Q3 2019 Earnings Call
2019 earnings conference call at this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference.
Over to your host Rachel Schacter of I see our please go ahead.
Thank you with me on the call as Jon Parker, Chief Executive Officer, and Robert Julian Chief Financial Officer, before we get started I would like to remind you of the company's safe Harbor language.
Siemens we make today will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 90, 95, which includes statements regarding our expectations about our future results of operations demand for products and growth of our industry actual future results may differ materially from those suggested in such statements due to.
Number of risks and uncertainties, including those described under the caption risk factors in the Companys 10-K for the year ended February 2nd 2019, and the company's other filings made with the FCC. We will also disclose nongaap financial measures during today's call definitions of such non-GAAP measure.
Yours as well as reconciliations to the most directly comparable GAAP financial measures are provided a supplemental financial information in our press release included as exhibit 99.1 to the form 8-K, we furnished the FCC today, which is also available on the Investor Relations section of our web site at investors that sport.
Since warehouse dotcom now I'd like to turn the call over to John Berger, Chief Executive Officer of sports fans warehouse.
Thank you Rachel good afternoon, everyone and thank you for joining us today I'll begin by reviewing the highlights of our third quarter performance and then discuss our strategic initiatives that are driving market share gains as well as thoughts on the remainder of the fiscal year.
Robert will then go over our financial results in more detail and review our outlook after which we will open up the call to your questions.
We're very pleased with our third quarter results, which were at the high end of our guidance on the top and bottom line. Excluding the eight recently acquired stores that were not included in our original outlook.
For the quarter net sales increased 8.7% to $242.5 million driven by a 4.8% comp increase Andy and 11, new stores, including eight new stores acquired at the end of Q3.
These eight new stores were rebranded and Grand opened as sports brands warehouse locations in the last two weeks of Q3, the eight stores saw a nice grand opening sales lift, which also contributed to our non comp sales growth for the quarter comparable sales increased 4.8%, which came in ahead of our exit.
Dictation, partially due to an 80 basis point lift from generator sales in California, driven by devastating wildfires and related power outages. Our thoughts are with everyone impacted and we are grateful to the many first responders and our store associates, who helped with the recovery efforts.
Continued strong performance across our mature stores and E. Commerce platform. We're also notable comp drivers in the quarter gross margins were approximately flat with prior year period, including a modest benefit from sell through of lower cost inventory included as part of the acquisition of the eight.
Doors operating expenses were impacted by 130 basis points of de leverage largely attributed to Preopening and transaction expenses associated with the eight locations acquired this resulted in adjusted diluted earnings per share up 25 cents for Q3 inclusive.
Have a 1.5 cents headwind from the eight acquired stores.
Our strong Q3 results in industry outperformance are a testament to the teams disciplined execution of our growth strategies combined with our unique positioning within a consolidating industry, our focus and commitment to innovation across our business to drive customer acquisition and engagement is further differentiating us.
And the outdoor sporting goods industry, and helping to strengthen our competitive positioning I will now highlight a few of these strategies and the progress we made against them in the third quarter.
Beginning with our omni channel strategy, which includes our stores and E. Commerce platform, we continue to grow our store base and capitalize on the white space opportunity, we see for our flexible store formats as you're aware during the quarter, we announced and closed on the acquisition of eight new stores for a total purchase price.
Cost of approximately $29 million.
This was an opportunistic acquisition that allowed us to expand our store footprint in both existing and new markets, where we didn't already have a brick and mortar presence such as New York.
In Pennsylvania, these markets, where appealing given the well established customer foundation in each of these respective markets. The eight stores were converted to sportswear our stores and officially opened on October 19th with Grand openings at each on October 25 and 26.
The Grand opening celebrations were a great way to showcase our products and interact with new customers and each respective community.
In terms of unit economics. The eight acquired stores that are never are an average of approximately 50000 square feet, which is larger than.
And the average sports men's wearhouse stores, we expect them to generate double digit four wall EBITDA margins and at least 20% ROI see consistent with the traditional sports fans warehouse store hurdle rates. While these stores are still new we're pleased with or poor performance thus far.
Following a period of investment in our Omnichannel capabilities technology and debt reduction over the past two years. We are rich we're excited to return to anymore typical store growth pattern.
With the acquired stores, we've expanded our store base by 11 stores or 13.6% square foot in fiscal 2019 to date, which is up from five stores or 3.9% square foot in fiscal 2018, we have one additional store plan in the fourth quarter. This new store will be.
