SPORTSMAN'S WAREHOUSE HOLDINGS, INC. The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in "Part I. Item 1A. Risk Factors" in our Fiscal 2020 Form 10-K. Also see "Statement Regarding Forward-Looking Statements" preceding Part I in this 10-Q.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this 10-Q.
Overview
We are an outdoor sporting goods retailer focused on meeting the everyday needs
of the seasoned outdoor veteran, the first-time participant and everyone in
between. Our mission is to provide outstanding gear and exceptional serviceto inspire outdoor memories.
Our business was founded in 1986 as a single retail store in
Our stores and our e-commerce platform are aggregated into one operating and reportable segment.
Proposed Merger with Great Outdoors Group, Inc.
On December 21, 2020 , Sportsman's Warehouse entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Great Outdoors Group and Phoenix Merger
Sub I, Inc. , a Delaware corporation and a wholly owned subsidiary of Great
Outdoors Group ("Merger Subsidiary"). Pursuant to the terms and conditions set
forth in the Merger Agreement, subject to the satisfaction or waiver of certain
conditions, Merger Subsidiary would be merged with and into Sportsman's
Warehouse , with Sportsman's Warehouse continuing as the surviving corporation in
the Merger and a wholly-owned subsidiary of Great Outdoors Group . On December
2, 2021 , Sportsman's Warehouse , Great Outdoors Group and Merger Subsidiary
entered into a Termination Agreement (the "Termination Agreement") under which
the parties agreed to terminate the Merger Agreement effective immediately. The
decision to terminate the Merger Agreement followed feedback from the Federal
Trade Commission ("FTC") that led the parties to believe that they would not
have obtained FTC clearance to consummate the Merger. Under the Termination
Agreement, Great Outdoors Group agreed to pay us the Parent Termination Fee (as
defined in the Merger Agreement) of $55.0 million by wire transfer of
immediately available funds concurrently with the execution of the Termination
Agreement. We received the $55.0 million payment on December 2, 2021 .
Update on Impact of COVID-19 Pandemic
We have experienced a significant increase in sales as compared to historical
sales levels since mid-March of 2020 for a variety of reasons, including the
COVID-19 pandemic and an increased participation in outdoor activities, as well
as the opening of new stores, increased demand through our e-commerce platform,
and demand driven by the change in consumer behavior associated with the
presidential election, change in presidential administration and social unrest.
A larger than normal portion of those sales has come from certain product
categories, particularly firearms and ammunition. While we continued to
experience increased sales through the third quarter of this year, resulting in
sales of $1.1 billion for the first three quarters of fiscal 2021, we have begun
to experience a stabilization of demand for our products. Our increase in sales
for the third quarter of fiscal year 2021 was primarily due to the opening of
seven new stores since October 31, 2020 , while our same store sales for the
third quarter of fiscal 2021 decreased 1.5% compared to the same period last
year. We expect that our net sales will continue to stabilize or decrease for
the fourth quarter of fiscal 2021 compared to the same period last year. We had
a strong fourth quarter of fiscal 2020 primarily resulting from the change in
presidential administration and social unrest at that time. In addition, we
expect our fourth quarter results
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for fiscal 2021 will continue to be impacted by supply chain disruptions we have
begun to experience. The demand for ammunition, in particular, continues to
outpace supply. Global supply chain constraints are resulting in higher
transportation costs, which are negatively impacting our gross profit. We expect
these higher transportation costs to continue during the fourth quarter of
fiscal 2021 and likely into 2022.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of
performance and financial measures. The key measures for determining how our
business is performing are net sales, same store sales, gross margin, selling,
general, and administrative expenses, income from operations and Adjusted
EBITDA.
Our net sales are primarily received from revenue generated in our stores and also include sales generated through our e-commerce platform. When measuring revenue generated from our stores, we review our same store sales as well as the performance of our stores that have not operated for a sufficient amount of time to be included in same store sales. We include net sales from a store in same store sales on the first day of the 13th full fiscal month following the store's opening or acquisition by us. We exclude sales from stores that were closed during the period from our same store sales calculation. We include net sales from e-commerce in our calculation of same store sales. Some of our competitors and other retailers may calculate same store sales differently than we do. As a result, data regarding our same store sales may not be comparable to similar data made available by other retailers.
Measuring the change in year-over-year same store sales allows us to evaluate how our retail store base is performing. Various factors affect same store sales, including:
? the impact of the COVID-19 pandemic;
? changes or anticipated changes to regulations related to some of the products
we sell;
? consumer preferences, buying trends and overall economic trends;
? our ability to identify and respond effectively to local and regional trends
and customer preferences;
? our ability to provide quality customer service that will increase our
conversion of shoppers into paying customers;
? the success of our omni-channel strategy and our e-commerce platform;
? competition in the regional market of a store;
? atypical weather;
? changes in our product mix; and
? changes in pricing and average ticket sales.
