Sportsman's Warehouse Holdings, Inc.

Greetings and welcome to Sportsman's Warehouse first quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Riley Timmer, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.

Thank you, operator. Participating with me on the call today is Joe Schneider, our interim CEO and chair of the board, and Jeff White, our chief financial officer. I will now remind everyone of the company's safe harbor language. The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding expectations about our future results of operations, demand for our products, and growth of our industry. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described 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 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 991 to the Form 8K we furnished to the SEC today, which is also available on the Investor Relations section of our website at sportsnews.com. I will now turn the call over to Joe.

Thank you, Riley, and good afternoon, everyone. As a member of the Sportsman's Warehouse Board of Directors for nine years now, I have been deeply involved in the oversight of the company strategy and execution. And now, as interim CEO, I have gained additional insights into the day-to-day operations of the business over the last several weeks. These additional insights will benefit me as the chairman and the rest of the board together in the long term. And with those insights, I'm even more confident that we have a clear path to achieving our strategic objectives that we have previously outlined for 2023. Those key strategies are growing our store footprint, further developing our omni-channel capabilities, and growing sales from sportsmans.com, leveraging our customer databases, and engaging our customers. The leadership team at Sportsmans are talented individuals with extensive experience in their respective areas of expertise. This allows them to execute at the highest level to further the success of the business. As I've gotten involved in the day-to-day of the business, it's been exciting to work with each and every one of them personally. As we carefully navigate the current environment and execute on our key initiatives for the year, while we have been faced with weather-related short-term headwinds and tough macroeconomic conditions, which Jeff will address in a few moments, the underlying foundation of the business remains strong. Our real estate funnel is strong with 15 planned new stores opening this year. We have a robust omni-channel platform allowing us to leverage our inventory and provide excellent service to our customers. Our industry leading assortment and in-store expertise gives us confidence in our competitive position within our hunting, shooting, sports department, as well as the other key categories we offer outdoor enthusiasts. We stand firmly committed to our right to win as a consumer's first choice for their outdoor needs. Finally, before I turn the call over to Jeff, I want to reiterate both my and the board's focus on finding a permanent, long-term CEO to lead Sportsman's Warehouse. We are working expeditiously but prudently to find the right person with deep retail and omnichannel experience, a passion for the outdoors, and a proven ability to return value to our shareholders. Egon Zender has helped the board create a strong pipeline of qualified candidates, and we are energized by the enthusiasm for leading this company that we hear from many of the candidates we have spoken to. I'll now turn the call over to Jeff to go through the first quarter's results and discuss our view on the second quarter.