Our first store launch under a new brand legacy shooting center.
This new brand concept will allow us to test a small retail store as well as an indoor archery and firearms range appealing to a broad spectrum of shooting sports participants.
The legacy shooting center will be in the same physical structure as our new corporate office in West Jordan, Utah.
Touching briefly on our ecommerce performance, we continue to be very pleased with the traction we've seen from our new websites sportsman stock comp as well as improved digital capabilities, including BOPUS, which increased over 80% in the quarter versus prior year. In addition, we are moving from a test to rollout phase for.
Ship from store to home with 20 stores now utilizing this capability to improve transit time to our customers reduced transportation expense and increased leverage on our inventory, we will continue to grow and enhance these features and keep you updated.
On additional progress.
Next customer acquisition and engagement, we saw strong growth in our loyalty program. In Q3, we now have over 2 million members driving approximately 50% of our revenue.
As an extension of our loyalty programs during the quarter, we launched our new sports fans warehouse explore rewards visa card through a partnership with alliance data. This program provides greater access to credit for our customers and best in class benefits, including the ability to earn five points for every $1 spent and a sports.
As we are now store or online at sportsmen satcom.
Turning to merchandising during the third quarter. We continue continued to expand our exclusive product offerings, including a new hunting rifle package developed and launched with a supportive key brands and a well known influencer reception of this rifle by our customers has exceeded expectation providing a right.
To win with proving our right to win with an exclusive products as mentioned in Q2, the assortment expansion initiatives in our Killik marquee outerwear brand and focus on camouflage for the fall season supported an increase in apparel sales, which Robert will discuss in his section.
Shifting gears to our Q3 comp performance and the composition of our third quarter comparable sales results. In addition to the 80 basis point generator lift I mentioned mentioned earlier in my remarks firearms and ammunition sales increased 4.9% in Q3 2019.
Firearm units across the company again increased over prior year. This performance continues to be reflection of our dominant positioning within the firearms industry, leveraging our extensive offering and value added services, including SFL partnerships and use firearms.
These differentiators and our best in class shopping in store and online at sports fans dotcom are driving customer acquisition and engagement for the third quarter firearm units increased 3.9% driven by growth across a broad spectrum of firearms products.
In summary, we had a very strong third quarter and exceeded the midpoint of our guidance on both the top and bottom line.
We're very pleased with the momentum of the core sports fans business as we continue to make progress and on all of our growth initiatives.
They are underlying strength of our core business combines a successful completion of the eight new store acquisitions.
Further strengthens our competitive positioning and we remain focused on building on our share gains moving forward.
As you saw in our press release, we are increasing our full year guidance, which Robert will discuss in more detail.
We feel very good about our long term positioning, but there are large competitors currently deemphasizing, the hunting and shooting categories, creating short term sales headwinds, which are reflected in our guidance.
These changes in the competitive landscape are causing near term sales pressure as these retailers sell through inventory, however, given our growing brand and expanding reach through e-commerce and retail expansion. We are uniquely positioned to capitalize long term on the market share opportunities with that ill turn the call over to Robert.
To discuss our financials.
Thank you John .
I'll begin my remarks, with a review of our third quarter results and then discuss our outlook for Q4 in full year 2019.
Most of the financial figures discussed on todays call our reported on a us GAAP basis.
In the instances, where we reported non-GAAP financial measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures in our earnings press release, which we issued earlier today.
Also please note that both our reported and projected results include the impact of eight new stores that were opened for business for the final two weeks of Q3 2019.
Okay.
Third quarter 2019, net sales were $242.5 million compared to 223.1 million in the third quarter of fiscal year 2018, an increase of $19.4 million or 8.7%.
Same store sales increased 4.8%, which was above the high end of our previously guided range of 1.5% to 4.5% growth.
We saw same store sales growth in every one of our product categories in Q3 2019.
The fishing department had the highest growth rate at 9.0%.
Led by rods in Reals terminal tackle and wars.
The closing category grew 8.3% compared to prior year led by men's hunting apparel men's fishing apparel and men's sportswear.
The camping Department also showed strong growth at 6.8% led by generator sales.
Which was significantly impacted by the California fires in associated power outages.
Firearms and ammunition sales grew 4.9% in the quarter versus prior year.
We ended the quarter with 103 stores operating in 27 States total square footage growth was 13.6% compared to the third quarter fiscal year 2018.
Q3, 2019 gross profit was $84.2 million.
Compared to $77.6 million in the third quarter fiscal year 2018.
