Q1 2021 Sportsmans Warehouse Holdings Inc Earnings Call

June 4, 2020

[music].

Greetings and welcome to the sportsmen warehouse first quarter 2020 earnings conference call.

Yes, Hi, all participants are not listen only mode.

A question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

I would now like to turn the conference over to keep on how.

Relations. Thank you please begin.

Thank you with me on the call today is Jon Parker, Chief Executive Officer, and Robert Julian Chief Financial Officer Sports Men's Wearhouse.

Before we get started I'd like to remind you of the company Safe Harbor language. The statements. We make today will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Which includes statements regarding our expectations about future results of operations demand for our products and growth of our industry.

Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described under the caption risk factors and the company 10-K for the year ended February 1st 2020, and the company's other filings made with the FCC.

We will also disclosed non-GAAP financial measures during today's call definitions of such non-GAAP measures as well as reconciliation. The most directly comparable GAAP financial measures are provided a supplemental financial information in our press release included has exhibit 99.1 to the four.

8-K, we furnished to the FCC today, which is also available on the Investor relations sections of <unk> section of our website at sports fans Dot com.

Also like to know that today's materials, including earnings conference call Powerpoint presentation, which is available at four times Dot com any investor Relations section of the website you can utilize this DAP to follow along with today's prepared remarks.

No I would now like to turn the call over to John Barker, Chief Executive Officer at Sports Men's Wearhouse, John. Thank you take one good afternoon, everyone and thank you for joining US today I Hope you and your families are safe and healthy during these challenging time.

I will begin my remarks by addressing the coldest 19 situation as it pertains to sports men's Wearhouse I will then discuss key metrics from the first quarter and will also provide updates on our omni channel growth strategy.

Robert will then provide his summary of our Q1 2020 financial results as well as some commentary on full year 2025.

Finally, we will open up the call for questions.

I'm now on slide four of the Investor presentation, and will address the cobot 19 situation. While the last few months have been challenging for many retailers. We have been fortunate to keep the majority of our stores open throughout the crisis I could not be prouder of this portions warehouse team and navigating both the global.

Pandemic and the surge in our business during this time.

While remaining open.

We have taken many steps to help protect the health and safety of our associates customers and their families, including additional cleaning and sanitizing plastic barriers that registers and face masks for associates. We've also leveraged our E commerce capabilities like ship to home and BOPUS and use there.

Oh platform recently launched curbside pickup, which allows us to sort of customers, while limiting person to person contact.

With respect to cobot, 19th impact on our supply chain, we did see some interruption in Q1 with products sourced from China, primarily related to camping and fishing.

China related interruption has largely subsided however, as the disruption to our supply chain due to cobot 19 has continued into the second quarter within certain pockets of our business.

This disruption has been compounded by surging demand, creating shortages in firearms ammunition and fishing.

Our merchandising and demand planning teams continue to do an exceptional job of working with our vendors to limit the disruption.

Well, we've seen significant increases in sales to date, there is tremendous uncertainty and variability in the economic environment. Therefore, we will not be providing forward guidance today, given the uncertainty surrounding cobot 19, we will continue to invest in our frontline associates and their safety.

Additionally, we will remain financially disciplined as we limit discretionary expenses reduced our debt load and preserve our our liquidity to effectively navigate these uncertain times.

Im now on slide five the surgeon demand resulted in very favorable financial results in the first quarter of 2020 net sales were 247 million an increase of 42% year over year. We believe the exceptional demand to date is driven by multiple factors, including that cobot.

19 situation.

Exit the exit of competitors and our core categories and the current collection cycle. However, parsing out the exact contribution of each factor is not possible.

Same store sales for Q1 increased 28.6%.

Fire App firearms, and ammunition were up 65, and 90% respectively, while nics checks were up 56% for the quarter.

Our sales increased significantly exceeded the nics checks, which gives us confidence that we're not only growing sales, but we are continuing to take market share in our core categories.

Additionally, during the Q1 surge in demand many customers entered our stores or ordered from our website for the very first time.

This gives us the opportunity to expose newcomers to sports men's wearhouse brand and to our extensive product offering.

