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 endedFebruary 1, 2020 . 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 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 inMidvale, Utah . Today, we operate 112 stores in 27 states, totaling approximately 4.4 million gross square feet. During fiscal year 2020 to date, we have opened six new stores, acquired four new store locations, and closed one store. We list the locations of our stores on our website, www.sportsmans.com. We also operate an e-commerce platform at www.sportsmans.com.
Our stores and our e-commerce platform are aggregated into one single operating and reportable segment.
Recent Developments
Acquisition of Two New Store Locations
InOctober 2020 , we closed the acquisition of the cash, inventory, furniture, fixtures, and equipment, and certain other assets related to two additionalField & Stream stores located inSouth Carolina andPennsylvania for a total aggregate purchase price of$2.0 million , which was funded through borrowings under our revolving credit facility.
Update on Impact of COVID-19 Pandemic
Since mid-March through the end of the third quarter of 2020, the Company has experienced a significant increase in sales. A larger than normal portion of those sales has come from certain product categories, particularly firearms and ammunition. As a result of the higher proportion of firearms and ammunition sales, our product mix during the three quarters of fiscal year 2020 has been impacted, which had a negative effect on our gross margin. The increased demand we have experienced sincemid-March 2020 resulted in our net sales increasing by 61.3% to$1,013.6 million during the 39 weeks endedOctober 31, 2020 compared to the corresponding period of fiscal year 2019. Within our net sales, our Hunting and Shooting category increased by 91.0% to$568.7 million in the three quarters of fiscal year 2020 compared to the three quarters of fiscal year 2019. Further, our same store sales increased 44.4% during the 39 weeks endedOctober 31, 2020 compared to the corresponding period of fiscal year 2019, with our hunting and shooting same store sales increasing 66.8%. Gross profit increased to$334.5 million during the 39 weeks endedOctober 31, 2020 compared to$211.6 million for the corresponding period of fiscal year 2019. As a percentage of net sales, gross profit decreased to 33.0% for the 39 weeks endedOctober 31, 2020 , compared to 33.7% for the corresponding period of fiscal year 2019 due in part to an increase in lower margin products, such as firearms and ammunition, in our product mix. As of the filing of this 10-Q, all of our 112 stores are open with no significant restrictions or limitations on their operations. Earlier this year, we were required to temporarily close four of our stores and significantly limit operations at eight other locations as a result of local and state regulations related to the COVID-19 pandemic. We have taken many actions and made numerous policy changes to adjust our operations in an effort to limit the spread of COVID-19, including requiring masks to be worn at our facilities, installing plastic barriers in stores, additional store and distribution center cleanings and implementing social distancing requirements, among others. Despite our efforts, we may be required to further restrict the operations of our stores and our distribution center if we deem this necessary or if recommended or mandated by authorities. 22 Table of Contents In addition, with respect to our supply chain, we continue to see some interruption with various vendors as a result of restrictions or limitations on their operations due to the pandemic. While our increase in sales shows a significant demand for firearms and ammunition during the pandemic that we believe is outpacing supply, we do not believe supply chain disruptions resulting from restrictions and limitations on supplier operations caused by the pandemic are resulting in significantly less supply and we are working closely with our vendors to limit such disruption. While we have experienced increased sales, especially in our hunting and shooting category, since the beginning of the COVID-19 pandemic, we cannot predict the future impact on us of the the COVID-19 outbreak. For instance, our financial results and operations would be significantly impacted if we were required or we deemed it appropriate to temporarily suspend or restrict the operations of a significant number of our stores. Further, the impact of the pandemic on the general economy could impact consumer behavior and dampen discretionary spending. The future impact of the COVID-19 pandemic will depend on a number of future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread and severity of the COVID-19 outbreak, the resurgence of COVID-19, the effects of the outbreak on our customers and vendors and the remedial actions and stimulus measures adopted by local and federal governments, including the potential temporary closing or restrictions on the operations of our stores. 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 endedFebruary 1, 2020 . 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.
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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 4%-6% 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.