An increase of $6.6 million or 8.5%.
Gross margin was relatively flat at 34.7% versus 34.8% in the prior year period.
Gross margin in Q3 2019 included a lift of approximately 10 basis points due to the discount we received on the purchase of inventory, where we acquired the eight new stores.
Yes.
Seeing expense of $68.3 million for Q3, 2019 was an increase of $8.3 million or 13.8% compared to the third quarter of fiscal year 2018.
This includes $1.9 million of pre opening expenses and transaction costs related to the eight new stores that opened at the under the quarter.
We incurred additional payroll expense of $4.0 million, primarily due to minimum wage and benefit increases plus new store growth.
Rent expense increased approximately zero point $7 million.
Primarily due to new store openings.
Other operating expense increased approximately $1.6 million, primarily due to incremental marketing expenses and software support fees.
As a percentage of net sales SGN eight increase approximately 130 basis points from 26.9% to 28.2%. This includes an 80 basis point increase for pre opening expenses and transaction costs related to the opening of the eight new stores.
Income from operations was 15.9 million or in Q3, 2019, compared to 17.5 million in the third quarter of fiscal year 2018.
Q3, adjusted income from operations was 16.3 million.
Interest expense in Q3, 2019 was $2.1 million compared to 2.6 million in Q3 of the prior year, our reduction of zero point $5 million. This improvement as a result of lower total borrowings primarily attributable to our inventory reduction efforts.
We recorded income tax expense of $3.3 million in Q3, 2019, compared to 2.5 million last year.
Net income for the quarter was $10.5 million or 24 cents per share based on a weighted average share count of $43.2 million as compared to net income of $12.4 million or 29 cents per share based on a weighted average share count of 42.9 million last year.
Adjusted net income was $10.8 million are 25 cents per diluted share based on a diluted weighted average share count of 43.6 million in the third quarter 2019.
Compared to adjusted net income of $11.1 million or 26 cents per diluted share based on a diluted weighted average share kind of 43.1 million in the third quarter of last year.
Adjusted EBITDA for third quarter, 2019 was $23.2 million compared to $22.6 million in the prior year period.
Turning now this balance sheet Q3, 2019, ending inventory was $338 million as compared to 369 million at the end of third quarter of last year, a reduction of $31 million.
Our Q3, ending inventory balance includes approximately $20 million of inventory related to the acquisition of the eight new stores.
On a per store basis inventory was down 18.2% compared to last year.
We had $13.4 million of capital expenditures during the third quarter of 2019 compared to 6.3 million in the prior year period, an increase of $7.1 million.
This increase includes $5.3 million, our furniture fixtures and equipment acquired with the eight new stores. The remaining increase is primarily associated with the buildout of our new corporate headquarters for which we expect to enter into a sale leaseback arrangement by fiscal year end.
Q3 year to date 2019, operating cash flow was positive $57.9 million versus negative $14.4 million for Q3 year to date 2018.
This $72.3 million improvement in operating cash flow year over year is primarily due to tight working capital management of both inventory and payables.
Our liquidity remained strong is we ended the quarter with $131 million, an outstanding borrowings and approximately 79 $9 million availability under revolving credit facility.
The outstanding balance on our revolving credit line is $51 million lower at the end of Q3 2019 compared to the same period last year even.
Even while utilizing this facility to fund the acquisition of the eight new stores during the quarter.
The outstanding balance on our long term debt was $30 million at the end of Q3 2019 compared to 38 million in the same period last year, a reduction of $8 million.
Turning now to our outlook for Q4 in fiscal year 2019.
As you saw in our press release, we're revising our full year guidance to reflect our Q3 topline results, which came in at the high end of our guided range. The opening of eight new stores, which occurred at the end of Q3 and the impact of the short term competitive environment to John referenced earlier.
We now expect net sales in fiscal year 2019 of 891 million to $901 million in same store sales growth in the range of flat to positive 1.0% compared to fiscal year 2018.
We project 2019 adjusted earnings per diluted share of 55 cents to 61 cents on approximately 43.5 million diluted weighted average common shares outstanding.
Our outlook for the fourth quarter of 2019 is as follows.
Net sales in the range of 263 million to $273 million.
Same store sales growth of minus 1.52 positive, 1.5% compared to Q4 fiscal year 2018.
Adjusted net income in the range of 12.6 million to $15.3 million.
Adjusted diluted earnings per share of 29 cents to 35 cents on approximately 43.5 million diluted weighted average common shares outstanding.
