Sportsman’s Warehouse Holdings, Inc. (NASDAQ:SPWH) Q2 2023 Earnings Call Transcript

Sportsman’s Warehouse Holdings, Inc. (NASDAQ:SPWH) Q2 2023 Earnings Call Transcript September 6, 2023

Sportsman’s Warehouse Holdings, Inc. beats earnings expectations. Reported EPS is $0.04, expectations were $0.02.

Operator: Greetings, welcome to Sportsman’s Warehouse Second Quarter 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Riley Timmer, Vice President of Investor Relations. Thank you. You may begin.

Riley Timmer: 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 8-K we furnished to the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com. I will now turn the call over to Joe.

Joe Schneider: Thank you Riley and good afternoon everyone. I’ll begin my prepared remarks by first providing an update on our CEO search. Next, I’ll talk through the key areas with the leadership team and I have been focussed. Then review our second quarter results followed by the actions we are taking. The search for Sportsman’s Warehouse next CEO is the board’s number one priority. This search is progressing well and we are very pleased with the quality and experience we are seeing in candidates. The search committee continues to filter candidates and the board is expecting to fill the position soon. We’ll keep you posted. Frankly, the second quarter was a disappointment from a net sales gross margin and profitability perspective.

Sales in the quarter were down nearly 12% versus last year, with comp sales down 16% both lower than we expected. Gross margins were 32.6, which is 90 basis points lower than the second quarter last year. In addition, adjusted EBITDA was 4.2% which is down from 8.7% versus last year. In the quarter, we saw deterioration and revenue as we did not see store traffic improved from the first quarter like we had anticipated. This resulted in year-over-year declines in each of our departments. While we did experience a late start to our spring selling season and later in the quarter and seasonable warm weather, we believe that the difficult macro environment, macroeconomic environment, is leaving fewer dollars available for discretionary spending.

We did however; see a bright spot in our omnichannel business where e-commerce continue to outpace the performance of our stores. Since I stepped in as interim CEO, I’ve been working with our strong management team looking at all aspects of our business. Specifically, we’ve been focusing on the following areas, supply chain and inventory, real estate, omnichannel and e-commerce, and operating expense CapEx. We quickly reviewed these four key areas and a result of the performance took immediate action to address the following. Steps to reduce are total inventory and have identified the areas of inventory that need to be accelerated for short-term promotions and markdowns. Adjusted the company’s expense structure to right-size to the current sales trends and significantly reduce investments in future news stores, openings, and other capital spend.

These aggressive actions we are taking to reduce inventory combined with increasing store traffic through short-term focus promotions and markdowns will further reduce gross margins during the back half of this year. In addition, we will continue to streamline our expense structure and focus our debt pay down to a well-present employees to start fiscal 2024 and a strong position to return Sportsman’s Warehouse to profitable growth. Over the last several months we have added additional talent in both our merchandising group in our distribution center. Brian Westfall, our Chief Merchant brings nearly 30 years of specialty outdoor retail experience to the team having worked in senior roles for both Cabela’s and Academy Sports. Brian is driving our inventory and merchandising realignment efforts and I’m confident in his ability to execute at a very high level.

While I’m not happy with our Q2 performance, we are taking swift and aggressive action to get the business back on track to return to a profitability. I’m very confident in the team. The adjustments we have made in our ability to execute with a sense of urgency. We are confident that we will successfully navigate through challenging business environment. With that, I’ll turn the call over to Jeff.

Jeff White: Thank you, Joe. I’ll begin my remarks today with a review of our second quarter fiscal 2023 financial results, then cover our outlook for the third quarter of 2023. Net sales for the second quarter of fiscal 2023 were $309.5 million, compared to $351 million in the second quarter of 2022. Same store sales decrease, 16.1% compared to the second quarter of 2022. In looking at comparable sales by department, first our hunting departments, same store sales were down 17.5% versus last year, breaking it down further, ammunition comp sales were down 30% accounting for the majority of the departmental decrease in the quarter. In last year’s second quarter, there was a significant full forward of demand as we started to return to normal in-stocks on key ammo calibers [Ph].