Opening new stores and acquiring store locations is also an important part of our growth strategy. While our target is to grow square footage at a rate of greater than 8%-10% annually, we may deviate from this target if attractive opportunities are presented to open stores or acquire new store locations outside of our target growth rate.
We also have been scaling our e-commerce platform and increasing sales through our website, www.sportsmans.com.
We believe the key drivers to increasing our total net sales include:
? increasing our total gross square footage by opening new stores or acquiring
new store locations;
? continuing to increase same store sales in our existing markets;
increasing customer visits to our stores and improving our conversion rate
? through focused marketing efforts and continually high standards of customer
service;
? increasing the average ticket sale per customer; and
? expanding our omni-channel capabilities.
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Gross Margin
Gross profit is our net sales less cost of goods sold. Gross margin measures our
gross profit as a percentage of net sales. Our cost of goods sold primarily
consists of merchandise acquisition costs, including freight-in costs, shipping
costs, payment term discounts received from the vendor and vendor allowances and
rebates associated directly with merchandise and shipping costs related to
e-commerce sales.
We believe the key drivers to improving our gross margin are increasing the
product mix to higher margin products, particularly apparel and footwear,
increasing foot traffic within our stores and traffic to our website, improving
buying opportunities with our vendor partners and coordinating pricing
strategies among our stores and our merchandise group. Our ability to properly
manage our inventory can also impact our gross margin. Successful inventory
management ensures we have sufficient high margin products in stock at all times
to meet customer demand, while overstocking of items could lead to markdowns in
order to help a product sell. We believe that the overall growth of our business
will allow us to generally maintain or increase our gross margins, because
increased merchandise volumes will enable us to maintain our strong
relationships with our vendors.
Selling, General, and Administrative Expenses
We closely manage our selling, general, and administrative expenses. Our selling, general, and administrative expenses are comprised of payroll, rent and occupancy, depreciation and amortization, acquisition expenses, pre-opening expenses and other operating expenses, including stock-based compensation expense. Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.
Our selling, general, and administrative expenses are primarily influenced by the volume of net sales of our locations, except for our corporate payroll, rent and occupancy and depreciation and amortization, which are generally fixed in nature. We control our selling, general, and administrative expenses through a budgeting and reporting process that allows our personnel to adjust our expenses as trends in net sales activity are identified. We expect that our selling, general, and administrative expenses will increase in future periods due to our continuing growth. Furthermore, 12 of our current stores are being impacted by minimum wage increases in fiscal year 2021 that have and will continue to drive up our selling, general, and administrative costs during fiscal year 2021.
Income from Operations
Income from operations is gross profit less selling, general, and administrative expenses. We use income from operations as an indicator of the productivity of our business and our ability to manage selling, general, and administrative
expenses.
Adjusted EBITDA
We define Adjusted EBITDA as net income plus interest expense, income tax
expense, depreciation and amortization, stock-based compensation expense,
pre-opening expenses, and other gains, losses and expenses that we do not
believe are indicative of our ongoing expenses. In evaluating our business, we
use Adjusted EBITDA and Adjusted EBITDA margin as an additional measurement tool
for purposes of business decision-making, including evaluating store
performance, developing budgets and managing expenditures. See "-Non-GAAP
Measures."