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, 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. 24 Table of Contents 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." 25 Table of Contents 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 31, November 2, October 31, November 2, 2020 2019 2020 2019 Percentage of net sales: Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 66.1 65.3 67.0 66.3 Gross profit 33.9 34.7 33.0 33.7
Selling, general, and administrative expenses 23.9 28.2 24.8 30.5 Income from operations 10.0 6.5 8.2 3.2 Gain on bargain purchase (0.6) - (0.2) - Interest expense 0.1 0.9 0.3 1.0 Income before income taxes 10.5 5.6
8.1 2.2 Income tax expense 2.5 1.4 2.0 0.5 Net income 8.0% 4.2% 6.1% 1.7% Adjusted EBITDA 12.9% 9.6% 11.0% 6.3% The following table shows our sales during the periods presented by department: Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, November 2, October 31, November 2, Department Product Offerings 2020 2019 2020 2019 Camping Backpacks, camp essentials, 12.9% 14.9% 13.8% 15.5% canoes and kayaks, coolers, outdoor cooking equipment, sleeping bags, tents and tools Apparel Camouflage, jackets, hats, 8.6% 10.3% 6.5% 8.7% outerwear, sportswear, technical gear and work wear Fishing Bait, electronics, fishing rods, 7.8% 8.9% 11.5% 12.6% flotation items, fly fishing, lines, lures, reels, tackle and small boats Footwear Hiking boots, socks, sport 5.6% 7.5% 5.3% 7.4% sandals, technical footwear, trail shoes, casual shoes, waders and work boots
Hunting and Shooting Ammunition, archery items, ATV 57.4% 48.5% 56.3% 47.4% accessories, blinds and tree stands, decoys, firearms, reloading equipment and shooting gear Optics, Electronics, Gift items, GPS devices, knives, 7.7%
9.9% 6.6% 8.4% Accessories, and lighting, optics, two-way Other radios, and other license revenue, net of revenue discounts Total 100.0% 100.0% 100.0% 100.0%
Thirteen Weeks Ended
Net Sales . Net sales increased by$143.2 million , or 59.1%, to$385.7 million during the 13 weeks endedOctober 31, 2020 compared to$242.5 million in the corresponding period of fiscal year 2019. Our net sales increased due to a variety of reasons including; increased demand driven by the exit of competitors and market share gains due to increase participation in outdoor activities, increased demand through our e-commerce platform, demand driven by the change in consumer behavior associated with the COVID-19 pandemic, and increased demand due to the presidential election and social unrest. Stores that were opened in fiscal year 2020 and stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed$52.5 million to net sales. Same store sales increased by 41.0% for the 13 weeks endedOctober 31, 2020 compared to the comparable 13 week period of fiscal year 2019, 26
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primarily driven by increases in our hunting and shooting department due to the drivers of increased demand discussed above.
All of our departments had increases in net sales for the 13 weeks endedOctober 31, 2020 compared to the corresponding period in fiscal year 2019, led by our hunting and shooting department with an increase in net sales of$104.2 million , or 88.7%. Our camping, fishing, apparel, footwear and optics, electronics, and accessories departments saw increases of$12.8 million ,$8.4 million ,$8.4 million ,$3.2 million and$8.2 million , respectively, in the third quarter of fiscal year 2020 compared to the comparable 13-week period of fiscal year 2019 due to increased traffic within our stores and online. Within hunting, our firearm and ammunition categories saw increases of$52.8 million or 130.7% and$27.1 million or 77.8%, respectively, in the third quarter of fiscal year 2020 compared to the comparable 13-week period of fiscal year 2019, which increases resulted from the drivers of increased demand discussed above. Each of our departments also had increases in same store sales, for the 13 weeks endedOctober 31, 2020 , again led by our hunting and shooting department, with an increase of 61.4%. Our camping, fishing, apparel, footwear, and optics, electronics and accessories departments had increases of 25.9%, 24.8%, 18.6%, 8.3%, and 26.4%, respectively, for the third quarter of fiscal year 2020 compared to the comparable 13-week period of fiscal year 2019. As ofOctober 31, 2020 , we had 94 stores included in our same store sales calculation. Gross Profit. Gross profit increased to$130.6 million during the 13 weeks endedOctober 31, 2020 compared to$84.2 million for the corresponding period of fiscal year 2019 primarily