Sportsman's Warehouse Q2 2024 Earnings Call Transcript

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Provided by Quartr
September 6, 2023

There are 7 speakers on the call.

Operator

Welcome to Sportsbids Warehouse Second 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. Please note this conference is being recorded. I will now turn the conference over to Riley Timmer, Vice President, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

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 for the company's safe harbor language. The statements we make today contain forward looking statements within the meaning 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 ks and the company's other filings made with the SEC.

Speaker 1

We 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 ks we furnished to the SEC I'll now turn the call over to Joe.

Speaker 2

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 where the leadership team and I have been focused, then review our 2nd 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.

Speaker 2

The search committee Continues to filter candidates and the Board is expecting to fill the position soon. We'll keep you posted. Frankly, the 2nd 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 Q2 last year.

Speaker 2

In addition, adjusted EBITDA was 4.2 Which is down from 8.7% versus last year. In the quarter, we saw a Deterioration in revenue as we did not see store traffic improve from the Q1 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 unseasonable 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 omni channel business when e commerce continued to outpace The performance of our stores.

Speaker 2

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, Omni Channel and E Commerce and operating expense CapEx. We quickly reviewed these 4 key areas and a result of the performance took Immediate action to address the following: steps to reduce our total inventory and have Identify 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 new stores openings and other capital spend. These aggressive actions we are taking to reduce inventory, combined with increasing store traffic through short term focused promotions and markdowns will further reduce gross margins during the back half of this year.

Speaker 2

In addition, we will continue to streamline our expense structure and focus our debt pay down. So we are well poised to start fiscal 2024 in 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 and 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.

Speaker 2

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 profitability. I'm very confident in the team, the adjustments we have made and 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. Thank you, Joe.

Speaker 2

I'll begin my remarks today with a review of our second Quarter fiscal 2023 financial results, then cover our outlook for the Q3 of 2023. Net sales for the Q2 of fiscal 2023 were $309,500,000 compared to $351,000,000 in the Q2 of 2022. Same store sales decreased 16.1% compared to the Q2 of 2022. In looking at comparable sales by department, first, our hunting department 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.

Speaker 2

In last year's Q2, there was a significant pull forward of demand as we started to return to normal in stocks on key ammo calibers. These calibers have been very challenging to procure over the prior 2 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 was 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.

Speaker 2

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 2nd quarter. However, we saw month over month Improvements in comparable store sales through the end of the quarter and into the beginning of Q3. During the Q2, we also experienced softness in our apparel, camping and footwear departments as pressures on consumer discretionary spend continues to weigh heavily on these categories.

Speaker 2

These categories were down 20.7%, 19.4% 13.8%, respectively, on a comparable basis. 2nd quarter gross margin was 32 point 6% for the quarter versus 33.5% in the prior year comparable period. This decrease as a percentage of sales was due to increased promotional and reduced product margins on ammunition. SG and A expense as a percentage of net sales was 33.1% compared with 27.6% in the Q2 of last year. This increase was primarily driven by increases in total rent, depreciation and new store opening expenses.

Speaker 2

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 per store basis, payroll was down about 11% versus last year and other operating expenses were down approximately 8%. Net loss for the 2nd quarter was $3,300,000 or negative $0.09 per diluted share compared to net income of $14,600,000 or $0.35 per diluted share in the prior year period. Adjusted net loss in the Q2 of 2023 was $1,600,000 or negative $0.04 per diluted share compared to adjusted net income of $15,100,000 or $0.36 per diluted share in the Q2 of the prior year. Adjusted EBITDA for the 2nd quarter was $13,100,000 or 4.2 percent of net sales compared to $30,600,000 or 8.7 percent of net sales in the prior year period.