We expect net capital expenditures of approximately $22 million to $25 million in fiscal year 2019, with approximately 30 $438 million in gross capital expenditures offset by $12 million to $13 million in landlord incentives and sale leaseback transactions.
With that I'll now turn the call back over to the operator for questions.
Thank you.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone Keith a.
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Your first question comes from line of Peter Keith with Piper Jaffray. Please proceed with your question.
Hi, good afternoon, everyone. Congrats on the nice results.
I guess it seemed like you gave us some quantification for the impact of the feeling stream acquisition in in Q3, which was about it.
That 1.9 million.
On expenses.
But then looking more towards Q4, where you're calling for little bit of comp and sales pressure, but.
That's a pretty healthy EPS it looks like there is pretty solid inflection and margin performance. So could you help us understand that the impact of the field <unk> stream stores on the model in Q4, if there is a big swing factor with better gross margins are better sales.
Hey, Peter it's John Good to talk to you Theres two things influencing the margin outlook in Q4, one as the inventory purchased with the eight acquired stores, we were able to purchase that at a.
At a discount to normal rates. The other thing that is critical to understand as we entered into Q4 holiday season of this year, we were better prepared than we've ever been on our marketing and our promotional cadence and we've stayed true to that.
And kept our margins very solid some of that came from first call up first cost of goods and rebate.
Negotiation some of stay with just a really clear marketing strategy and we expect to stay with that marketing strategy and stay rigorous on our margins in our profit to the remainder of the quarter. So those two things combined are driving the optimism and our margin outlook for Q4.
Very helpful and I guess on the as a follow up on that feeling stream.
Discounted inventory will you largely be sold through.
The majority of that by the end of Q4 or should we expect some carryover into 2020 as well.
Peter that carryover into 2025th fiscal 2020 will be minimal.
Okay and then.
Pivoting to different topic on the competitive landscape.
So we know Walmart has had a pretty high profile announcement about deemphasizing.
Ammo category.
Are you seeing some discounting of ammunition in in the channel and maybe Furthermore, I know you have stores that are right next to Walmart are you seeing any.
Sales benefits at this point.
From perhaps some market share gains.
Yes, so Peter good question as you know there's three major retailers in that are assessing or have clearly communicated their desire to limit hunting and shooting sports.
As you mentioned Walmart is exiting.
Categories around handgun ammunition and.
MSR, a our platform ammunition.
We saw a novel and mid November the pricing start to get more aggressive from those stores. We're now seeing a situation where it appears that they are dwindling through that inventory at a price point, that's very very promotional.
In our understanding is that the new receipts in Wal Marts have stopped so over the next few weeks, we expect to see that ammunition be sold through that's creating some I'll call. It near term pressure on ammunition pricing in that commodity class, which we are not chasing.
We are staying with our everyday low pricing in our traditional promotional cadence.
The exciting thing for us as we look forward to 2020 every one of our stores has at least one Wal Mart within 20 miles the average distances to eight miles and in some cases, probably about a dozen level, we actually share parking lot more than a couple of hundred yards. So while near term it is creating some.
The pressure on the sales for that for that category long term as they exit those categories, which we expect or somewhere between 250 at $300 million nationwide Theres, a nice market opportunity for us to go after.
Weve as you can imagine we've known for some time what's happening.
On that on their side of the business through their press releases and our work with vendors and we have already start to re forecast our inventory purchases to ensure that we maintain maintain our in stock positions and our margin positions in 2020.
Okay. That's very helpful interesting maybe one last question for me John You mentioned the credit card launched I.
I think it was in October .
The.
The benefits that are presented on the web site looks quite attractive from a points perspective in interest refinancing so curious on.
What the initial reaction is maybe it's a little early but this is the cards certain resonate with consumers at this point.
I can give you some color force as employment I'm prepared to give any data points, but what I can tell you Peter's the combination of that BC card and the in store credit.
Yes.
Created an acceptance rate for our consumers that weve never seen before with our prior our partners on the credit card. So order for in store. So as you know advanced Alliance data as the visa card for consumer is unable to qualify for the visa card we have an in stores fortunes warehouse credit.
Option thrilled that is backed by alliance data and what I can tell you at US the response rate from the consumers in the acceptance rate is significantly better than we've experienced with our prior card that we had in the past and really right on track with our expectations as presented through alliance data.
So we will will talk a little bit more about that.
At the end of the next earnings call I believe we launch that card out right around the first week of October so.
I have a few weeks in what we're really pleased with the progress.
Okay sounds good thank you and good luck.
