Sportsman's Warehouse Holdings, Inc.

Greetings. Welcome to the Sportsman's Warehouse first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I'll now turn the conference over to your host, Riley Timmer, Vice President of Investor Relations. You may begin.

Thank you, Operator. With me on the call today is John Barker, Chief Executive Officer, and Jeff White, Chief Financial Officer of Sportsman's Warehouse. I will now remind everyone of the company's Safe Harbor language. The statements we make today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding our expectations about our future results of operations, demand for our products, and growth of our industry. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described under the caption risk factors in the company's most recent Form 10-K and the company's other filings made with the SEC. We will also disclose non-GAAP financial measures during today's call. Definitions of such non-GAAP financial measures, as well as reconciliations to the most directly comparable GAAP financial measures, are provided as supplemental financial information in our press release included as Exhibit 99.1 to the Form 8K we furnished with the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com. I would also like to note that today's materials include an earnings conference call PowerPoint presentation, which is available at sportsman.com in the investor relations section of the website. You can utilize this deck as a reference with today's prepared remarks. I will now turn the call over to John Barker, our CEO.

Thank you, Riley. Good afternoon to everyone on the call, and thank you for taking the time to join us today. In my remarks today, I will provide an update on our first quarter performance, comment on the current trends we are seeing with our consumers, and review a few key elements of the growth strategy for our omnichannel business model. Following my comments, Jeff will provide additional details on our first quarter, as well as discuss our outlook for the second quarter of 2022. Finally, we will open the call up for questions. First, regarding our Q1 business performance, we are pleased with our first quarter 2022 results and finished the quarter at the high end of our sales guidance while significantly exceeding the top end of our earnings per share guidance. I believe that these successes illustrate the fundamental strength of the business underscored by the strategic initiatives and omnichannel capabilities we've implemented over the last couple of years. As many of you know, the first quarter comparison versus the prior year is difficult given the large inflow of government-funded stimulus money in 2021 relating to the pandemic. That said, same-store sales in the quarter performed slightly better than we expected, down 11.6% compared to the first quarter of 2021. Comparing same-store sales to pre-pandemic in Q1 2019, we were up 38.2 in the first quarter of this year. As we continue to execute on our 2022 strategic growth drivers and leveraging our omnichannel platform, we will maintain focus on the following, growing our store footprint, growing sales generated from sportsmans.com, leveraging our growing customer data and improving the customer shopping experience by modernizing certain stores in our fleet. Starting with continued expansion of our retail store footprint, during the first quarter we successfully opened three new stores to our fleet, and just last week added our fourth store this year in Riverton, Wyoming, bringing our total store count to 126. We remain committed to executing on growing our store footprint and believe we have developed a strategically unique formula for expanding our geographic reach through our flexible store format. Both the Riverton, Wyoming and Stansbury Park, Utah stores that we've opened this year are our new 10,000 square foot or less spike camp format. By leveraging this new format, we were able to enter these smaller markets where there's an underserved consumer. tailoring our immense assortment of products to reflect local needs. It's important to note that although early, the Stansberry Park store has performed better than our initial expectations, giving us additional confidence to take the smaller store concept to carefully considered markets across the U.S. As communicated prior, we are on track to open 10 new stores this year, ending fiscal 2022 with a total of 132 stores in 30 states. As we look to the future, our real estate team continues to actively review over 100 different target markets, supporting the opportunity to reach 300 plus stores in the coming years. Now turning to growing sales generated from sportsmans.com. We continue to leverage sportsmans.com as a way to increase our reach consumers outside our