Speaker 2

Turning to our balance sheet and liquidity. 2nd quarter ending inventory was $457,200,000 compared to $437,400,000 at the end of the Q2 of 2022. On a per store basis, inventory was down nearly 6% versus last year's Q2 and just over 5% compared with Q1 2023. As Joe discussed, we will move swiftly with a greater velocity of promotions and markdowns to lower our total inventory levels and drive more traffic to our stores. Looking at cash flow for the first half of twenty twenty three.

Speaker 2

Cash used in operating activities was $58,300,000 versus cash provided by operating activities of $8,000,000 for the 1st 6 months of 2022. The increase in our cash outflows was primarily due to the additional inventory for our 14 new stores and a net loss in the first half of this year compared to net income during the prior year 6 month period. Regarding liquidity, we ended the second With $203,100,000 outstanding on our line of credit and $2,900,000 of cash on hand. We have approximately $96,000,000 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 levels, complete construction on our final two new stores and reduce our operating costs, freeing up excess cash for debt pay down.

Speaker 2

During the Q2, we bought back about 430,000 shares under our current buyback program for an investment of $2,100,000 At the end of the quarter, we have approximately $7,500,000 remaining under the authorized share repurchase program and will 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 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 leaner and more efficient. We anticipate these ongoing efforts will yield up to $25,000,000 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.

Speaker 2

Availability is at an all time low, making it more difficult for us to find real estate in markets where we have the right to win and ensure achievement of our new store financial hurdles. As such, we expect the number of new stores we will open in 2024 to be significantly fewer than 2023 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 twenty twenty three than we have historically been.

Speaker 2

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 Q3 guidance. We expect net sales to be in the range of $310,000,000 to $330,000,000 We expect that our promotional activity during the quarter will impact gross margins between 250 and 350 basis points versus prior year. Same store sales in the 3rd quarter are anticipated to be in the range of down 19% to down 14% and adjusted EPS for the Q3 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.

Speaker 2

This reduction in gross margins will be partially offset as we continue to implement our cost savings That concludes our prepared remarks today. I will now turn the call back over

Operator

A confirmation tone will indicate your line is in the question And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Ryan Sigdahl with Craig Hallum Capital Group. Please proceed.

Speaker 2

Good afternoon, guys. I want to start with

Speaker 3

kind of guidance or the current Q3 Quarter to date, are you seeing any specific categories that you're planning to increase promotions and discounts? Or is that generally across the entire business and company?

Speaker 2

Hey, Ryan, it's Jeff. Great question. As we look into the Q3 guidance, the main areas you're going to see us be more promotional in than we Have historically been is going to be in the apparel and footwear 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.

Speaker 3

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?

Speaker 2

There's going to be normal promotions throughout other categories. Within hunting, you're going to see us A little more promotional in the bow category, but that's a very small portion of the overall hunting business, but everything else you should see a normal cadence throughout The back half of the year in terms of promotional activity.

Operator

Great.

Speaker 3

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 8% to 10 And 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?

Speaker 2

Yes. As we look at the margin 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 to normal behavior, I see gross margins and 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.

Speaker 3

Great. Thanks, guys.

Operator

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

Speaker 4

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 completely in the back half of this year?

Speaker 4

Or are there some categories, some products that Seasonally, you'll have to carry into next year before you can really start promoting those, and so there might be some margin impact next year as well.

Speaker 2

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 cadences of flowing goods in and out of the stores. And Eric, this is Joe. As we mentioned, we brought in a seasoned 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 corrective action and getting back on track.

Speaker 4

Okay. And then on the store growth Planned changes. I mean, you threw out a lot of things between kind of the current economic climate, what you're seeing with your customer base, The inability to maybe find real estate that fits your goals, your return goals, also desire to pay down debt and focus cash flow 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 sheet, sort of focus on preserving cash flow, getting back to normalized position versus has anything changed In your view longer term around the strength of certain categories, you've seen something with recent store openings that Hasn't been working that makes you rethink just kind of even longer term plans or is it really more all kind of short term Economic balance sheet related versus a long term strategy shift?