We believe this bodes well for developing repeat customers by reengaging across new categories building, our loyalty program and customer days database and ultimately growing our business.

In contrast to firearms and ammunition apparel and footwear were down materially in the first quarter. During the height of the cobot 19 crisis in Q1 customers, what I referred to as questing, they were far less likely to browse browse the store and others and as a result, we did not experience the traditional sales mix.

Cross category.

The combination of surging demand for firearms and ammunition and soft sales in apparel and footwear materially impacted our gross margins in Q1, which Robert will discuss in greater detail during his prepared remarks.

Turning now to slide six.

The tools and capabilities, we've built over the last two and a half years, along with our extensive assortment enabled us to capitalize on the increased online traffic during Q1 before the crisis, we were already seeing robust adoption of our ecommerce platform, including BOPUS and ship to home as a crisis created the need for social display.

Sensing and required people will stay at home customers embrace these services, even more accelerating our online penetration sportsman dotcom saw a massive surge in demand during the quarter with our E Commerce chip channel sales growing over 200% year over year.

During the first quarter. We also completed the rollout of ship from store and we are now utilizing our stores as fulfillment nodes for orders placed online we've made great progress, but we must continue to invest in our capable of capabilities to remain relevant and increasingly ecommerce driven retail environment.

With respect to our physical store footprint, we have opened three new sports men's wearhouse stores year to date, including two prior field and stream stores located in Crescent Springs, Kentucky, and Kalamazoo, Michigan. Additionally, we closed a store and Milpitas, California during Q1 in.

A typical year sportsman warehouse will open 812, new stores as we're all aware this year is not typical with recent permitting and construction delays our store expansion strategy has been impacted we now expect to opened five to seven total new stores in fiscal year.

2020.

Turning to slide seven.

In summary, we couldn't be more excited with the momentum in our core business coming out of Q1 in the near term we view the upcoming election cycle as a potential catalyst for our business. Furthermore, we believe cobot 19 is changing consumer behavior and motivating people to spend more time outdoors.

Products, our products fit exceptionally well and into it in an environment in which consumers are spending more time fishing camping hiking and hunting.

We will continue to work with our vendors to ensure we have our stores and websites stock for the products our customers demand and the medium term there is significant uncertainty in the economic environment and we are monitoring this evolving situation very closely and the long term. We believe we are uniquely positioned to capitalize on me.

Market share opportunities and changing consumer behavior to become a larger and more profitable company.

With these factors as the backdrop, we continued to make progress on our growth initiatives, including enhancing our online platform and expanding our store footprint. We look forward to speaking to you again in early September when we report our second quarter results with that I'll turn the call over to Robert.

To discuss our financial results.

Thank you John.

I'll begin my remarks today with a review of our Q1 2020 financial results.

As John mentioned earlier, we're not providing forward guidance at this time however.

I will provide a few parameters for thinking about our expected full year 2020 financial results.

Turning now to slide nine of the presentation.

First quarter 2020, net sales were $246.8 million compared to 174.0 million in the first quarter of 2019.

An increase of $72.8 million or 41.8%.

Same store sales increased 28.6% in the quarter led by firearms and ammunition.

Starting in April camping, and fishing also rebounded nicely for the quarter.

Increasing over the prior year period by 16.6% and 8.5% respectively on a same store basis.

Q1, 2020, gross profit was $74.8 million compared to 54.2 million in the first quarter of 2019.

An increase of $20.6 million.

Gross margin was 30.3% for the quarter, a decline of 80 basis points versus prior year.

This decline can be attributed to several factors.

Product and channel mix caused a 250 basis point decline in gross margin due to a higher proportion of revenue coming from firearms and ammunition.

And more sales volume coming from our ecommerce channel.

This was partially offset by higher vendor incentives and improved product margins, which positively impacted gross margin by 120 basis points and 50 basis points respectively.

As gene expense of $75.2 million for Q1, 2020 was an increase of $15.7 million are 26.3% compared to the first quarter of 2019.

As a percentage of net sales SGN, a decreased approximately 370 basis points to 30.5% for the quarter.