Yes, Peter.
As a reminder, if you'd like to ask the question. Please press star one on your telephone keypad.
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Your next question comes from the line of Peter Benedict with Baird. Please proceed with your question.
Hey, guys.
Hi, Thanks for taking the request from here.
I apologize on Mr. For example, when you have.
Results for winter Fielding three revenue impact is in the fourth quarter plan and then as we seek to boot.
For Q.
EBIT margins.
Seems like compiled up maybe 75 basis points of so year over year.
How's the gross margin look we'll not on them or not just a yield of railcar what the consequence loosens Willdans group.
So Peter this is Robert.
Couple of comments.
In Q3, we have this part of our filings we have disclose that the field windstream stores contributed about $3.8 million.
Revenue in Q3, so we beat.
Q3 revenue by about seven and a half million dollarss.
Versus the midpoint of our guidance, let's say half of it was the feel midstream stores half of it was succeeding same store sales growth.
But that certainly higher than mid points and even higher than the top and by end of our range. We're not disclosing how much to field and stream stores are projected to impact Q4, we do not want to get into habit of.
Reporting specifically the growth of any new store opening the same way that we haven't provided specific sales.
Numbers for Lansing or.
Fort Wayne and insulin.
Although they're probably have some math you can do to triangulate, we did effectively reduce our same store sales growth outlook for Q4 in more or less.
We're sort of projecting the baseline business to be flat to two our outlook. The last time, we gave guidance. So you could probably triangulate something in there that the overall increases probably due to some new stores.
We haven't.
Provided more guidance in that specifically.
As it relates to gross margin it is true.
Did the discount in inventory that we received in this transaction has given a lift to margin in Q3 over that two week time period ahead about a 10 basis point impact I would say the projected impact in Q4 is roughly 80 basis points or so.
And so if you look at our gross margins that is the lift that you would see in Q4 relative to that discounting inventory, which we expect to be.
Sold out of Molino, primarily sold out of by the ended the quarter and as John said, probably will not impact our view Q1 margins.
Got it hopefully to answer your question.
Yeah, No now that that's great color.
Hello.
I guess.
Maybe I mean, those great software on a premium kind of Walmart normal.
Is there.
Right.
The other players who were stepping back.
Maybe the timing in the cadence of.
Maybe when those.
Those headwinds might.
Might fall off.
Peter you cut out a little bit there, but I think your question was the other retailers that are deemphasizing when that will happen is that is that accurate that your question. Yeah, just any color around what they're doing and then when you see those processes being.
Behind us.
I can tell you know looking at the promotional activity that's happening by the two other retailers that were referencing there is a significant effort to reduce inventory, which I I can only assume as part of a change in strategy in those categories. We do know that one of those two retail.
Sailors has announced that they will close somewhere between 20 and up to 35 of their stores because it does not fit their strategic assortment goals.
We know that serves.
Other folks that are deemphasizing, and we're seeing that in their promotional materials and our marketing.
We expect our we assume that a lot of that will flow throughs. During Q4, they're taking advantage of the sales cycle and the and the traffic onto moved through this excess inventory. So that's part of our reflection of Q4 guidance is what we're seeing a real time from those.
Retailers and we expect them to.
To be more normalized going into Q1 of 2020.
Okay. Thank you John then I guess my last question would just be.
Around.
Backlog there is only going all the above but more recently, we saw something in any one from last month was down a bit.
Oh your latest view, maybe on Homelink backdrop shacks.
In the industrial hall from that standpoint that yet yeah, Peter I think I again, sorry for the phone connection I'm not sure if Thats. Your me, but I think your question is around the kind of cadence of Nics checks I believe November adjusted net was mix was up 2.1%.
I can tell you that if you look state by state there was some significant changes this year state by state specifically in the state of Washington, There was legislation passed at the beginning of November 2018 that within enacted in mid 2019, if you look at the adjusted Nics data.
The state of Washington on adjusted Nics in November was down 43% in firearm units background checks. So we've seen some pretty significant volatility in November depending on which state you look at we've seen some other states that are up in the double digit range.
Our business continued to be solid we were pleased with our.
Same store unit expansion and.
Q3, and I can tell you we're very pleased with performance we saw over the key shopping holiday that we just went through.
Okay, great. Thanks, I apologize for the connection so no no no markets you're talking to Peter.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.
I want to thank everyone for their time today, a special thanks to all of our hard working team members, who contributed to our successful third quarter and are working diligently to serve our customers. During this holiday selling season. Thank you again for your time.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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