Speaker 2

Yes, Eric, that's a great question. This is Jeff. Long term strategy for sportsmen, we still see immense amount of white space and expansion opportunities for Sportsman to continue to take market share. We continue to see retraction from our competition in our core categories. So as we look at the 2024 real estate plan, I would frame it up that this is a short term pause on what We're doing in terms of making sure our balance sheet is healthy as we then start to focus more on long term growth objectives.

Speaker 2

Got it. Thank you. Appreciate it.

Operator

Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed.

Speaker 5

Hi, guys. First off, for me, just want to clarify and ask, stores opened during the quarter, maybe what's opened since the quarter ended and kind of where the store count And I think, Jeff, you said you've got 2 more to go, but any additional numbers you can give us on that?

Speaker 2

Yes, Mark, great question. So As we sit here today, we have opened 13 of the 15 that we had planned for the year. So we have 2 more stores remaining to open. 1 of them will open in mid September. The other one will open more towards mid November.

Speaker 2

Perfect.

Speaker 5

And then I want to dig in just to the ammo space a little bit. I think you said that was down 30% on a Comp basis, what are your thoughts around that segment? I know in the past you guys have talked about ammo being kind of like the milk at the grocery store. Yes. There are things you can do to drive additional sales there as we've seen inventory come back up?

Speaker 5

Or is there a hesitancy to get you don't want to Overly promotional, maybe walk through your thoughts on that segment.

Speaker 2

Yes, Mark, that's a great question. I think it's a fine balance. We have to make sure we stay competitive in the market and look at the pricing that we're seeing across our competitive landscape. And to your point, we also need to use it to drive traffic into our stores. So as we think about the go forward, I expect that we're going to continue to see pressures similar to what we saw during Q2.

Speaker 2

We highlighted that that was the number one cause of margin degradation in Q2 as we looked at the comp sales on a year over year basis. So I don't think that that's going to stop, especially in the consumer environment we're in today, where people are really stretching every single dollar that they have.

Speaker 5

Okay. And then as we think about the larger hunt shoot kind of category, We're still early into kind of fall and some early hunting seasons, but any additional thoughts around demand, what you're seeing from these consumers, Even license data, kind of anything that you can give us for outlook as you guys think about This really important fall hunting seasons and then moving into the holidays.

Speaker 2

Yes. As we look at Q3 guidance, I'll tell you one thing we considered is the while there is still people participating in hunting and buying hunting licenses. Where we're seeing hesitation is the upgrading of their equipment or purchasing new equipment. So the individual that's going out to hunt Is making their rifle last another year. They're extending the life of their hunting boots.

Speaker 2

They're not buying a new backpack to go in the backcountry. So while the consumer is pressured, I think that trend continues. Once the consumer gets healthier, I think we start seeing the refresh or the upgrade cycle start again, but when that happens, I think is anyone's best guess.

Speaker 5

Okay. And then maybe last question for me is, as we think about getting more Promotional here over the next quarter or 2 and a lot of this being focused within apparel and footwear. Can you talk about using being promotional around your private label Brands versus international brands?

Speaker 2

Yes. Our promotions will be more focused on the national brands. Our private label brands were able to manage very closely and make sure that we're still hitting the sell through and margin targets on those. So You'll see the promotional activities more centered towards national brands. Great.

Speaker 2

Thank you.

Operator

Our next question is from Justin Klaper with Robert W. Baird. Please proceed.

Speaker 6

Yes, good afternoon, everyone. Thanks for taking the question. So first, just a clarification on the store traffic comment. Did store traffic get worse on a same store basis relative to 1Q or did it just not improve as you had anticipated?

Speaker 2

Great question, Justin. It did not improve as we anticipated. So traffic stayed Very flat to what we saw in terms of trends in Q1, and we just did not see the increase that we were expecting in Q2 to see.

Speaker 6

Got it. Okay. And Jeff, on the $25,000,000 in annualized cost savings that you cited, how much of that do you anticipate Realizing this year and can you talk about the buckets, the bigger buckets where you're sourcing these savings from?