geographic area, utilizing both our digital marketing efforts and our third-party FFL partnership program. During the first quarter, our e-commerce business increased approximately 2.5% as compared to Q1 2021. This increase was driven by strong sales from our apparel, footwear, and ammunition categories. Respective to the ammunition category, we continue to see improved in-stock position within certain ammunition types. This improvement has allowed us to leverage our omnichannel capabilities to serve customers online for specific ammunition SKUs for the first time since mid-2020. As the industry improves supply in all ammunition categories over time, we will be prepared to capitalize on the demand through the broad reach of our stores and online at sportsmans.com. As a key area of focus, we look to further increase traffic and sales on sportsmans.com, and we will continue to expand our online assortment, utilizing our large vendor base and improved dropship capabilities. These capabilities allow us to acquire and retain customers through increased assortment with limited investments in inventory. Over the past two years, we've invested in the omni-channel inventory capabilities, allowing us to leverage the inventory of all stores, our distribution center, and dropship partners. During Q1, we set new levels of performance in this initiative, with over 70% of all ecom-driven revenue being sourced from forward-deployed store inventory and through our dropship partners. In addition, approximately two-thirds of all e-com revenue was picked up in-store, providing us with the opportunity to further engage with our consumers. Turning to leveraging our customer-growing database. Our databases, including our loyalty program, co-branded credit card, and email database continue to grow. We continue to evolve existing and implement new targeted marketing strategies in an effort to maximize retention and increase market share. A great example of this is in the ammunition category, which I mentioned earlier. By utilizing targeted marketing campaigns, we can update specific consumer profiles within our database of 3.3 million loyal to consumers in near real time as inventory becomes available. As we look to the future, we have immense opportunities to leverage these databases, increase retention, and maximize the lifetime value of our customers. Turning to our store operations, our refresh and remodel plan for fiscal 2022 is now nine stores. This provides us with store improvement opportunities that strengthen our brand and overall in-store experience. An area we continue to experience success and are developing further throughout this year is the store within a store concept with some of our key vendor partners. These concepts include adding end caps to highlight specific brands or dedicating sections of the stores to highlight a more robust offering from our vendor partners. This quarter we further expanded this concept with an additional ammunition partner. As we strategically partner with our vendors, we see improved sales results at these stores and with the selected merchandise highlighted. Turning to the leadership team, I'm pleased to welcome two new executives to the leadership team. Earlier this month, Shruti Patnaik joined as our new Chief Information Officer to lead our technology function. She brings a high degree of skill and knowledge to sportsmen and is joining us from a long tenure in the retail industry. And most recently, we added Sherry Jane Love to the executive team as the Senior Vice President of Merchandising. With nearly 30 years of experience in retail industry, we look forward to her leading our omnichannel merchandising strategies. Now I want to take a moment to address the larger macroeconomic environment and its impact on the health of the consumer. During the most recent weeks, we've seen indications that a high rate of inflation may be influencing consumer shopping habits. As an example, in camping, we've seen a softening in demand for higher consideration product, such as pellet grills, which we believe is directly correlated to the current inflationary pressures on the consumer. Although there is inflationary pressure impacting the consumer, we believe that our positioning as a value price leader will allow us to capture additional market share of those people seeking to enjoy the benefits of the outdoors. In closing, as we look towards the long-term opportunities to capture additional market share within the estimated $70 billion outdoor industry, we will continue to invest in our geographic retail expansion and leverage our omnichannel capabilities and grow our customer databases. With that said, I will turn the call over to Jeff to review our first quarter 2022 results and discuss our Q2 2022 guidance.