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These calibers have been very challenging to procure over the prior two years making for a difficult year-over-year comparison. Our firearm sales on a comparable basis were down 10.9%. In reviewing our performance for the quarter versus the adjusted mix data, a key indicator of firearm sales we continue to outperform this industry measure which is down 12.7% in the same period. We believe this demonstrates that although sales were down year-over-year we are gaining market share in this key category to our business. Looking now at other departments within our business. Our fishing department was down 11.1% versus last year on a comparable store basis. Continuing the same trend as Q1, we experienced soft trends in fishing as we entered the second quarter.

However, we saw months over month’s improvements in comparable store sales through the end of the quarter and into the beginning of the third quarter. During the second quarter, we also experienced softness in our payroll, camping and footwear departments as pressures on consumer discretionary spend continues to weigh heavily on these categories. These categories were down 20.7% 19.4% and 13.8% respectively on a comparable basis. Second quarter gross margin was 32.6% for the quarter versus 33.5% in the prior year comparable period. This decrease as the percentage of the sales was due to increase promotional activities and reduced product margins on ammunition. SG&A expense as a percentage of net sales was 33.1% compared to 27.6% in the second quarter of last year.

This increase was primarily driven by increases in total rent, depreciation, and new store opening expenses. This was partially offset by a decrease in our total payroll expense as we quickly adapted our store labor to changes in product demand. On a personal basis, payroll was down about 11% versus last year, and other operating expenses were down approximately 8%. Net loss for the second quarter was $3.3 million or negative $0.09 per diluted share compared to net income of $14.6 million or $0.35 per diluted share in the prior year period. Adjusted net loss in the second quarter of 2023 was $1.6 million or negative $0.04 per diluted share compared to adjusted net income of $15.1 million or $0.36 per diluted share in the second quarter of the prior year.

Adjusted EBITDA for the second quarter was $13.1 million or 4.2% of net sales compared to $30.6 million or 8.7% of net sales in the prior year period. Turning to our balance sheet and liquidity, second quarter ending inventory was $457.2 million compared to $437.4 million at the end of the second quarter of 2022. On a per store basis, inventory was down nearly 6% versus last year’s Q2 and just over 5% compared to Q1, 2023. As Joe discussed, we will move swiftly with the greater velocity of promotions and markdown to lower our total inventory levels and drive more traffic to our stores. Looking at cash flow for the first after 2023, cash used in operating activities was $58.3 million versus cash provided by operating activities of $8 million for the first six months of 2022.

The increase in our cash outflows was primarily due to the additional inventory for our 14 New Year stores and a net loss in the first half of this year compared to net income during the prior year of six months period. Regarding liquidity, we ended the second quarter with $231 million outstanding on our line of credit and $2.9 million of cash on hand. We have approximately $96 million available under our credit facility. We expect the outstanding balance on our line of credit to substantially decrease during the second half of the year, as we lower our inventory level, complete construction on our final two new stores, and reduce our operating costs, freeing up excess cash for debt pay down. During the second quarter, we bought back about 430,000 shares under our current buyback program for an investment of $2.1 million.

At the end of the quarter, we have approximately $7.5 million remaining under the authorized share repurchase program, and we’ll continue to opportunistically execute in the open market. As you’ve heard from Joe, the impact on our business from the challenging macroeconomic conditions has been greater than expected. We did not see the improvement to in store traffic during Q2 that we had anticipated, causing sales and demand for our products in each of our departments to decline significantly. As Joe mentioned, during the quarter, we successfully executed certain cost reductions and continue to find ways to streamline our overall cost structure to be more linear and more efficient. We anticipate these on-going efforts will yield up to $25 million in annual savings, and will align our business for the current demand trends we are seeing.

Regarding our 2024 new store funnel, this is another area of our business impacted by the challenging macroeconomic environment. Availability is in an all-time low, making it more difficult for us to find real estate and markets where we have the right to win and ensure achievement of our new store financial hurdles. As such, we expect a number of new stores we will open in 2024 to be significantly fewer than 2022, given the pressure on our sales, availability of real estate and capital allocation priority now directed to paying down debt. Turning now to our guidance, given the difficult retail environment that we are operating in, we expect to see continued pressure on our top-line sales. In effort to reduce inventory and drive traffic, we will be more promotional in the back half of 2023 than we have historically been.