Speaker 2

Yes. The biggest bucket that we have in there, Justin, is going to be in the labor pool. So that's going to be an immediate savings that you recognize as you reduce your labor pool. And so we could we will start to see that flow through in the back half. In terms of other expense cuts, We're looking at contracts.

Speaker 2

We're looking at any discretionary spend. Those types of things are going to

Speaker 1

take a little longer to

Speaker 2

make sure that they come to fruition as we exit contracts reevaluate contracts and do those renegotiations. But I would say to frame that up, the biggest portion of the expense cuts are going to be in the labor pool.

Speaker 6

Okay. And then Jeff, you mentioned the payroll, I think, per store was down 11%. How much room do you have So the cut before you reach what I assume is some level of minimum staffing in stores?

Speaker 2

Yes, this is Joe. And one thing we don't want to do and we're very driven is we've got to continue to delight the customer and that customer experience and having an emotional attachment with Sportsman's Warehouse. So it's a little bit fluid on how much more we can do. We believe what we have done is taken the corrective action, where the difference between a need and a want. But again, The part that we do not want to cut is where we're disappointing our customer.

Speaker 6

Yes. That makes sense. Last question for me guys, just on CapEx. You spent 52,000,000 Year to date, I think your original guidance was $48,000,000 to $56,000,000 if I go back to the Q4. So you're already within that range.

Speaker 6

I guess, is that still the right range for CapEx? It's really going to slow that materially over the back half of the year? Or should we be thinking about a higher number relative to that initial plan? Thank you.

Speaker 2

Yes, Justin, great question. One little nuance on that. So on the cash flow in that section, it's showing 52. We have landlord Payments that we've received for TI dollars that actually show up in operations. So the guidance that we're giving is on a net basis, net of those landlord allowances.

Speaker 2

So the guidance that we gave in the in our CapEx guidance would take that into consideration. That's going to be the difference that you have. So I am still comfortable with the range that we've given.

Speaker 6

Got it. Thanks for that clarification, Jeff. Best of luck in the next quarter.

Speaker 1

Thanks, Justin. Thanks.

Operator

We now have a follow-up question from Eric Wold with B. Riley Securities. Please proceed.

Speaker 4

Thanks. Just a follow-up question. I know it's always difficult to compare Sportsman's to other Outdoor or kind of activity retailers given the product mix, merchandise mix differences, especially around hunting and ammo. But given kind of the comp trends and traffic trends you're seeing, anything you can read into The demographic profile that you're reaching that's different from others or something that you're seeing different in your regions that may be different others or

Speaker 2

Maybe some of

Speaker 4

you can point to that maybe why the trends you're seeing are maybe on the worse side comparatively.

Speaker 2

Eric, great question. I think a big contributor there is the average Income portfolio of our customer versus some of the other public companies that you've seen go out. I would say that our Average customer trends to be at a lower average income versus some of the public company comparables. That's significantly going to impact Their ability for discretionary spend, which is really what Sportsman is heavily penetrated in when you look at what we sell inside our store versus some of those other comparable public companies that have similar products, but it makes up a much smaller portion of their business. Helpful.

Speaker 2

Thank you. Yes. And Eric, to that end, We're really working very hard, a, getting more bodies through the door and then being productive with those Consumers that come through the doors, we've in some of the stores, we've done seasonal pads of Assortment, we have more refined regional assortment. So we're really working hard on Delighting the customer once they're in the door and capitalizing once we have them within the 4 walls. Perfect.

Speaker 2

Thank you both.

Operator

We have reached the end of our question and answer session. I would like

Speaker 2

Thank you for joining the call today, and thank you to all our dedicated employees around the country for their commitment to Sportsman's Warehouse. Together, we look forward to providing our customers with the best experience and customer service in the outdoor industry. Again, thank you.

Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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