Thank you, Joe, and good afternoon, everyone. Over the past three years, our business has grown tremendously, nearly doubling in size. We knew that eventually the business would begin to normalize, and we have been experiencing a moderation of demand over the last few quarters. Much of this, we believe, has been due to significant inflation and its impacts on our consumers. Our sales in the first quarter were also impacted by the unfavorable weather conditions in the western United States, as record levels of rain and snow pressured the spring camping and fishing seasons, causing demand for products in those categories to be softer than expected. If we look beyond weather, the business continues to experience pressure from the difficult macroeconomic conditions, and we are not seeing the increase in store traffic we had expected. with softness throughout our spring-related merchandising categories. Because of these trends, we are closely managing our spring assortment and merchandising efforts while making the necessary adjustments to ensure our inventory stays seasonally relevant and our in-stocks for turning merchandise remain healthy. During Q1, our hunting department outperformed most of our other categories driven by strong firearm sales during the quarter. Our industry-leading firearms assortment coupled with best-in-class omnichannel capabilities allowed us to better service our customers and win at the point of sale. Within the hunting department, we did see reduced ammunition sales and lower margins on ammunition compared with last year. We expected the comps to be tough during Q1 2023 as we lapped the industry returning to an in-stop position in Q1 2022, driving customers to pull forward purchases. During the quarter, the team continued their execution on organic growth and opened five new stores as we continue to expand our store footprint. We have six stores slated to grand open in the second quarter and four stores on track to open early in the third quarter as we enter the hunting and the holiday seasons. It's critical that we continue to stay diverse and flexible in our approach, but disciplined in our financial hurdles of 10% four-wall EBITDA and 20% ROIC as we navigate through the macroeconomic pressures we are seeing in the business. As the primary vehicle for deploying capital, new store openings have proven to be a strong way to generate positive return by generating over 110% ROIC over the last five years when compared to the total capital invested. These returns are achieved through our new stores reaching profitability on average in five to six months even with including the pre and grand opening costs associated with that store. We continue to believe in new store growth due to the considerable white space opportunities driven by increased firearm ownership, outdoor participation, and a reduction in the competitive landscape. We also continue to invest in our omnichannel platform, adding incremental functionalities as a way to drive additional sales through reaching new consumers outside our geographic area and making the experience for customers as seamless as possible. This allows us to leverage our fleet-wide inventory and increase assortment through introduction of new relevant products to our website. We will continue to use enhanced digital marketing efforts to reach new customers and entice existing customers to shop our website. The website now penetrates in the mid to high teens and is one part of the business that is comping positive year over year on both a quarterly and annual basis. Turning now to our Q1 results. Our first quarter results were in line with our guidance range for both sales and earnings per share. We achieved net sales of $267.5 million compared to $309.5 million in Q1 of 2022. The decrease was primarily driven by the unusually wet weather and extended winter in the western United States and lower overall sales demand from consumer inflationary pressures. These declines were partially offset by the opening of 11 new stores over the last year. Same-store sales decreased 17.8% in the quarter compared with the same quarter of fiscal year 2022. Gross margin was 29.9% for the quarter, a decrease of 210 basis points versus the prior year first quarter period. The decrease in gross margins was primarily due to a reduction in sales mix in our camping and fishing departments, which carry a higher margin profile and lower comparable product margins, mainly in ammunition. Selling general and administrative expenses in the first quarter were $99 million compared to $96.1 million in Q1 of 2022. As a percentage of net sales, SG&A expense increased to 37% compared to 31% in the first quarter of the prior year. This increase was primarily due to higher rent, depreciation, and pre-opening expenses from the addition of 11 new stores opened over the last year. Looking now at earnings per share, we reported a 39 cent per share loss in the quarter. In adding some additional color to this loss, I want to highlight some significant drivers. First, the reduction in sales due to weather and lower penetration in our camp and fish departments contributed 18 cents to this reduction of EPS. Next, the expense burden of new store openings reduced EPS by an additional 3 cents per share during the quarter on a year-over-year basis. And finally, the increase in our interest expense reduced EPS by a on a year-over-year basis. I will now take a minute and review our balance sheet and liquidity. First quarter ending inventory was $469.5 million. We expect this to be the high point for inventory for the year, as this includes most of the buildup needed for the balance of our new stores to be open this year and much of the seasonal products for the summer and early fall selling seasons. Although we will be adding 15 new stores during 2023, we expect year-end inventory to be approximately $400 million as we improve our terms and gain efficiency with better regional and seasonal assortments. This equates to a per-store reduction of inventory of approximately 10%. Our liquidity continues to be a strength as we ended Q1 with $150.3 million on our line of credit. Our total liquidity, including cash on hand at the end of Q1, was $153.5 million. Turning now to our view on the second quarter. Starting with our net sales outlook. We estimate second quarter net sales to be in the range of $310 to $340 million. Same-store sales in the second quarter of 2023 are anticipated to be in the range of down 17% to down 9%. This guidance takes into consideration a 3% to 4% same-store sales headwind versus Q2 of last year driven by the political rhetoric due to the unfortunate event in Uvalde. EPS for the second quarter of 2023 is expected to be in the range of $0.02 to $0.15. Finally, to add some color to our Q2 outlook, over the last year, we started reducing our costs in many of our stores particularly focused on store labor. This effort resulted in a year-over-year cost reduction of 6% on a per-store basis. Unfortunately, we continue to see pressures on the business from the macroeconomic environment and a demand slowdown in our camping and fishing categories, reducing the amount of traffic to our stores. In response to this continued softening, during the second quarter, we will further implement a company-wide cost reduction effort to align our expenses with the current sales trends. It is critical that we maintain financial discipline and rigor as we navigate the current consumer headwinds. That concludes our prepared remarks today.