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Results of Operations
The following table summarizes key components of our results of operations as a percentage of net sales for the periods indicated:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30, October 31, October 30, October 31,
2021 2020 2021 2020
Percentage of net sales:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 67.7 66.1 67.5 67.0
Gross profit 32.3 33.9 32.5 33.0Selling, general, and administrative expenses 24.9 23.9 26.3 24.8 Income from operations 7.4 10.0 6.2 8.2 Gain on bargain purchase - (0.6) - (0.2) Interest expense 0.1 0.1 0.1 0.3 Income before income taxes 7.3 10.5
6.1 8.1
Income tax expense 1.8 2.5 1.5 2.0
Net income 5.5% 8.0% 4.6% 6.1%
Adjusted EBITDA 9.8% 12.9% 9.0% 11.0%
The following table shows our sales during the periods presented by department:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30, October 31, October 30, October 31,
Department Product Offerings 2021 2020 2021 2020
Camping Backpacks, camp essentials,
canoes and kayaks, coolers,
outdoor cooking equipment,
sleeping bags, tents and
tools 12.6% 12.9% 13.9% 13.8%
Apparel Camouflage, jackets, hats,
outerwear, sportswear,
technical gear and work wear 9.1% 8.6% 7.4% 6.5%
Fishing Bait, electronics, fishing
rods, flotation items, fly
fishing, lines, lures,
reels, tackle and small
boats 7.7% 7.8% 11.3% 11.5%
Footwear Hiking boots, socks, sport
sandals, technical footwear,
trail shoes, casual shoes,
waders and work boots 6.4% 5.6% 6.3% 5.3%
Hunting and Ammunition, archery items,
Shooting ATV accessories, blinds and
tree stands, decoys,
firearms, reloading
equipment and shooting gear 55.4% 57.4% 53.7% 56.3%
Optics, Gift items, GPS devices,
Electronics, knives, lighting, optics,
Accessories, two-way radios, and other
and Other license revenue, net of
revenue discounts 8.8% 7.7% 7.4% 6.6%
Total 100.0% 100.0% 100.0% 100.0%
Thirteen Weeks Ended
Net Sales . Net sales increased by$15.3 million , or 4.0%, to$401.0 million during the 13 weeks endedOctober 30, 2021 compared to$385.7 million in the corresponding period of fiscal year 2020. Our net sales primarily increased due to the opening of seven new stores sinceOctober 31, 2020 . Stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed$24.7 million to net sales. Same store sales decreased by 1.5% for the 13 weeks endedOctober 30, 2021 compared to the comparable 13-week period of fiscal year 2020, primarily driven by a decrease in our hunting and shooting department. The decrease in our hunting and shooting department is due to a leveling out in demand compared to the corresponding period of fiscal
year
2020.
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Our footwear, apparel, optics, electronics, and accessories, camping, fishing,
and hunting and shooting departments saw increases of $4.0 million , $3.0
million , $2.2 million , $1.7 million , $0.9 million and $0.2 million ,
respectively, in the third quarter of fiscal year 2021 compared to the
comparable 13-week period of fiscal year 2020 due to the opening of seven new
stores since October 31, 2020 . Within the hunting and shooting department, our
firearm category saw a decrease of $9.3 million or 10.0%, while our ammunition
category saw an increase of $1.8 million or 2.9% in the third quarter of fiscal
year 2021 compared to the comparable 13-week period of fiscal year 2020. The
decrease seen in the firearm category is primarily due to lower demand as we
anniversaried the social unrest and pending presidential election of the prior
year period. The increase in the ammunition category is due to the opening of
seven new stores since October 31, 2020 , partially offset by supply chain
disruptions.
With respect to same store sales, during the 13 weeks ended October 30, 2021 ,
our footwear, apparel, and optics, electronics, and accessories, departments had
increases of 14.3%, 5.6%, and 3.5%, respectively, compared to the comparable
13-week period of fiscal year 2020. Our hunting and shooting, fishing, and
camping departments saw decreases of 6.1%, 1.8%, and 0.4%, respectively, as we
anniversaried the demand driven in the prior year by the COVID-19 pandemic,
social unrest, and the pending presidential election. As of October 30, 2021 , we
had 109 stores included in our same store sales calculation.
Gross Profit. Gross profit decreased to $129.6 million during the 13 weeks ended
October 30, 2021 compared to $130.6 million for the corresponding period of
fiscal year 2020. As a percentage of net sales, gross profit decreased to 32.3%
for the 13 weeks ended October 30, 2021 , compared to 33.9% for the corresponding
period of fiscal year 2020 due to higher freight costs. The higher freight costs
were partially offset by an increase in product margins across most departments
and increased vendor incentives. We expect higher transportation costs to
continue to impact the business during the remainder of fiscal 2021.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased by $7.8 million , or 8.4%, to $100.0 million
during the 13 weeks ended October 30, 2021 from $92.2 million for the comparable
13-week period of fiscal year 2020. This increase was primarily due to an
increase in our payroll expense of $2.8 million , which was the result of opening
seven new stores since October 31, 2020 , and minimum wage increases impacting 12
of our stores in fiscal year 2021. We also had an increase in acquisition costs
of $0.8 million due to costs relating to the proposed merger with Great Outdoors
Group , as well as increases in rent, depreciation, pre-opening, and other
selling, general and administrative costs of $1.8 million , $1.3 million , $0.8
million , and $0.2 million , respectively, during the 13 weeks ended October 30,
2021 primarily related to the opening of seven new stores since October 31,
2020 . As a percentage of net sales, selling, general, and administrative
expenses increased to 24.9% of net sales in the third quarter of fiscal year
2021, compared to 23.9% of net sales in the third quarter of fiscal year 2020,
due to the same reasons disclosed for the increase in selling, general, and
administrative expenses.
