Sportsman’s Warehouse Holdings Inc. reported sales of camping and apparel gear grew much faster than gun and ammo sales shrank in the quarter ended Aug. 2.

While sales of firearms and ammo, fell $4.8 million, 2013, sales of camping gear, clothing and footwear grew $8.4 million compared with the fiscal second quarter ended Aug. 3. The decline in traffic from gun and ammo buyers resulted in a comp store decline of 15 percent in hunting and lesser declines in fishing and optics, electronics and accessories. Same store sales of camping, clothing and footwear, meanwhile, were up 4.5 percent, 4.3 percent and 5.2 percent respectively. The result was a decline in total same-store sales of 6.1 percent, or less than the 7-8 percent the company forecast.

Total net sales reached $159.5 million, up 2.3 percent thanks to the opening of eight new stores, which contributed $12.8 million in additional revenue. Nearly half of that, or $5.9 million, came from four stores opened during the quarter. The Midvale, UT-based retailer ended the quarter with 54 stores in 18 states, up from 46 at the end of the second quarter of fiscal 2013.

Expanding apparel assortments
SPCH has expanded its apparel assortment in 31 of stores in recent years. In the fiscal second quarter, for instance, it reallocated an average of 2,700 square feet of space in three stores. 

President and CEO John Schaefer disclosed Thursday that the company has begun installing fixtures that will enable the company to expand apparel assortments at another 15 smaller stores. The fixtures will also enable SPCH to roll out shop-in-shops its developing with key apparel brands to a new generation of 30,000-square-foot stores it has developed for smaller markets where it is less likely to encounter big box competitors.

SPWH’s model calls for stores to produce sales of $9.5 million and four wall adjusted EBITDA margins of over 10 percent in their first year. The model aims for return on invested capital of more than 20 percent, including upfront inventory investment, or greater than 50 percent excluding it.

“As we open more of these 30,000 square foot stores, we continue to see evidence that we can achieve our targeted returns at something less than $8 million in net sales per store,” said SPWH President and CEO John Schaefer.  

No impact from big box competitors, yet
Better than expected results at six SPWH stores operating in newly competitive markets also contributed to better than expected same store sales results in the fiscal second. In Anchorage, AK, where Cabela’s and Bass Pro Shops both opened stores last year, sales came in 34 percent ahead of expectations.  In Missoula, MT, where Cabela’s opened one of its smaller Outpost stores, the SPCH store exceeded expectations by 60 percent. In both instances, SPWH expectations are adjusted based on the impact of prior competitive store openings .

At markets where SPCH has competed for three years or more with a major competitor, same store sales declined 2.5 percent, while in markets where it faces no big box competitors, same store sales declined 1.3 percent. These data and SPWH’s flexible, low cost retail footprint show that the company can continue to profitably grow its store count 10 percent a year, Schaefer argued.

SPCH reported gross margin decreased 40 basis points to 33.1 percent in the fiscal second quarter.  A loyalty program launched in November 2013 accounted for approximately half of the decrease, while lower gross margin in firearms, ammunition and other related product categories due to increased supply in the market accounted for the rest.

Selling, general and administrative expenses increased by $4.4 million, or 12.2 percent, to 25.4 percent of net sales, compared with 23.2 percent of net sales in the year earlier quarter. The increase was due to stock-based compensation expense and increased payroll, rent and pre-opening expenses from new store locations.
Income from operations decreased to $12.3 million from $16.1 million in the second quarter of fiscal 2013. Net income declined 33.8 percent to $5.1 million, or 12 cents per share.

The company ended the quarter with $1.7 million in cash, inclusive of net proceeds of $3.0 million from the underwriter’s partial exercise of the over-allotment option related to the company’s IPO in April 2014. Total debt was $219.8 million, consisting of $62.9 million outstanding under the revolving credit facility and $156.9 million outstanding under the term loans, net of unamortized discount.  Total liquidity, or cash plus $23.0 million of availability on a $105.0 million revolving credit facility, was  $24.7 million.

Firearms declines slowing
Schaefer cited SPCH’s comp store sales and gun permit data to support his assertion that the gun and ammo business would return to normal in the back half of the year.

“Fiscal Q1 for us was down 18.1 percent,” Schaefer said of SPWH comp stores sales. “Calendar Q2, which I think is an important data point, was down 8.9 percent and fiscal Q2 was down 6.1 percent So, you can see the trend.”

Data from the National Shooting Sports Foundation, meanwhile, indicates that the number of background checks related to guns sales were off just 4.5 percent in July compared with a 45.8 percent decline seen in January.

New guidance
SPWH expects net sales for the third quarter of fiscal 2014 to be in the range of $183.0 million to $188.0 million based on the opening of one new store on Aug. 16 and a decrease in same store sales from the third quarter of fiscal year 2013 in the range of 4.0 percent to 6.0 percent. Net income is expected to be in the range of $7.8 million to $8.6 million, with diluted earnings per share of $0.19 to $0.20 on a weighted average of approximately 42.0 million estimated common shares outstanding.

For fiscal 2014, net sales are expected to be in the range of $665.0 million to $675.0 million based on opening eight new stores for the full year and a decrease in same store sales from fiscal year 2013 in the range of 6.0 percent to 8.0 percent. Net income is expected to be in the range of $18.2 million to $20.3 million.

Executives said they dont see much pricing pressure on guns and ammo in the back half from big box competitors, although discounting will continue in the mom and channel as smaller retailers who loaded up on modern sport rifles, or MSRs, in the aftermath of the last presidential election continue to work through their inventories.  

“I think most of the national players are back to a normal scheduled promotional pattern and thats where we are as well,” Schaefer said.