I will now turn the call back to the operator to facilitate any questions. Thank you.

Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 star key. Our first question comes from the line of Eric Wald with B Reilly. Please proceed with your question.

Thank you. Good afternoon, guys. couple questions i guess um jeff you noted that you know firearm sales um were a strong point in the quarter um can you talk about you have the tax rates you're seeing with those purchases people coming in if they're buying a similar level of kind of accessories uh and ammo uh that they may have previously purchased the ammo sales are down but in terms of the people buying firearms at that time you're seeing similar levels of tax rates and then Same kind of question along that lines, you know, as they kind of make their way through this door, you know, twice, you know, once for the background check and once to pick up the firearm, are you seeing them kind of, you know, buy a similar level of other basket items as they make their way back? Or is that being impacted as well? A bit of a follow-up.

Yeah, Eric, great question. In terms of firearm sales and the attachment of accessories onto the firearm, we're still seeing a very good attachment rate for items specifically relating to the firearm purchase. So a holster, a security product, ammunition, to the extent that they need it to go used. Where we're seeing the customer back off from purchases is the attachment rate to other items within the store. So the consumer's coming in, they're purchasing the firearm, they're purchasing the associated accessory with that firearm, but then they are not shopping other areas of the store, such as camping, fishing, apparel, footwear, places like that where we used to see a higher attachment rate.

Got it. Okay. And then my second question, obviously, in order to kind of the weather impact you saw in Q1 have kind of lingered into Q2. What does the guidance imply to down 9% and down 17%? I mean, have you seen any turn so far in those regions of demand coming back? Are you getting a sense that kind of pent-up demand is coming back in the stores? Do you think those sales may be lost? Showing us that wide range, are you assuming, you know, that you started to see some turnaround and you're assuming it continues or is it one end assuming no turnaround and the other end assumes the turnaround?

That's a great question. In terms of the guidance, the guidance figures in that the pattern continues with our current business trend. We gave a large range on the guidance just because we have seen some areas start to turn in camping and fishing penetration, but not at the rate that we were hoping or expecting them to turn. And so with the guidance that we gave, we've kind of figured in the downside risk and then the upside opportunity if those trends start to change in the business and we get further penetration into fishing and camping and other seasonal merchandise.

Just to clarify, the low end of the range is assuming current trends continue. The better end of the range is assuming future. Or is the low end of the range assuming a further downturn from here?

I think the low end of the range assumes a further downtrend from our current business patterns. The midpoint right now is in line with what we're seeing in current business trends.

Got it. Perfect. Thanks, Jeff.

Our next question comes from the line of Justin Clever with Robert W. Baird. Please proceed with your question.

Yeah, good afternoon, everyone. Thanks for taking the question. First of all, up there on firearms specifically, Jeff, did that business comp positive in the first quarter or not?

It did not comp positive, Justin, but it outperformed the rest of the company in terms of comps for the quarter.

Got it. OK, thank you for that. And then just maybe help us disentangle the gross margin in the first quarter a bit more like can you frame the mixed impact versus the headwind from lower margins in ammo? And then specifically on the ammo piece, I guess where are we in the process of margins on ammunition normalizing? I know we were over-earning on those categories during the pandemic, but where are we in that kind of mean reversion from a margin perspective, specifically within ammo?