Thank you, John. I'll begin my remarks today with a review of our first quarter fiscal year 2022 financial results I will then review our outlook for the second quarter of 2022. Net sales for the first quarter of fiscal 2022 were $309.5 million compared to $327 million in the first quarter of 2021, a decrease of 5.3% over the prior year period, but at the high end of our guidance. This decrease was primarily driven by a very tough comparable period as we anniversary the demand driven by the economic stimulus received last year. Same-store sales decreased 11.6% in the quarter compared with the same quarter of the prior year. This decrease was primarily driven by lower sales demand across all product categories due to the tough year-over-year comps. While down versus last year, on a same-store basis, we did see solid performance in the apparel and footwear categories. First quarter 2022 gross profit was $99.1 million compared to $104 million in the first quarter of 2021, a decrease of $4.9 million. Gross margin was 32% for the quarter, an improvement of 20 basis points versus the prior year comparable period. Higher product margins and favorable mix contributed to the gross margin increase over the prior year period. These increases were partially offset by higher overall freight costs. We continue to expect transportation costs to be a headwind to the gross margins during the remainder of 2022. SG&A expense of $96.1 million for the first quarter of 2022 was an increase of $5.7 million, or 6.3% compared to the first quarter of the prior year. As a percentage of net sales, SG&A expense increased to 31% compared to 27.7% in the first quarter of the prior year. This increase is primarily driven by resuming our normal marketing-related activities during the quarter and the timing around our new store opening. We also experienced higher payroll and rent expense due to the 13 new stores in operation versus last year. Income from operations was $3 million in the first quarter of 2022 compared to $13.6 million in the prior year period, a decrease of $10.6 million. Net income for the first quarter was $2 million or $0.05 per diluted share as compared to net income of $10.5 million or $0.23 per diluted share in the prior year period. Adjusted net income in the first quarter of 2022 was $2.2 million or $0.05 per diluted share compared to adjusted net income of $12.5 million or $0.28 per diluted share in the first quarter of the prior year. Adjusted EBITDA for the first quarter of 2022 was $12.9 million compared to $23.5 million in the prior year period. Turning to our balance sheet and liquidity, first quarter 2022 ending inventory was $436.4 million compared to $386.6 million at the end of 2021, an increase of $49.8 million. Given the supply chain challenges over the last couple years, it was important that organizationally we invest in the right inventory to support our customers. Over the last two quarters, we have strategically increased inventory for the upcoming summer camping and fishing seasons, as well as providing certain geographies with sufficient inventory levels to capture seasonal sales demands. We also felt it prudent, given the rising inflationary pressures, to opportunistically invest in additional inventory during the quarter. Making these investments gives us confidence that we are well positioned to handle our current sales demands so we can best serve our customers. First quarter 2022 cash used in operating activities was $16.8 million versus cash used in operating activities of $4 million for the first quarter of 2021. This increase in our cash outflows from operating activities was primarily the result of the strategic build of inventory. Our liquidity continues to be strong as we ended the first quarter of 2022 with $98.5 million borrowed on our line of credit, which was primarily related to the inventory investments noted. Our cash balance remained strong ending the quarter with $57.7 million in cash. We are pleased to report that we have successfully amended our current credit agreement, which governs our revolving line of credit. Our borrowing capacity was increased to $350 million from the previous $250 million capacity, and we were able to obtain favorable market terms given the financial strength of the company. We remain confident that our strong balance sheet, good liquidity, and ability to generate positive cash flows strategically positions us to expand our store reach, take advantage of potential M&A opportunities, and execute on our plan to return capital to our shareholders. As a reminder, as part of our long-term capital allocation plan, the Board authorized a share repurchase of up to $75 million. We will begin executing on this plan during Q2 with an update on the plan progress scheduled for our next earnings call. Turning now to our guidance. Starting with our net sales outlook, we estimate second quarter net sales to be in the range of $330 million to $350 million. Same store sales in the second quarter of 2022 are anticipated to be in the range of down 16% to down 10%. Adjusted EPS for the second quarter of 2022 is expected to be in the range of 22 cents to 30 cents per diluted share. This guidance takes into consideration the trends in consumer behavior and overall macroeconomic pressures that were mentioned earlier in the call by John. To give you some additional perspectives on the full year, we reiterate our plan to open 10 new stores in 2022, with the remaining six stores opening in the back half of the year. Even though we expect to continue to see inflationary pressures and record high transportation costs, we still feel confident in our ability to achieve our target of high single-digit adjusted EBITDA margins through disciplined management of our expenses and execution of our 2022 strategic initiatives. Finally, we continue to expect our 2022 capital expenditures to be approximately $48 to $55 million as we further expand our store footprint, refresh our existing fleet, and invest in technology. That concludes our prepared remarks for today. With that, I will now turn the call back over to the operator to facilitate any questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the start keys. One moment, please, while we call for questions. And our first question comes from the line of Mark Smith with Lake Street Capital Markets. Please proceed with your questions.

