In its first report since going public in late April, Sportsman's Warehouse Holdings Inc. reported a loss due to an expected sharp decline in firearms and ammunition sales.
On a conference call with analysts, John Schaefer, Sportsman's Warehouse’s president and CEO, said first-quarter results were better than expected with even an 18.1 comp decline in line with expectations. He also remained bullish about the outdoor chain’s growth plans.
The net loss in the period was $3.4 million, or 10 cent, in the quarter. The adjusted net loss, which excludes expenses related to the IPO bonuses, was $2.0 million, or 5 cents, in the latest period, down 55.5 percent from $4.5 million, or 13 cents, in the same period a year earlier.
Adjusted EBITDA declined 52.8 percent to $6.8 million compared to $14.4 million in the first quarter of fiscal 2013. Interest expense jumped 65.6 percent to $5.3 million from $3.2 million in the first quarter of fiscal 2013.
Revenues in the three months ended May 3 decreased 3.0 percent to $132.4 million. Comps had jumped 20.8 percent in the prior year’s quarter, fueled by a surge in demand for firearms and ammunition. Unit growth was 11.1 percent.
The 18.1 percent comp decline was a result of the 36.2 percent drop in the firearm and ammunition category as the retailer cycled the surge in demand for those categories in the first half of 2013. These categories had a combined same-store sales increase of 38.8 percent in the first quarter of 2013 for a two-year stack comp increase of 2.6 percent. Sportsman’s Warehouse continues to expect the category to “normalize in the second half of the year as we anniversary the spike in demand that began in 2012 and continued into 2013,” said Schaefer.
Schaefer also said that the chain had cleared much of its excess firearms inventory and are “comfortable with, both from an aggregate level as well as a few composition standpoints especially in the MSR type firearms which are most prone to these peaks and valleys.”
Excluding firearms and ammunition, same-store sales decreased 1.6 percent.
Schaefer said extended cold and wet weather across many of its locations had a “modestly unfavorable impact” on its fishing, camping, and to a certain extent cutlery and electronics categories, although that was nearly offset a strong performance in soft goods. Added Schaefer, “The fact that our clothing initiatives and continued growth in footwear helped alleviate what would otherwise have been a more significant weather impact demonstrates that our customers want a broader selection from us, and are providing us the opportunity to gain more share of their wallet.”
Apparel gained double-digits, benefiting from in-store initiatives around the category launched last year. Last fall, a store within a store program with major brands like Under Armour and Columbia was initiated in 16 stores and was extended to 28 stores at the end of the quarter. This change added an average of 2,700 selling square feet in the apparel department in each of the 28 remodeled locations. In these locations, clothing performed 28 percent better than in non-expanded stores. The program will reach 35 stores by 2015. Said Schaefer, “Clearly, our emphasis on merchandising strategy and value proposition and complementary products and categories to supplement our core hunting and fishing offerings continue to resonate with our customers.”
Gross margins in the quarter decreased 110 basis points to 30.3 percent, due to a return to a more normal promotional cadence, loyalty program expenses, and the weather.
Last year it did not its run its regularly scheduled promotions because of “unprecedented firearm demand.” Management doesn’t expect continued margin pressure this year due to this factor since it returned to its normal marketing calendar in the second quarter of 2013.
Participation in its loyalty program, launched in November 2013, exceeded expectations but impacted margins since the 2013 period didn’t feature the program. Finally, the prolonged winter led to markdowns in apparel. The CEO said, “In line with our typical seasonal promotional cadence, we began discounting our winter products in January and continued into March, which was somewhat longer than in the recent past, resulting in overall product margins being lower than they would otherwise have been in typical seasonal weather patterns.”
SG&A expenses increased to 30.4 percent from 23.6 percent in the corresponding quarter of 2013, primarily as the result of a one-time IPO bonus of $2.2 million paid in April as well as $1.7 million in stock-based compensation expense for equity awards granted to employees in the fourth quarter of fiscal year 2013. In addition, the growth in a number of stores increased fixed operating costs.
Sportsman’s Warehouse opened three stores during the first quarter in Hillsboro, OR; Carson City, NV; and East Wenatchee, WA to reach 50 at the quarter’s close. It’s on track to add five additional locations. The openings in the quarter reflect “dual strategy of entering into smaller markets where we believe we can be the main destination outdoor sporting good retailer as well as larger markets where we are the conveniently located and attractively priced local store for our customers.”
Regarding competitor openings, he said Sportsman’s Warehouse faced new competition in five of its markets and stores in those markets are “performing better than we expected.” He said the chain competes against “much larger format stores” in 13 locations, and each of those 13 stores “still generates double-digit four-wall EBITDA even after the impact of its larger competitors.”
He notes that overall, Sportsman’s Warehouse and other larger players have room to expand with mom-and-pop operators representing approximately 2/3 of the outdoor sporting goods market, which he estimated at $50 billion.
But he also pointed to several differentiators for Sportsman’s Warehouse against other larger players, including that fact the company is the largest outdoor specialty retailer in the Western U.S. Its flexible store format allows Sportsman’s Warehouse to profitably service both small metropolitan statistical areas for MSAs with a population of 50,000 as well as larger MSAs with population in excess of 1 million.
The smaller flexible store size, combined with a “no-frills approach,” also allows for a lower capital investment per store and higher return on capital than many competitors also. He also counted the chain’s focus on easy in, easy out access, locally relevant product assortment, everyday low prices and highly knowledgeable sales associates as differentiators.
He said individual stores do see a near-term impact upon the entry of a competitor into its market, but the location’s business typically rebounds to “free competition levels” in approximately two to three years. Schaeffer adds, “In fact, we find that mom and pop retailers generally end up being the ultimate market share donor.”
For the second quarter, sales are expected to be in the range of $154.0 million to $157.0 million based on four new stores and a decrease in same store sales in the range of 7.0 percent to 8.0 percent. Net income is expected to range between 9 and 10 cents a share.
Sales for the full year are expected to be in the range of $665.0 million to $675.0 million based on opening eight new stores and a comp decrease in the range of 6.0 percent to 8.0 percent. Adjusted net income (excluding IPO charges) is expected to be in the range of 47 to 52 cents, which compares with 51 cents a year ago.