as a result of increased sales. As a percentage of net sales, gross profit decreased to 33.9% for the 13 weeks endedOctober 31, 2020 , compared to 34.7% for the corresponding period of fiscal year 2019 due to the change in product mix in the quarter as a result of the majority of revenue being generated from lower margin categories such as firearms and ammunition and a channel mix shift to higher e-commerce driven sales causing increased freight costs. The gross margin decline was partially offset by higher product margins, volume incentives, and other adjustments, which positively impacted gross margin. We expect a continued higher than normal proportion of revenue to come from firearms and ammunition, and a higher volume of sales to be conducted through our e-commerce platform. Both of these factors will continue to put pressure on gross margin partially offset by improved product margins. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased by$23.9 million , or 35.0%, to$92.2 million during the 13 weeks endedOctober 31, 2020 from$68.3 million for the comparable 13-week period of fiscal year 2019. This increase was primarily due to an increase in our payroll expense of$14.3 million , which mostly resulted from the opening of 10 new stores since the end of the third quarter of fiscal year 2019, minimum wage increases impacting 62 of our stores in fiscal year 2020 and the payment of$2.0 million in hazard pay. We also had increases in other selling, general, and administration expenses, rent, and depreciation of$7.3 million due to increased credit card fees,$2.4 million , and$0.5 million , respectively, during the 13 weeks endedOctober 31, 2020 primarily related to the opening of 10 new stores sinceNovember 2, 2019 . These increases were partially offset by a reduction in pre-opening expenses of$0.5 million during the 13 weeks endedOctober 31, 2020 . As a percentage of net sales, selling, general, and administrative expenses decreased to 23.9% of net sales in the third quarter of fiscal year 2020, compared to 28.2% of net sales in the third quarter of fiscal year 2019, primarily as a result of the significant increase in net sales we experienced in the third quarter of fiscal year 2020 compared to the third quarter of fiscal year 2019. Interest Expense. Interest expense decreased by$1.6 million , or 74.4%, to$0.5 million during the 13 weeks endedOctober 31, 2020 from$2.1 million for the comparable 13-week period of fiscal year 2019. Interest expense decreased primarily as a result of a lower debt balance during the third quarter of fiscal year 2020 compared to the third quarter of fiscal year 2019. The outstanding principal amount of our term loan has decreased from$30.0 million as ofNovember 2, 2019 to$8.0 million as ofOctober 31, 2020 , which reflects a$2.0 million repayment during the third quarter of fiscal year 2020, and we had outstanding borrowings under our revolving credit facility of$130.8 million as ofNovember 2, 2019 compared to no borrowings as ofOctober 31, 2020 . Income Taxes. We recognized income tax expense of$9.5 million and$3.3 million during the 13 weeks endedOctober 31, 2020 andNovember 2, 2019 , respectively. Our effective tax rate for the 13 weeks endedOctober 31, 2020 andNovember 2, 2019 was 23.8% and 23.9%, 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. 27 Table of Contents
Thirty-Nine Weeks Ended
Net Sales . Net sales increased by$385.3 million , or 61.3%, to$ 1,013.6 million during the 39 weeks endedOctober 31, 2020 compared to$628.3 million in the corresponding period of fiscal year 2019. Our net sales increased due to a variety of reasons including: increased demand driven by the exit of competitors and market share gains due to increase participation in outdoor activities, increased demand through our e-commerce platform, demand driven by the change in consumer behavior associated with the COVID-19 pandemic, and increased demand due to the presidential election. Stores that were opened in fiscal year 2020 and stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed$120.4 million to net sales. Same store sales also increased by 44.4% for the 39 weeks endedOctober 31, 2020 compared to the comparable 39 week period of fiscal year 2019, primarily driven by increases in our hunting and shooting department due to the drivers of increased demand discussed above. All of our departments had increases in net sales for the 39 weeks endedOctober 31, 2020 compared to the corresponding period in fiscal year 2019, led by our hunting and shooting department with an increase in net sales of$270.9 million , or 91.0%. Our camping, fishing, apparel, footwear, and optics, electronics, and accessories departments also had increases in net sales of$42.5 million ,$36.2 million ,$11.1 million ,$7.5 million and$16.9 million , respectively, in the 39 weeks endedOctober 31, 2020 compared to the comparable 39-week period of fiscal year 2019 due to increased traffic within our stores and online. Within hunting, our firearm and ammunition categories saw increases of$135.5 million , or 121.7%, and$84.3 million , or 92.6%, respectively, in the 39 weeks endedOctober 31, 2020 compared to the comparable 39-week period of fiscal year 2019, which increases resulted from the drivers of increased demand discussed above. Each of our departments had increases in same store sales for the 39 weeks endedOctober 31, 2020 compared to the corresponding period in fiscal year 2019, led by our hunting and shooting department with an increase in same store sales of 66.8%. Our camping, fishing, optics, electronics and accessories, footwear, and apparel departments had increases in same store sales of 32.0%, 29.7%, 24.6%, 6.8%, and 5.5% respectively, for the 39-weeks endedOctober 31, 2020 compared to the comparable 39-week period of fiscal year 2019. As ofOctober 31, 2020 , we had 94 stores included in our same store sales calculation. Gross Profit. Gross profit increased to$334.5 million during the 39 weeks endedOctober 31, 2020 compared to$211.6 million for the corresponding period of fiscal year 2019. As a percentage of net sales, gross profit decreased to 33.0% for the 39 weeks endedOctober 31, 2020 , compared to 33.7% for the corresponding period of fiscal year 2019 due to the change in product mix in the quarter as a result of the majority of revenue being generated from lower margin categories such as firearms and ammunition and a channel mix shift to higher e-commerce driven sales causing increased freight costs. The gross margin decline was partially offset by higher product margins, volume incentives, and other adjustments, which positively impacted gross margin. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased by$59.8 million , or 31.2%, to$251.1 million during the 39 weeks endedOctober 31, 2020 from$191.3 million for the comparable 39-week period of fiscal year 2019. This increase was primarily due to an increase in our payroll expense of$34.4 million , which mostly resulted from the opening of 10 new stores since the end of the third quarter of fiscal year 2019, minimum wage increases impacting 62 of our stores in fiscal year 2020 and the payment of$4.6 million in hazard pay. We also had increases in other selling, general, and administration expenses, rent, and depreciation of$16.6 million due to increased credit card fees,$6.8 million , and$2.7 million , which includes$0.8 million of asset write-offs relating to the closing of one store during the first quarter, respectively, primarily related to the opening of 10 new stores sinceNovember 2, 2019 . As a percentage of net sales, selling, general, and administrative expenses decreased to 24.8% of net sales in the three quarters of fiscal year 2020, compared to 30.5% of net sales in the three quarters of fiscal year 2019, primarily as a result of the significant increase in net sales we experienced in the 39 weeks endedOctober 31, 2020 compared to the corresponding period in fiscal year 2019. Interest Expense. Interest expense decreased by$3.6 million , or 52.9%, to$3.0 million during the 39 weeks endedOctober 31, 2020 from$6.6 million for the comparable 39-week period of fiscal year 2019. Interest expense decreased primarily as a result of our lower debt balances during the 39 weeks endedOctober 31, 2020 compared to the corresponding period of fiscal year 2020 as noted above.
Income Taxes. We recognized an income tax expense of
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and
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 2020 because of the significant spike in sales in the first three quarters of fiscal year 2020 as a result of the increased demand during the COVID-19 pandemic and other factors noted above.
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 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 39 weeks endedOctober 31, 2020 , we incurred approximately$15.4 million in capital expenditures primarily related to the opening of new stores during the period. We expect total net capital expenditures between$17.0 million and$19.0 million for fiscal year 2020. 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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