Interest Expense. Interest expense decreased by $0.1 million , or 22.9%, to $0.4
million during the 13 weeks ended October 30, 2021 from $0.5 million for the
comparable 13-week period of fiscal year 2020. Interest expense decreased
primarily as a result of decreased borrowings on our term loan during the third
quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020.
Income Taxes. We recognized income tax expense of $7.4 million compared to an
income tax expense of $9.5 million during the 13 weeks ended October 30, 2021
and October 31, 2020 , respectively. Our effective tax rate for the 13 weeks
ended October 30, 2021 and October 31, 2020 was 25.2% and 23.8%, respectively.
Our effective tax rate will generally differ from the U.S. Federal statutory
rate of 21.0%, due to state taxes, permanent items, and discrete items relating
to stock award deductions.
Thirty-Nine Weeks Ended
Net Sales . Net sales increased by$76.2 million , or 7.5%, to$1,089.8 million during the 39 weeks endedOctober 30, 2021 compared to$1,013.6 million in the corresponding period of fiscal year 2020. Our net sales increased due to a variety of reasons including: the opening of seven new stores sinceOctober 31, 2020 , increased participation in outdoor activities, increased demand through our e-commerce platform, and demand driven by the change in consumer behavior associated with the COVID-19 pandemic and social unrest, partially offset by lower demand during the second and third quarters of fiscal 2021 compared to the same periods in fiscal 2020 in certain categories as we anniversaried the demand 24 Table of Contents driven in the prior year by the COVID-19 pandemic, social unrest, and the pending presidential election. Stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed$67.1 million to net sales. Same store sales increased by 1.5% for the 39 weeks endedOctober 30, 2021 compared to the comparable 39-week period of fiscal year 2020, primarily driven by increases in all of our departments. All of our departments had increases in net sales for the 39 weeks endedOctober 30, 2021 compared to the corresponding period in fiscal year 2020, led by our hunting and shooting department with an increase in net sales of$17.2 million , or 3.0%. Our apparel, footwear, camping, optics, electronics, and accessories and fishing departments saw increases of$15.5 million ,$15.3 million ,$12.4 million ,$10.0 million and$7.5 million , respectively, in the first three quarters of fiscal year 2021 compared to the comparable 39-week period of fiscal year 2020 due to increased traffic within our stores and online. Within hunting and shooting, our firearm and ammunition categories saw decreases of$0.6 million or 0.2% and$3.2 million or 1.8%, respectively, during the first three quarters of fiscal year 2021 compared to the comparable 39-week period of fiscal year 2020. The decrease seen in the firearm category is due to lower demand as we anniversaried the social unrest and pending presidential election of the prior year period and supply chain disruptions experienced in the first half of 2021. The decrease seen in the ammunition category is due to the lack of supply in the market as a result of supply chain disruptions caused by the COVID-19 pandemic and demand that is outpacing manufacturing capacity. In regards to same store sales, each of our departments except our hunting and shooting department, had increases for the 39 weeks endedOctober 30, 2021 . Our footwear, apparel, optics, electronics, and accessories, camping, and fishing departments had increases of 23.3%, 19.2%, 10.3%, 4.5%, and 0.7%, respectively, for the first 39 weeks of fiscal year 2021 compared to the comparable 39-week period of fiscal year 2020. We saw a substantial increase in same store sales for our clothing and footwear departments as we saw consumer spending return to a more normalized pattern during the first 39 weeks of fiscal 2021 compared to the same 39-week period of fiscal year 2020. Our hunting and shooting department had a decrease of 3.3%, with our firearm and ammunition categories having decreases of 7.4% and 8.1%, respectively, for the first 39 weeks of fiscal year 2021 compared to the first 39 weeks of fiscal year 2020. Our hunting and shooting department and firearm and ammunition categories saw a year-over-year decline because we began recognizing strong demand for these products during the second and third quarters of fiscal 2020 due to social unrest and the pending presidential election at that time. As ofOctober 30, 2021 , we had 109 stores included in our same store sales calculation. Gross Profit. Gross profit increased to$353.7 million during the 39 weeks endedOctober 30, 2021 compared to$334.5 million for the corresponding period of fiscal year 2020 primarily as a result of increased sales. As a percentage of net sales, gross profit decreased to 32.5% for the 39 weeks endedOctober 30, 2021 , compared to 33.0% for the corresponding period of fiscal year 2020 due to higher freight costs. The higher freight costs were partially offset by an increase in product margins across most departments and increased vendor incentives. We expect higher transportation costs to continue to impact the business during the remainder of fiscal 2021 and likely into 2022. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased by$35.2 million , or 14.0%, to$286.3 million during the 39 weeks endedOctober 30, 2021 from$251.1 million for the comparable 39-week period of fiscal year 2020. This increase was primarily due to an increase in our payroll expense of$17.3 million , which was the result of opening seven new stores sinceOctober 31, 2020 , and minimum wage increases impacting 12 of our stores in fiscal year 2021. We also had increases in acquisition costs of$6.1 million due to costs relating to the proposed merger withGreat Outdoors Group , as well as increases in rent, other selling, general and administrative costs, depreciation, and pre-opening expenses of$5.4 million ,$3.1 million ,$2.0 million and$1.3 million . respectively, during the 39 weeks endedOctober 30, 2021 primarily related to the opening of seven new stores sinceOctober 31, 2020 . As a percentage of net sales, selling, general, and administrative expenses increased to 26.3% of net sales in the first three quarters of fiscal year 2021, compared to 24.8% of net sales in the first three quarters of fiscal year 2020, primarily as a result of opening seven new stores sinceOctober 31, 2020 and costs associated with the proposed merger withGreat Outdoors Group .