During the quarter, we closed one store that resulted in a noncash impairment charge of approximately $1 million in Q1 2020.

We incurred additional payroll expense of $6.5 million versus prior year, including $1.1 million of hero pay for our front line associates.

The remaining increases primarily due to minimum wage increases and new store growth.

Rent expense increased approximately $1.6 million, primarily due to new store openings.

Other operating expense increased approximately $5.4 million versus prior year.

We incurred incremental marketing expense of $2.2 million.

Credit card fees increased $1.3 million due to the increase in sales volume and insurance expense increase the zero point $3 million.

Store operating expenses, including utilities janitorial insecurity increased by zero point $6 million due to new store openings and additional cleaning performed due to the cobot 19 situation.

We incurred zero point $4 million of pre opening expenses and transaction costs associated with the acquisition of two fields in stream stores.

Loss for our operations was zero point $4 million in Q1, 2020 compared to a loss of 5.4 million in the prior year period.

Interest expense in Q1, 2020 was $1.5 million compared to 2.1 billion in Q1 of 2019.

A reduction of zero point $6 million.

This improvement is result of lower total borrowings and lower interest rates.

We recorded an income tax benefit of zero point $8 million in Q1, 2020 compared to a benefit of 2.0 million in Q1 2019.

The $1.2 million reduction in this benefit is primarily the result of our improved financial performance year over year.

Net loss for the quarter was $1.1 million or three cents per diluted share as compared to a net loss of $5.5 million or 13 cents per diluted share in the prior year. This represents a year over year improvement of 10 cents per diluted share.

Adjusted net income in Q1, 2020 was positive zero point $4 million are one cent per diluted share compared to adjusted net loss of $5.2 million or negative 12 cents per diluted share in 2019.

This represents a year over year improvement of 13 cents per diluted share on an adjusted basis.

Adjusted EBITDA for Q1, 2020 was $8.2 million compared to 0.4 million in the prior year period.

Turning to slide 10, I will now comment on our balance sheet and liquidity.

We have added 14, new stores and closed one store during this time period.

Inventory is down 9.6% on a per store basis compared to prior year.

We incurred $4.8 million of net capital expenditures in the first quarter of 2020 compared to 3.1 million in Q1, 2019, an increase of $1.7 million.

This increase was due to new store construction and maintenance on our existing stores.

First quarter 2020, operating cash flow was $31.3 million versus 3.4 million for Q1 2019.

27.9 million dollar improvement in operating cash flow year over year is primarily due to higher accounts payable associated with increased sales volumes.

Our liquidity remains strong as we ended the quarter with $118.4 million in net outstanding borrowings on the line of credit compared to $141.6 million at the end of Q1 2019, a reduction of $23.2 million.

This reduction was achieved while holding an incremental $20 million of cash on our balance sheet in order to provide maximum flexibility during these uncertain times.

At the end of first quarter 2020, we had approximately $60.3 million of availability on the revolving credit facility.

The outstanding balance on our term loan was $25.7 million at the end of Q1 2020 compared to 33.7 million at the end of Q1 2019.

A reduction of $7.9 million.

Our total liquidity, including cash on hand at the end of Q1, 2020 was $82.4 million compared to $41 million in the prior year.

Turning now to slide 11 of the presentation.

As I mentioned previously we will not be providing forward guidance at this time due to the significant uncertainty surrounding the current economic situation.

However, I would like to provide some data points in commentary on how we're thinking about expected full year 2020 results.

Starting with new store growth, we anticipate opening a total of five to seven new sports men's wearhouse stores in 2020.

With respect to gross margin, we expect a continued higher 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.

We expect our fiscal year 2020 effective tax rate to be approximately 27%.

Fiscal year 2020 interest expense is estimated to be approximately $6.5 million to $7.0 million.

Finally, full year 2020 capital expenditures are anticipated to be approximately $23 million to $28 million.

It is important to note that the current economic situation is fluid it could change very rapidly. Therefore, we will continue to take a relatively conservative approach to managing our inventory expenses and liquidity in 2020 and beyond.

We look forward to updating you on our business and financial results. During our next earnings call in early September.

With that I will 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.