Yeah, that's a great question, Justin. So in terms of the gross margin for the quarter, If you look at the degradation year over year, I'm down about 200 basis points in totality. I will tell you that mix accounts for roughly half of that, and then the margin impact in the quarter equates about the other half of that. So the big driver on the margin degradation is going to be in terms of ammunition. We knew eventually we were going to see some degradation in ammunition margin, that it was not going to stay at the levels that it was at during COVID. We are now seeing that in the market, but we're still seeing a margin that is much higher than what it was pre-COVID. So this is an expected change in the margin profile in ammunition, and that took a larger basis point decline in overall gross margin in Q1, just given softness in some of the other categories like fishing and camping, which tend to carry higher gross margins.

Yep. Okay. That makes sense. Thanks for that, Colin. Just one follow-up on margin. Can you help us just think about how or what you're embedding in your earnings guidance for 2Q from a gross margin rate perspective? Do we anticipate the The year-over-year declines, do they ease from what we've just seen in the first quarter? Do they get worse? Just any color there would be helpful. Thanks so much.

Yeah, on Q2, we're really looking at the penetration into some of the other categories. Back to Eric's question, you know, the middle point of the guidance assumes that our current penetration trends in areas like camp and fish continue for the rest of the quarter. If we start to penetrate higher in those categories, those carry overall accretive margins to the overall gross margin. So we will see better profitability from a gross margin perspective. If the current trend continues where we penetrate heavily into firearms, then we're going to see a continuation of some of the margin difficulties we saw in Q1.

All right. Thanks, guys. Best of luck. Our next question comes from the line of Mark Smith with Lake Street Capital Markets.

Please proceed with your question.

Hi, guys. First off, Jeff, can we dig into the ammo business just a little bit more? You've talked a bit about the profitability. Just any changes that you're seeing fundamentally in that business as far as competition, kind of where your inventories are today? And as we think about competition and kind of your initiatives to online, are you seeing more?

uh consumers move to online purchases of ammunition yeah mark in terms of ammunition let's talk about industry and where we're at as we sit here today the industry is is very full and robust in terms of in stocks in ammunition the consumer is no longer buying excess boxes of ammo they're coming in and buying what they use they're able to find anything that they want at this point and they're able to find copious quantities of it on the shelves. So there's really no reactionary behavior from the consumer. In terms of the competitive landscape, as noted, we've seen some declines in the margin profile, but I'm not seeing any aggressive promotional activity in the market like we saw pre-COVID when there was a ripe in-stock position or an overstock position. So I have yet to see aggressive promotional items I think in terms of what we'll see going forward, it's back to a normal promotional cadence where you'll see good deals as some of the holiday seasons, Father's Day, hunting seasons, holiday, those types of things. As we progress through those, I think we'll go back to a very normalized promotional cadence in the ammo business.

Perfect. And then as we think about the rest of the business, as far as inventory goes, you know, some of these categories that are fairly spring-based, some of the camping and fishing, you know, do you feel like you're going to have to clear out some of this inventory? Will we see some bigger markdowns? You know, what kind of hits, you know, do you think you could take or do you feel pretty comfortable with where the inventory is and your ability to move that over the next few weeks or quarters?

Yeah, Mark, I'm very comfortable with the inventory position as we sit here today. We saw the slowdown in spring merchandise and goods early in the season. And like we've been doing for the last year, we made the necessary choices and reactions in order to ensure that we do not have too much inventory at the end of the season. So you're going to see us move through our in-stocks in a normal promotional cadence through the spring, through the summer season, into the fall season. But at this point, if I look at the overall health of my inventory, I'm not worried about having to do any flash sales or fire sales in order to right-size my assortment.

Okay. Last one from me. Can you talk big picture just about kind of your comfort with leverage, where you think that maybe could go, where you're comfortable, and then performance? Maybe big picture, your desire to kind of keep the foot on the accelerator for store growth and what kind of gives you the comfort to continue growing at this rapid rate.