Hi, guys. First question for me is just anything to call out in cadence of sales, you know, during the quarter? You know, can you just talk about how sales kind of trended throughout the quarter?

Yeah, Mark, this is Jeff. Nice to talk with you. Just to give you some color on the quarter, I would say that as we went through the winter season, we saw very strong sales in particular cold weather categories, ice fishing, et cetera, had very good performance. To John's remarks, as we got towards the end of the quarter, the weather started to warm up across the country and we entered more into the summer vacationing season. That is when we started seeing some initial slowdown in the consumer behavior, which has trended into the beginning weeks of what we've seen in Q2. And that was the reason for the cautionary remarks that John gave during his part of the conversation.

Anything to call out on weather? And I know you guys don't typically talk much about weather, but did we see later warm weather that maybe impacted sales?

Yeah, Mark, it's John. Good talking to you. Actually, we continue to see cold weather in the West, especially. It snowed here in Utah several inches on Saturday and Monday. and the ice fishing season was extended later than I think I've ever seen, certainly in the industry. So we are still optimistic that as the weather changes, we will see an improved trend in outdoor, the ability for people to participate outdoor. Of course, we do believe that the macro inflationary impacts are also a consideration that we need to be thoughtful as investors we navigate the next quarter.

Okay. And then, you know, without seeing the queue here for segment data, any particular segments to call out that are doing well or any maybe that are underperforming? I know you called out pellet grills, for instance, on the call, but any segments maybe that are worth calling out that are doing well or poorly?

Yeah, Mark, a couple things to call out for you. We have seen, obviously, very good performance from the ammunition categories. You know, coming back in stock as we came out of last year and being able to offer that product to the consumer, we've seen very healthy demand for that, and that has continued as we sit here today. A couple other call-outs that we've made note of is what John mentioned, you know, really good performance in our apparel and footwear categories. I think that, you know, kind of speaks to where the consumer is thinking about participating, but seeing that those good results out of there was something that we were very pleased through during Q1.

Mark, I'll add on the firearms segment of the business, we have seen some headwinds on the personal protection product, specifically to handguns and personal protection shotguns. Alternatively, we've seen very healthy performance in our hunting and bolt-action rifle business.

Excellent.

I'll jump back in the queue for any more.

Thank you.

Thank you, Mark.

Our next question comes from the line of Ryan Sigdahl with Craig Hallam. Please proceed with your question.

Good afternoon, John, Jeff. Appreciate taking our questions. Happy to. Curious, since you mentioned inflation starting to take a toll on the consumer, curious if you could break that down a little bit more between traffic trends versus just downsizing kind of between the good, better, best assortments, or I guess where you're seeing more of that change in consumer behavior recently here?

Yeah, Ryan, this is Jeff. Good to talk with you. To start off, I think the biggest trend in consumer behavior that we're seeing is a pullback from high consideration items. So as we think about the business, you can break it down into some of those hard goods that are high consideration versus the consumable items that we have in our businesses. We're still seeing very good trends in items that are consumable. That can be anything from food to fishing baits to ammunition. So obviously there's still a consumer that's participating and coming in and picking up those consumables. But on some of the higher considerations, we mentioned pellet grills. You know, there could be some high price point kayaks, anything that is really towards the top end of the price range where the consumer does not have the expendable income. Those are the categories and areas that we're seeing pull back in.

That's good to hear participation is still good for longer term trends. Have you broken out or do you break out, I guess, kind of the break out between those of consumable versus, you know, equipment, I'll say purchases or high consideration items?

We only break that out in our 10K and give specific numbers as a percentage of overall units sold in the 10K. To give you a little color, I would tell you that it is running north of where we ended last year at as a percentage of units. So if you go and look through the 10K, you should be able to find where we ended last year at. We're running north of that currently as we go through Q1. Helpful.

Switching over inventory, this is up decently, sequentially year over year. How much of that is safety stock versus an opportunistic ordering, as you mentioned? Jeff, versus just growing store base and just getting back to normal?

Yeah, that's a really good question, and you highlighted some good points there. I think the first is the growth of the store base. One thing I'd like to highlight is if you look back three years, we had a very few number of stores in the eastern part of the United States. We have grown that over three times. in the last three years. So as you think about the seasonality and the different trends of participation as it comes to the eastern United States, there's obviously different seasons that we are making sure that we're inventoried for appropriately in a much larger store base. So as you look at the inventory makeup, part of the growth that we've had is ensuring that we have sufficient inventory to capture all the different seasons that we now participate in, from the fishing season in Alaska to the spring fishing season down in Florida. Other than that, I would tell you that as we thought about inflation, there are things that we had the opportunity to purchase right now where we knew that there are price increases coming down the line, and we may have gone out and built some safety stock in those to try to offset some of the inflationary pressures that the entire retail industry is going through currently.