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Our first question has come from the line of Daniel Hofkin of William Blair. Please proceed with your questions.

Good afternoon.

Okay.

Just.

I wanted to.

Maybe just ask a little bit about sales trends and maybe differences by.

Types of market or anything additional color that you can share.

As well as.

Trim.

Over the court you may have said something about a bit trends over the course of the quarter in sense, and just sort of how thats develops in them.

If theres anything that suggests.

What what.

Whether some of the increase in demand.

Some of the categories have strengthened recently has been pent up demand versus.

More maybe representative of trends, we might expect going forward. Thanks for investors.

You to do any Dan it's John Hele bodes well, let me give just a little bit of color on what we saw in Q1 from a trend basis and curve started off February the business was right on track with where we expected we were seeing a nice up tick in some of the categories that others have exited a falling super Tuesday.

We started to see a surge in firearms and ammunition, primarily around our core categories, our core customer and I attribute that to the fact that the SP and the actual skews, we were selling right in and what normal.

When cobot 19 started to become a major issue in the country in mid March we started to see the types of products change across the business. We saw heavy heavy demand on personal needs such as water storage water filtration generators dehydrated foods.

On the firearm side, we did see a transition to a lower price point firearm mid month, there were a lot of new firearms buyers in the market for personal protection.

And we were able to serve them well, having a full extensive assortment that we keep in place when the stimulus checks came out.

The next component within our core customer a core product start to sell again with firearms ASP is increasing.

And the type of firearm being purchased slightly different or returning to the core.

We're not providing any update on Mays performance or post first quarter performance, but what I can share with you that gives us confidence about the long term as we are seeing a lot of new participants in the outdoor activities, not just shooting and hunting, but camping fishing and hike.

Being.

The has seen a significant surge across the industry. We are seeing a lot of new customers that we're educating on those products and we're seeing a lot of folks coming into the stores that haven't finished for decades, maybe it all the center getting back to it I believe that Thats, an indicator is folks think about how to spend their money how to spend time.

And with their families the outdoors and great way in a cost effective manner to make memories and to stay safe from a social distancing. So we are very.

Upbeat about what that can bring for us in the long run.

That's great and maybe just one quick follow up obviously, one from additional civil unrest in the last.

We can a house.

Any anything that you can see just in terms of trends or.

Whether you think that's been an additional factor very recently in terms of people wanting to.

Spent much time and more crowded areas than even before.

Hi, Yes, Dan I think that it was a good call out I don't know how to think about whether it's a trend or not but certainly for a few days we've seen.

An increase in personal protection.

Equipment being needed and again kind of returning back to more of a.

Entry level personal protection than a core user of firearms, but again thats only been a few days so I would be.

Uncomfortable, indicating that might be at long term opportunity for the industry or sportsman warehouse.

Understood.

Thanks, very much best of luck.

Thanks, Dan.

Thank you our next questions come from the line except segment of Credit Suisse. Please proceed with your question.

Hey, guys. Thanks for taking the question appreciate a nice job navigating through what I'm sure. It was a very dynamic environment.

I just want to fall, but want to last points around new customers coming in and sort of more active activities and things outside of the home should we interpret from that that youre seeing a pickup in some of them on firearm categories. Maybe late April and May. So if you comment on on some of those category trends that would be helpful. And then just related to that.

We also assume if that's true that the margin performance could look a little bit different a little bit more favorable into the second quarter. Thanks.

Yes, Seth good afternoon, I'll try to hit on on the categories and just to be clear, we did start to see a pickup in categories outside of the shooting sports in late April and early may as coded restriction started to be.

Reduce across the country, we saw a significant uptick in participation across camping fishing and hiking.

We expect that will continue throughout the year I think thats multiple parts. One is there is uncertainty about the economic situation in the country, where some people may be investing less in their vacation and traveling and may be spending more time outdoors with their family I also think the social distancing.

Uh huh.

Got a fact that's happened in the way people are thinking is likely to have more people seeking outdoor activities farther away from large.

Masses and groups Robert I'll, let you hit on the margin. If you will so Seth. This is your question about margins certainly our margin is greatly impacted by sales mix and we talked about 250 basis points of pressure in Q1 due to the is much higher proportion of firearms and ammunition in our and our toll.