Yeah, on the leverage front, Mark, you know, if we look at the leverage at the end of the quarter and our inventory position, as I stated on the call, we're kind of at the high point for inventory for the entire year. So if you think about the flow of inventory, inventory total dollars reducing through the end of the year, that money is obviously will go to the leverage or to my line of credit. So I'm still very comfortable with our liquidity, with the position the company's in to weather these downturns. This is why we openly communicated that we do not want to over-lever the company in order to weather any of these macroeconomic headwinds like the one that we're currently in. So very comfortable there. In terms of the store growth, there's a lot of white space opportunities still in the market for us to explore. I will tell you, Mark, that as we are looking at markets and with retail real estate inventory at the lowest level it's been at for decades, the ability for us to find markets where we can meet our financial hurdles is getting a bit challenging, and I will not open up stores just to hit a number. So if it does not meet my financial hurdles of 10% for all EBITDA and 20% ROIC, I'm not going to sign a lease. And that's something that we're going to continue to monitor as we move forward into the store expansion.

Excellent. Thank you. Our next question comes from the line of Mark Harmon.

With R5 Capital, please proceed with your question.

Hey, guys, thanks for taking my call. I think you just answered part of my question, but I'm kind of looking out the next year's, you know, store growth plan. You know, are there any thoughts on changes to, you know, location selection, especially box size, CapEx changes, anything that you're thinking differently for next year based on how things have been going the last couple months?

Yeah, Mark, I'd go back to the statement of the retail real estate inventory is at the lowest level than it's been for decades. A real estate is still a real estate. So you have a long line of retailers lining up to sign a lease on any of the boxes that we're looking at. So as we think about further expansion, we're going to continue to target the right MSAs, We go into any market targeting that 30,000 square foot box as our starting point, and we adjust up and down accordingly based on market conditions, the right real estate, the size of the box that we can find, and then consumer trends and demand. We're going to continue to monitor those trends as we look at real estate expansion. For me, my primary focus right now is ensuring that any box we do go into, I am confident that it can hit our financial metrics that we've laid out.

So have you seen that those hurdles are more easily met with a smaller size box yet, or is that not the case?

I would say that it goes back to we target a 30,000 square foot box because that's really the right space for us to make a nice presentment of SKU assortment. In those smaller boxes, we really have to know the SKU assortment well. It has to be in markets that we understand intently so we can just put the A SKUs in there. The 30,000 square foot box allows me to have a broad assortment with a variety of products and allows me to hit those financial hurdles easier.

Okay, thanks. And then maybe follow up to that. Just on the e-commerce side, can you quantify what happened this quarter in e-commerce?

Yeah, as we stated on the call, e-commerce for us is a continually growing highlight of the business. You know, where other retailers, and I'm sure you've seen them come out, are pointing to declines in their e-commerce sales, that's an area for us that continues to comp positive year over year. So we're really happy with what our e-com team has done to the business. We continue to penetrate into new geographies and acquire new customers, and we're excited about the opportunity that, you know, gives to the business on a go forward.

Thank you. Our next question is a follow-up from the line of Eric Wald with B. Riley.

Please proceed with your question.

Thanks. Hey, Jeff. Just a quick pause. Let me make sure I understand one of the previous questions on gross margin. I understand the decline year over year was, you know, ammo margins coming in and then the mix with lower camping and fishing. But if we take ammo out of it and take mix out of it, on an apples-to-apples basis, kind of how are the categories different? comparing to last year? Are camping margins, apples to apples, up, down versus last year? You don't get into the categories, but I'm just trying to understand, x-mix, what margins are doing besides ammo?

Outside of ammo, Eric, the margins within our categories are very similar to the prior year. We have not seen a lot of pressure from the margin front in those categories. Obviously, we keep a very close eye on the competitive landscape and make sure our pricing is in line to match with our low-price guarantee that we have. But we have not seen much pressure in the other areas of the business outside of ammo.

Perfect. Thanks, Jeff.

There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.