Then just moving over to private label, curious what the penetration was, if you can call that out in the quarter, and then if there are any places where you're seeing that gain better traction versus maybe others where it's a priority or focus going forward.

Yeah, Ryan, it's John. Just a couple things. We don't give the exact number In the cube and I can tell you we are we've seen some improvement over time as I've stated in the past We're between three and four percent on average of our product is either exclusive mean It's only available at sportsman's where it's private label meaning It's one of our brands and we have designed and developed it. We see a path to high single digits We did see some improvement in q1 specifically around our clothing category as we look at the performance of our entry-level Camouflage clothing through Rustic Ridge, we saw nice improvements there. That's the good on the good, better, best profile of product. And then our premier brand, Achillic Camouflage and Outdoor Wear, we saw significant improvement in sales of that product over the last quarter compared to prior year. Again, driven by the investment the team has made into product design and unique features and benefits that are not found in other products. for outdoor wear that are at the same price point. So those are two areas within the clothing category that have shown very, very nice trends upward in sales.

Thanks. Good luck, guys. Thank you, Ryan. Thanks, Ryan.

Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

Great. Thanks, guys. It's nice to be joining you. Wanted to talk about traffic or transactions versus ticket. I didn't think I heard anything about that. I don't know if you have any thoughts on that. Is the transactions kind of maintain themselves and the down comps mostly due to ticket? How should we think about that?

Yeah, it's a good question, Scott. We don't specifically release those numbers. Obviously, we do track them in a very detailed manner. We do not put that out publicly. I would tell you that On the trends of what we're seeing, the decrease in same-store sales is a combination of traffic and then a combination of ticket combined. I would tell you that the decline in traffic is closely correlated to the decline in same-store sales that we put out. But I'm being cautious here as we've never put those numbers out into a public forum.

Okay, great. And then, you know, thinking about the merchandise market, One more short-term one, and I want to go a little bit longer. Thinking about the inventory levels and the fact that you kind of said the high-priced items are the ones you're struggling with, a lot of people we've been covering are talking about clearance activities. How should we think that with you guys, with the inventory you're carrying, if the consumer continues to decelerate here, kind of frame that for us, if you would?

Yeah, Scott, this is Jeff. I will tell you that as we sit here today, there is nothing that would cause us to think that we would need to be more aggressive than our normal clearance and promotional pattern that we have planned out for this current year. We're not seeing any of our competitors in the market aggressively discount items that we compete with them in, and we're not forecasting that to occur. So as I think about a promotional cadence, I don't think it's any different than what we've had historically. Now, I would caution you that for the last two years, our promotional cadence has almost been non-existent. So what you may view as a more aggressive promotional cadence this year is more in line with what we've done as a business historically. On the inventory front and those items that are higher consideration, I would tell you that as a company, we are keenly aware of the decrease or what declines in demand we may have, and we are actively monitoring those inventory levels and scenarios to make sure that we're not over-inventoried and need to do some sort of mass clearance or discount to clear out of those items.

Perfect. And then my last one is a little bit more longer term and obviously new to the story. I saw the strategic acquisitions there up on the slide. And I was wondering maybe if you could, again, frame that a little bit. Are you thinking mom and pop? Are you thinking, like, smaller chains? You know, talk to us about that. Like, maybe you've done this before, so we can take it offline.

But if you haven't, I'd love to hear a little bit more. Yes, Scott, this is John. Nice speaking with you. Just high level on the M&A. You know, we are actively looking at three verticals of potential acquisitions. Could be e-commerce and an adjacent or content-based business that would support sportsmen. Could be retail that, again, would be adjacent. That could be an existing retailer or an independent or mom-and-pop, as you referenced. And certainly on the brand building or private label, you know, we purchased TAPCO a few years ago. That's a product line that we'll be launching later this year. So we're looking at all three. We are being very disciplined and thoughtful in in our M&A consideration as we sit here today, ensuring that we understand each of these potential acquisitions and how they might be accretive to the business in the long term, especially given some of the recent changes in market conditions. Great. Thanks, guys. I'll yield. Appreciate all the answers. Thanks, Scott.