The revenue.

So it is true if our mix would return to more typical our normal aired at levels you would see the equivalent improvement in our overall gross margin just on mix alone.

Got it Okay and then can you just follow up on the promotional activity in the industry. What are you seeing competitively and related to that I think you had one competitor that was expected to fully exit the category in a significant number of stores. This year I think they got part of the way through but maybe defer that into next year, becoming.

That does that have any impact in your view, let me know thanks.

Yes on happy to do so a promotional activity during Q1 and into May has has been limited.

Some certainly some activities were already pre planned by our competition and even sportsman is warehouse and we've maintained that cadence, but from a margin standpoint, the promotional activity as it's been very limited and helped margins on a per department per category basis.

With the other questions about the competitors I think you're probably the credit you are probably referencing Dick's sporting goods. They had announced I believe as early March that are late February theyre going to exit 440, more hunting launches, which.

We knew there was a potential for that to happen when they announced that we.

We certainly we're interested to see how they might execute on that from an inventory reduction standpoint, and whether that would lead to promotional activity immediately after they announced it we went right into a cobot situation, which I suspect helped move to move some of that inventory out of those hunting lodges within the even a few weeks before they.

Shutdown because the cobot I think on their earnings call. This week. They may have mentioned the plan is still in place to exit the for 40, but may be delayed for some amount of time as they navigate through the reopening of their stores and just the time it will take to make that transition. So we expect that still to happen.

And provide again more market opportunities for sports men's wearhouse in a hunting and shooting sports.

Got it alright, thanks, guys. Good luck.

Thanks.

Thank you our next questions come from the line of Ryan said all of Craig Hallum. Please proceed with your questions.

Good afternoon, guys and congrats on the strong quarter.

Thanks, Ron maybe just to start you mentioned higher vendor incentives benefited gross margin in the quarter. Just curious I guess what was different this quarter with their particular categories was volume driven et cetera.

Yes, Yes. This is Ryan summit is just a function of volume most of these vendor incentives are tied to purchase orders and our.

Sales activity.

So certainly just on a volume basis alone.

There is we've seen an improvement in that and we've worked very closely as our vendors.

In these relationships and to be able to support the marketing activities that we do in in advertising insulin it has to both their benefit in our benefit and so.

Our team their marketing team and purchasing team has been working closer with these vendors to to look for ways that we can partner and grow both of our businesses together and and the volume is just driven more absolute dollars of incentive.

Got it.

Ben just on E commerce really strong quarter, there I mentioned it to headwind to gross margin.

I guess is there more or less opex needed for the E commerce or said differently can you compare kind of EBITDA margin of in store sales versus ecommerce.

Yeah, Ryan let me see if I can.

Provide some color on that if you think about the work content that's required throughout the supply chain to fulfilling E com order versus a store order. There is more work content required the differences some of that work content.

Falls on the last mile delivery on the parcel carrier you Sps so when we think about the cost structure.

And the unit economics of an E com order versus a store order, it's really not a black and white situation. If you think about an unit economics of an E com order that our bottomline pickup in store or ship to store, they're effectively the same as a store unit economics the differences.

As you start shipping that directly to home that does put pressure on gross margin because of the transportation packaging related to that item that is not inherent in a bottom line pickup in store orders. So that will put pressure on gross margins, we did see a significant uptick in the percentage of.

E Com orders that were shipped a home during the co bid.

Pandemic as customers were staying home and not shopping the stores I suspect that overtime, we will continue to see an uptick in that percentage of ship to home as we've introduced a lot thousands active new customers across the country to sportsman over the next few months that are outside of our store region.

So it's a nice opportunity for us to engage new comes consumers and grow the business, but it will have some margin pressure as it relates to transportation expenses.

Got it one last one for me how that'll turn it over.

Inventory down 10% on its per store basis, I guess, how do you feel by category are there.

No you noted guns and ammo strength are there certain categories that you wish you had more of an is that primarily a function of just demand or are there any.