Interest Expense. Interest expense decreased by$2.2 million , or 70.7%, to$0.9 million during the 39 weeks endedOctober 30, 2021 from$3.0 million for the comparable 39-week period of fiscal year 2020. Interest expense decreased primarily as a result of decreased borrowings on our revolving line of credit and our term loan during the first 39 weeks of fiscal year 2021 compared to the first 39 weeks of fiscal year 2020. 25 Table of Contents
Income Taxes. We recognized income tax expense of$16.5 million compared to an income tax expense of$20.7 million during the 39 weeks endedOctober 30, 2021 andOctober 31, 2020 , respectively. Our effective tax rate for the 39 weeks endedOctober 30, 2021 andOctober 31, 2020 was 24.8% and 25.1%, respectively. Our effective tax rate will generally differ from theU.S. Federal statutory rate of 21.0%, due to state taxes, permanent items, and discrete items relating to stock award deductions. Seasonality Due to the openings of hunting season across the country and consumers' holiday buying patterns, net sales are typically higher in the third and fourth fiscal quarters than in the first and second fiscal quarters. We also incur additional expenses in the third and fourth fiscal quarters due to higher sales volume and increased staffing in our stores. While we typically would expect our net sales to continue to reflect this seasonal pattern, we may not recognize higher sales volume in the fourth fiscal quarter of fiscal year 2021, in particular compared to the fourth fiscal quarter of last year, because of the significant spike in sales during the fourth quarter of fiscal year 2020 as a result of the demand driven by the COVID-19 pandemic, social unrest, and the pending presidential election.
The timing of our new retail store openings also may have an impact on our quarterly results. First, we incur certain non-recurring expenses related to opening each new retail store, which are expensed as they are incurred. Second, most store expenses generally vary proportionately with net sales, but there is also a fixed cost component, which includes occupancy costs. These fixed costs typically result in lower store profitability during the initial period after a new retail store opens. Due to both of these factors, new retail store openings may result in a temporary decline in operating profit, in dollars and/or as
a
percentage of net sales.
Weather conditions affect outdoor activities and the demand for related apparel
and equipment. Customers' demand for our products, and, therefore, our net
sales, can be significantly impacted by weather patterns on a local, regional
and national basis.
Liquidity and Capital Resources
Our primary capital requirements are for seasonal working capital needs and capital expenditures related to opening and acquiring new store locations. Our sources of liquidity to meet these needs have primarily been borrowings under our revolving credit facility, operating cash flows and short and long-term debt financings from banks and financial institutions. In addition, onDecember 2, 2021 , we received a$55.0 million cash payment fromGreat Outdoors Group in connection with the termination of the Merger Agreement. See above under "Proposed Merger withGreat Outdoors Group " for additional information. We have not yet determined our use for those proceeds. We believe that our cash on hand, cash generated by operating activities and funds available under our revolving credit facility will be sufficient to finance our operating activities for at least the next twelve months. For the 39 weeks endedOctober 30, 2021 , we incurred approximately$43.1 million in capital expenditures primarily related to the construction of new stores and the refurbishment of existing stores during the period. We expect total net capital expenditures between$45.0 million and$50.0 million for fiscal year 2021 primarily to refurbish many of our existing stores and to open ten new stores in fiscal year 2021. We intend to fund our capital expenditures with operating cash flows and funds available under our revolving credit facility. Other investment opportunities, such as potential strategic acquisitions or store expansion rates in excess of those presently planned, may require additional funding.
Cash flows from operating, investing and financing activities are shown in the following table:
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