Thanks, Scott.

And our next question comes from the line of Eric Old with BYU Securities. Please go see what your question is.

Thank you. Good afternoon. Thanks for taking my question, John and Jeff. These two questions kind of follow on from some of the prior comments. When you talked about obviously seeing a little bit of weakness or softness in the higher price categories or products, Are you seeing those consumers then kind of trade down to a lower-priced product or just, you know, completely kind of avoid that purchase altogether right now? Maybe kind of tough to read that, but anything around that?

Tough to read on the initial – hey, Eric, it's John. Tough to read on the initial first couple weeks of the season here in May, but it does appear there's some softness in these higher-consideration products. We mentioned a couple examples earlier. We're being very thoughtful now we think about our discipline around inventory in those products, whether that's grills or personal protection firearms or kayaks. Those are the areas that we're seeing the softness and it'll take us a few more weeks into June before we'll be able to understand the trade down trends from the consumer.

Got it. And then as animal inventories have improved and you've seen kind of traffic around that area, Anything you can call out in terms of the behavior of the ammo buyers that are coming out of the store, maybe purchasing online? Do you see evidence of stocking up? Are they coming in and buying ammo and then walking out? Are they getting a larger basket of goods while they're in the store buying ammo?

Eric, the basket on the ammo buyer is about the same. We are starting to see, again, a better fill rate on that ammunition, the promotional target ammunition. whether that be for a pistol, an MSR, or a .22 rimfire, all much improved. So we're seeing those customers that have been coming in, looking at the shelf on a regular basis, actually having the ability to walk out with a couple of boxes. We still have work to do as an industry. Premium centerfire hunting ammunition and shot shell ammunition is still thin in supply, and the demand is still extensive for that product. We are working with our key partners right now to ensure that we are in a better in-stock position as we go into hunting season. And then as we look at shot shell, I suspect that one's going to take a little bit longer. From all the indicators, we're seeing that we could be at the end of the year or longer before shot shell is where we need to be as an industry. So, again, trends are really, really improved in ammunition, but we've got a couple of categories we need to... to get in stock as an industry.

Just a final question on that. Anything about system-wide, maybe it varies by category or store, or maybe not at all, but any restrictions on the amount that you're letting people purchase enamel right now?

There are certain reloading components, powders and primers, that have some limitations. But effectively, on the ammunition side, the limits have been removed.

Thank you both. Thank you.

And our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hi, this is Matt on for Peter. Thanks for taking our questions. You mentioned in the prepared remarks that transportation is expected to be a headwind for the rest of the year. Can you talk about the impact you expect this year maybe versus last year and then maybe also relative to pre-COVID? And then for our second question, we're curious about your COVID cohorts that you acquired. Are they behaving any differently than previous cohorts, or is there anything to call out there? Thank you.

Yeah, Matt, this is Jeff. Thanks for your question. I'll cover the transportation costs. As we think about transportation costs, we have seen some decrease. in the amount it takes to get a container across the seas from China. That has come down recently to, I think the last time I checked, it was hovering around $9,000 or $10,000. So that coming down is something that I think is very good for the overall industry. You know, if we think about pre-COVID on that, I don't think we'll ever get back to a level where it was as cheap as it was pre-COVID where it was running $4,000 or $5,000. In terms of domestic transportation, I think we're still seeing a similar trend in cost as what we've seen over the last few quarters. As we think about the future of those trends, the later we get into the year, the easier comp it gets because we're up against those increases last year. So as you think about that moving forward, it's still going to impact our gross margins, but the impact it's going to have versus say Q1 is going to be a little bit less as we get into the back of half of the year.

