Don’t Worry; Sportsman’s Warehouse Will Get Cheaper

Key Points

• Sportsman's Warehouse had a tough quarter and issued weak guidance. 
• Inflation and fear of recession are cutting into top-line results. 
• Plans to control costs will help make the fear of recession a self-fulfilling prophecy. 

If you are interested in Sportsman’s Warehouse NASDAQ: SPWH, there are good reason’s to be. The company is well-positioned in the outdoor recreation market and on track for long-term growth. Today's trouble is related to the broader economy, not the company’s operational quality, so this is a buying opportunity. The question is how far SPWH shares can fall, and it looks like it could be quite a bit. Not only are headwinds persisting in Q2, but the company’s efforts to combat the headwinds will only make them stronger. 

Other than the weather, which can not be controlled, the issues are inflation and the looming recession. The company calls out inflation and fear of recession as a detractor to top-line results and profitability. To combat these issues, the company will improve efficiency and cost control, which means less spending and the possibility of layoffs. Looking at the issue if weak consumer spending from the big-picture perspective, another company spending less and laying off workers will increase fear, hasten the onset of a recession, and make the recession a self-fulfilling prophecy.

Sportsman’s Warehouse Invests In Growth 

Sportsman’s Warehouse had a tough quarter but is still planning to invest in the business and open new stores. The results are mixed; the revenue of $267.5 million fell 13.6% compared to last year but beat the Marketbeat.com consensus estimates by 300 basis points. The decline was driven by a 17.8% decrease in comp sales offset by adding new stores. The worst news is that the margin contracted at the gross and operating levels. The gross margin contracted by 210 bps, and SG&A increased by 600 to leave adjusted EBITDA in negative territory. The adjusted EPS of -$0.39 reversed a profit in the prior year and missed by $0.02 despite the top-line strength. 

The guidance is mixed and negative but not to the point of a share-price implosion. The company expects to see a sequential improvement in revenue and margin, with the range for both bracketing the consensus. The detail weighing on the market is that the midpoint of the range is below the consensus and leaves a wide margin for underperformance. 

The company doesn’t pay a dividend, so there is no risk in that regard, but it does buy back shares. The net outflow left the company in a weakened but not weak position, with net debt of $147 million and total liquidity near $150. The risk in the near term is that repurchases will slow or cease until cash flow improves, and the debt may increase as well. 

The Analysts Lower Their Targets 

There is not a lot of analyst activity in SPWH shares, and what there is has not been bullish, but there is a takeaway from the data that will help the market to bottom. The 5 analysts with ratings on the stock rate it a Hold, down from Moderate Buy, and they see an upside relative to the current price action. The consensus target is nearly $10 or about 95% above the price action, but this is a high target.

The more recent targets are well below it, and the single target posted since the Q1 release is a reduction. However, even the newest target, the new low price target, assumes about 50% of upside from the post-release action. This activity may weigh on the price action in the near term but should also help provide a softer landing than it may otherwise experience. 

The only thing good about the chart is that the stock is oversold. This will help it to bottom when it reaches critical support levels, which may be near the $4.00 level. The stock could fall lower if this price point, or a higher 1, doesn’t produce a solid bounce. In that scenario, a move into the penny stock range is possible.