growth as a result of slower firearm demand post-election combined with anniversarying difficult comparisons due to the San Bernardino tragedy in December 2015 and President Barack Obama’s related executive orders in January 2016.
Sales expanded 6.2 percent to $221.4 million, while same-store sales slumped 5.2 percent. The hunting and shooting department accounted for 4.5 points of the 5.2 percent comp decline.
Schaefer noted that despite the weakness, underlying demand for firearms remains strong when compared to historical levels. While the adjusted NICS background checks decreased 17.8 percent year over year for the three-months period since the election, total firearms sold during the period represented the third highest total for a three-month period of time since the inception of NICS in November 1998. The levels are behind only 2015 and 2013, two periods that also benefited from “unusually high” event-driven demand.
“As evidenced in these numbers, participation rates in outdoor shooting sports continue to rise as more people, including an increasing number of women and children, become involved in the hunting and shooting sports industry,” said Schaefer. “In addition, while our store areas in many areas of the country rely on sales of firearms driven by protection purposes, our areas, especially in the rural markets, have a significant portion of sales in the use category, which have been historically more stable and consistent over time. This is evidenced by our non-MSR rifle and shotgun unit sales in Q4 being up 22.3 percent versus the prior year, indicating that the desire to participate in hunting and outdoor shooting continues to grow.”
Moreover, Schaefer believes the chain is “the best positioned retailer in our niche to continue to capture market share” given its breadth of product and everyday-low pricing combined with the consolidating competitive environment. He added, “Also, our higher mix of use versus protection purchases skews towards the historical 5 percent to 8 percent annual growth that we’ve previously maintained and we believe allows for a more stable firearms business over time.”
The weakness in firearms is being partially offset by relative strength in its non-hunting categories. Clothing and footwear, which represents roughly 50 percent of its mix, remained positive in the fourth quarter on a same-store basis with gains of 0.4 percent and 1.8 percent, respectively. On a same-store basis, customer conversion and average order size continued to increase in the fourth quarter.
Gross margins in the quarter decreased 40 basis points to 33.6 percent as a result of increased promotional activity this year.
Schaefer did note that the retailer held or increased individual product gross margin in four of its six departments versus the year-ago quarter. He also pointed out that the company didn’t have to resort to “substantial discount” in a promotional climate marked by some competitors using firearms promotions for the first time. Added Schaefer, “This outcome again illustrates the appeal of our everyday-low pricing model and the trust we have earned with customers as a result of our localized offering in combination with our reliable and consistent pricing.”
For 2016, net income increased 6.8 percent to $29.7 million, or 70 cents a share. Excluding expenses related to two equity offerings and a litigation charge, adjusted earnings advanced 13.1 percent to 69 cents a share. Sales increased 10.4 percent to $780.0 million with same-store sales sliding 0.7 percent.
Highlighting some accomplishments for 2016, Schaefer noted that the company was able to deliver flat gross margins for the year despite the promotional climate, achieved relatively-flat adjusted SG&A as a percent of sales despite the small comp decline, and reduced inventories by 3.5 percent per store at year end. The company also met its goal of opening 11 stores and those stores are on plan to deliver its target 20 percent ROIC. It ended the year with 75 locations.
For 2017, it plans to open 12 locations, increasing square footage by 11 percent. Other priorities for the current year include associate training and maximizing the potential of it loyalty program. Loyalty members accounted for 43 percent of its sales in the fourth quarter. Growing e-commerce, which accounted for 1.3 percent of sales in 2016, also remains a focus.
The retailer also announced that Jon Barker, formerly VP global officer for Walmart, has been hired as president and COO. At Walmart, he served dual roles including president and CEO of Hayneedle.com, the online home furnishings retailer, as well as group leader for home and outdoor furnishings categories for U.S. e-commerce across Walmart.com. Baker will direct marketing, supply chain, compliance and technology functions, as well as e-commerce business while store growth and operations, merchandising and business development will continue to report to Schaefer. Said Schafer, “I’ve known Jon for almost 20 years and not only as an excellent retail executive, he is also a passionate user of our products.”
Regarding its outlook, Sportsman’s Warehouse is planning its hunting and shooting business conservatively in the first half of the year as it anniversaries the shooting in Orlando in June 2016.
For the first quarter, sales are expected to be in the range of $150.0 million to $155.0 million based on a same-store sales decline in the range of 9.0 percent to 11.0 percent. The company expects to show a net loss in the range of $2.6 million to $3.4 million, or 6 to 8 cents a share.
For 2017, sales are expected to be in the range of $825.0 million to $845.0 million based on a same-store sales decline in the range of 4.0 percent to 6.0 percent. Net income is expected to be in the range of $25.5 million to $29.0 million, or 60 to 68 cents a share, down from 69 cents just reported.
Asked in the Q&A session about the impact of the Gander Mountain bankruptcy, Schaefer said the chain only competes against Gander Mountain in three markets and doesn’t see a major impact from liquidation sales. On the upside, “some significant opportunistic buying opportunities” are expected in the near-term from vendors as well as an abundance of real estate opportunities in the years ahead due to the overall consolidation.
“I think the consolidation of the industry, not just from the mom-and-pop area but from some of the big boxes with Bass and Cabela’s getting together and now Gander in a filing, really gives us a whole lot of runway and a whole lot of multiple areas in which we can grow,” said Schaefer. “Our challenge is to grow effectively and cost effectively and in a steady pace such that we maintain our discipline and we maintain our customer service and that’s kind of what we intend to do.”
Photo courtesy Sportsman’s Warehouse