And Matt, on your second question, this is John. Regarding the cohorts from COVID, as you're aware, specific to the firearms industry and segment of our business, we had about 15 million first-time firearms buyers during that two-year period, which is the large sub-take of first-time buyers in the history of the industry. We have seen some changes in how those consumers are behaving. While many are returning to purchase additional equipment for their firearm or a second or third firearm, the percentage of that absolute number is lower than we would have seen prior to the COVID run-up. Our assumption in the data that we're reviewing and receiving from consumers The industry is some of those first-time buyers were focused on personal protection. They filled the need that they felt was appropriate given COVID and some civil unrest activities were happening in the country and may or may not pursue the opportunity to buy a second firearm. With that said, given the massive amount of first-time buyers, even at a lower percentage buying a second or third firearm, the opportunity for us at Sportsman's Warehouse to capture that second, third, fourth firearm purchase is immense. And it is something that, again, we've shown over time, our ability to gain market share against the adjusted NICs, and our numbers would indicate we continue to do so today.

Great. Thanks, guys. Thank you.

And our next question comes from the line of Justin Claver with Robert W. Barrett. Please proceed with your question.

Yeah, good afternoon, guys. Thanks for taking the questions. Jeff, I wanted to first follow up on the comp guide for 2Q. Is that the range you guys are living in today, or does your guidance embed some incremental deceleration over the balance of the quarter, just given all the macro uncertainty you alluded to?

That's a great question, Justin. I would tell you that the guidance we gave takes into consideration the trends that we've seen over the last couple weeks in the consumer behavior.

Okay, and then this is a follow-up. Moving down the P&L, from an earnings perspective, can you help us understand how you're thinking about gross margin on a year-on-year basis relative to the 20 basis points of expansion you delivered here in 1Q?

Yeah. To add on to cover that, I would tell you that we're going to continue to be focused on gaining back what we lost in gross margins. If you think about where this company has run historically, always historically been in that 33.5% gross margin range. Over the last couple of years, we've lost it. John and I's focus right now is to continue to leverage our supply chain, work on our product margins. Mix is obviously going to help that, but I would say that as part of the guidance, there's continued improvement along the trends that we've seen in gross margins. If we then talk through SG&A, obviously in the guidance, there's some figuring in of the difference between fixed costs and variable costs. I would tell you that there are some things within our cost structure that are fixed in nature. It takes a certain number of people to run the stores. utilities, rent, et cetera, the guidance would take into consideration everything that we can do from an expense perspective to help offset the declines in the same stores that we're seeing.

That's a helpful color, Jeff. Just maybe a follow-up on margins. If we look at product margins, are there any categories that have been supply constrained where those margins are still at levels that you wouldn't consider to be sustainable on a normalized basis?

That's a great question. Obviously, you know, we've seen really healthy improvements in product margins over the last couple years. And I would tell you that I think the category where we've seen the least improvement is in the firearms category. I think that that category stayed relatively flat even through COVID. We saw a little bump, but that has gone down significantly. basically back to where we sat pre-COVID on a margin basis. All other categories are performing very well. There are certain items within a category that become harder when it comes to fully burdened margin. If you take something like a pellet grill or a kayak, those large items where you can only fit a certain number of them on our containers, obviously those are bearing a higher burden from a freight perspective than you know, a container full of clothing or other small items like fishing lures.

Okay, thanks for that. Last question, just have you guys ever talked about the mix of firearms? You know, John, you mentioned kind of the shotguns and the handguns, PPE, the MSRs. Have you ever broken out kind of your mix of firearms kind of within those separate categories?

Justin, we haven't ever broken it out. I will tell you that it's the balance of all that product, right, from the entry-level first-time plinking .22 to the competitive shotgun or buying a $10,000 shotgun. That's how we've built this business, and it does take a very broad mix of product across all categories to be successful in this industry. So we haven't historically broke that out, and there's no intention at this point to do so.

Okay, well, that's so helpful. Thank you, John, and best of luck, guys.

Okay, thank you. Thanks, Justin. And we have reached the end of the question and answer session. I'll now turn the call back over to John Barker for closing remarks.

I want to thank you for joining the conversation today, and thank you to all of our dedicated employees around the country for their commitment to making Sportsman's Warehouse the leading company in the outdoor industry. Together, we look forward to continuing to serve our customers. Thank you.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.