We will also continue to look at ways to reduce our operating expenses and better leverage the assets of the business. Executing these items will position Sportsman’s Warehouse to be much healthier as we move into 2024. Now focusing in on our third quarter guidance, we expect net sales to be in the range of $310 million to $330 million. We expect that our promotional activities during the quarter will impact gross margins between 250 and 350 basis points versus prior year. Same store sales in the third quarter are anticipated to be in the range of down 19% to down 14%. And adjusted EPS for the third quarter is expected to be in the range of negative $0.20 to negative $0.05 per diluted share driven primarily by the reduction in gross margins.

This reduction in gross margins will be partially offset as we continue to implement our cost savings initiative highlighted earlier in my remarks. That concludes our prepared remarks today. I will now turn the call back over to the operator to facilitate any questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed.

Ryan Sigdahl: Good afternoon, guys. I want to start with kind of guidance or the current Q3 quarter-to-date. We’ve seen specific categories that you’re planning to increase promotions in discounts or is that generally across the entire business and company.

Jeff White: Hey Ryan, it’s Jeff, great question. As we look into the Q3 guidance, the main areas are going to see if the more promotional end than we have historically been is going to be in the apparel and footwork category. I think it’s something that you’re seeing across all sorts of industries that those are kind of the areas where additional promotions are necessary. So that’s going to be some of the key drivers of the promotional activity you see during Q3.

Ryan Sigdahl: Anything across the other ones where maybe it’s less severe but increased promotions or is hunting, camping kind of the other categories generally similar year-over-year?

Jeff White: There’s going to be normal promotions throughout other categories. Within hunting, you’re going to see it a little more promotional in the boat category, but that’s a very small portion of the overall hunting business, but everything else you should see in normal cadence throughout the back half of the year in terms of promotional activity.

Ryan Sigdahl: Great. And then, as you think about kind of the pressure on margins in the near term, you guys put out some medium term margin targets for each 10% EBITDA margins. I guess how comfortable are you still achieving that when things normalize, versus is there anything structurally changed in the business or the industry today?

Jeff White: Yes, as we look at the margins, headwinds that we’re going through right now. I do view them as short-term. This is something where we need to work through the back half of the year and through the consumer headwinds. As we move on into a healthier position in 2024 and beyond, and the consumer returns the normal behavior. I see gross margins in our margin profile returning back to a more normal cadence, but it is something that we have to work through right now in the short term.

Ryan Sigdahl: Great. Thanks, guys.

Operator: Our next question is from Eric Wold with the B. Riley Securities. Please proceed.

Eric Wold: Thank you. Good afternoon guys. A couple of questions I guess follow up on the last one around inventory and margins. Do you expect the margin impact to be localized, conclude in the back half of this year or there’s some category, some products, that seasonally you’ll have to carry in the next year, before you can really start promoting those, and so there might be some margin impact next year as well.

Jeff White: Our anticipation is that we move through all of these additional promotional items we have to do in the back half of the year and are able to go into 2024 in a healthier position, where we then transition more to just seasonal cadence is flowing good in and out of the stores.

Joe Schneider: And Eric, this is Joe. As we mentioned, we brought in a season veteran Brian Westfall, who is helping us navigate this and address the core inventory items and get back to a normal cadence on our inventory, which then impacts our margins, which should improve in 2024. So we’re addressing it, taking the correct abaction, and getting back on track.

Eric Wold: Okay. And then on the solar growth plan changes. You threw out a lot of things between kind of the current amount of climbers that you’re seeing with your customer base, the inability to make you find that real estate that fits your goals, your return goals, also desired to pay down debt and focus cash well there. Maybe, help us understand, how much of the change in store growth plans for 2024 is really kind of a short-term focus on balance. So you’re trying to focus on just having cash, you’re getting back to your life position versus anything changed in your view, longer term around the strength of certain categories. Are you seeing something with the reason store — that hasn’t been working that makes you rethink, you’re just kind of either even longer-term plan or a really more all kind of short-term economic balance you’ve related versus a long-term strategy shift.