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 Annual
Report on Form 10-K for the fiscal year ended
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 every enthusiast in between. Our mission is to provide outstanding gear and exceptional service to 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 single operating and reportable segment.
Recent Developments
Store Acquisitions
In
Update on Impact of COVID-19 Pandemic
As noted in our Annual Report on Form 10-K for the fiscal year ended
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continue to be closed or have significant restrictions in place as a result of local and state regulations. We may further restrict the operations of our stores and our distribution facility if we deem this necessary or if recommended or mandated by authorities.
In addition, with respect to our supply chain, we continue to see some
interruption out of
The extent to which the COVID-19 outbreak impacts our business, results of
operations and financial condition will depend on future developments, which are
highly uncertain and cannot be predicted, including, but not limited to the
duration, spread, severity and impact of the COVID-19 outbreak, the effects of
the outbreak on our customers and vendors and the remedial actions and stimulus
measures adopted by local and federal governments, and to what extent normal
economic and operating conditions can resume. For more detailed information on
the potential impact of COVID-19 to our business, we refer you to Item 1A, Risk
Factors, "The novel coronavirus (COVID-19) pandemic, efforts to mitigate or
disrupt the pandemic and related weak, or weakening of, economic or other
negative conditions, may disrupt our business, which could have a material
adverse effect on our operations, liquidity, financial condition and financial
results." in our Annual Report on Form 10-K for the fiscal year ended
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:
· 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 and acquiring new stores is also an important part of our growth strategy. While our target is to grow square footage at a rate of greater than 4%-6% annually, we may deviate from this target if attractive opportunities are presented to open or acquire stores outside of our target growth rate.
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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 or acquiring new stores;
· 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.
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 clothing 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, 62 of our current stores are being impacted by minimum wage increases in fiscal year 2020 that have and will continue to drive up our selling, general, and administrative costs during fiscal year 2020.
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
May 2, May 4,
2020 2019
Percentage of net sales:
Net sales 100.0% 100.0%
Cost of goods sold 69.7 68.9
Gross profit 30.3 31.1
Selling, general, and administrative expenses 30.5 34.2
Loss from operations (0.2) (3.1)
Interest expense 0.6 1.2
Loss before income taxes (0.8) (4.3)
Income tax benefit (0.3) (1.2)
Net loss (0.5)% (3.1)%
Adjusted EBITDA 3.3% 0.2%
The following table shows our sales during the periods presented by department:
Thirteen Weeks Ended
May 2, May 4,
Department Product Offerings 2020 2019
Camping Backpacks, camp essentials, canoes 10.2% 11.9%
and kayaks, coolers, outdoor cooking
equipment, sleeping bags, tents and
tools
Clothing Camouflage, jackets, hats, outerwear, 4.4% 8.0%
sportswear, technical gear and work
wear
Fishing Bait, electronics, fishing rods, 10.1% 12.1%
flotation items, fly fishing, lines,
lures, reels, tackle and small boats
Footwear Hiking boots, socks, sport sandals, 4.4% 7.4%
technical footwear, trail shoes,
casual shoes, waders and work boots
Hunting and Ammunition, archery items, ATV 65.6% 53.6%
Shooting accessories, blinds and tree stands,
decoys, firearms, reloading equipment
and shooting gear
Optics, Gift items, GPS devices, knives, 5.3% 7.0%
Electronics, lighting, optics (e.g. binoculars),
Accessories, and two-way radios, and other license
Other revenue, net of revenue discounts
Total 100.0% 100.0%
Thirteen Weeks Ended
Our hunting, camping, fishing, and optics, electronics, and accessories
departments saw increases of
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hunting, our firearm and ammunition categories saw increases of
With respect to same store sales, during the 13 weeks ended
Gross Profit. Gross profit increased to
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased by
Interest Expense. Interest expense decreased by
Income Taxes. We recognized an income tax benefit of
Seasonality
Due to consumers' holiday buying patterns and the openings of hunting season across the country, 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. We anticipate our net sales will continue to reflect this seasonal pattern.
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 clothing 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.
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Liquidity and Capital Resources
Our primary capital requirements are for seasonal working capital needs and capital expenditures related to opening new stores. 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. 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 13 weeks ended
Cash flows from operating, investing and financing activities are shown in the following table:
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