Other supply chain constraints, there thanks, and good luck right Ryan as you can imagine we feel very good with the forecasting we put in place and our ability to execute against the extent increasing demand quickly.

In March and I think you can see that in our next.

Our firearms checks compares the next and we absolutely gained significant market share during that period. However, with the type of growth we've seen in some of these categories. The supply chain has been unable to keep up and it's not just specific to sports men's wearhouse most of our competitors have a major holes in.

Firearms and ammunition in fishing and in some camping related categories and that is the single.

Largest focus of the demand planning and merchandising team right now is to get back in stock and make sure that we can serve the customers. We expect is the way. We expect so you think about the 10% down per store that is not our plant.

Plan, we cut quite a bit inventory out of the system last year and as I mentioned in my previous calls as we set up this year, we were not expecting additional declines in per inventory per store inventory, we would like to be in a better spot than we are today. So that is our focus is getting our receipt flow back end.

In line and getting that product out to the stores, but this isn't a specific to one category or one vendor. This is the overall supply chain as it relates to outdoor products right now are seeing significant pressure on them, yes, I'll just add that we did a really nice job last year of reducing inventory while.

Actually improving our in stock performance, we're in a little bit of the different situation now what we have now is demand outstripping supply and we're just trying to chase it a little bit.

Frankly, we're probably doing better than most in staying in front of that but it's a little bit of the different situation now than it was last year, while we were reducing inventory while improving in stock.

Good if I could sneak one more in actually to just kind of as a follow up on that.

You mentioned Nixon so may was plus 75% could industry you guys nicely outperformed in the quarter, arguing inventory constraints or is there any reason why I guess you can't perform in line with the industry or better luck cabin.

Theres No reason why we can't continue to take market share in firearms in the short term and long term Ryan.

Good thanks, guys with the for me.

Thank you.

Thank you. Our next question comes from the line there Peter Keith of Piper Sandler. Please proceed with your question.

Hi, good afternoon guys.

Great job great results.

I was hoping.

You could talk about your competitive positioning.

Certainly that the vendor in tend to benefit of 120 basis points is intriguing.

But maybe on a big picture basis.

Are you finding that.

You're getting better product margin.

Even with all the demand do you feel like you, maybe first or second in line to get products.

Curious, though maybe your competitor positioning has evolved so far this year with some of those other competitor exits.

Yes, I think certainly Peter we've continued to have great relationships with our vendor base. That's always been a core principle of our merchandising department as to make sure that we have a collaborative relationship that everybody wins gross sales and profit.

As some of the competitors have exited.

Thats certainly helped us.

We've grown I think Weve opened 15 stores in the last year. There is no one in the outdoor sporting goods market. It's opened 15 stores and the last year I think it's been just the opposite on so I'd like to believe from the perspective of the vendors that they would tell you that we approaches collaboratively limiting.

Kept some relationship what the vendors and we want them to grow we want them to be healthy.

And we want to share together in the profit that's available.

We're heavily focused on improving pricing in our capabilities around that and making sure that we can be as dynamic as possible to changing market conditions.

Okay, and and for Robert that 120 basis points to date getting Q1.

Ken that type of run rate continue it sounds like it so a lot of driven by collaboration or if sales slow your peers not going to get the the same type of benefit.

I think that there's multiple ways that that impacts. This one is we part of that owns those incentives go towards marketing and Q1, we didnt market as heavily as we would normally would given the activities.

And as or if you know.

Sales would slow it would impact those incentive so I don't think I would be again that as a true run rate, but it was a testament to what the team accomplished in Q1 to help offset the overall mix margin.

Impact.

Okay, good and looking just now with some of the category trends.

I guess it looks like we've done.

Camping and fishing, finishing positive for the quarter is pretty good spike in demand in April can continuing with may but I was hoping you can maybe comment a little more specifically on the footwear and clothing.

Is that.

It's something that has reflected positive is there may be less less questing more broader shopping in the store.

Yes so.

Yes, we have seen a return to a more normal Ics consumer shopping process, where they're not just coming in and grabbing an item and getting out as quickly as possible. They are starting to cross shop departments. So all departments are showing improved trends are started showing improved trends.

We also reacted pretty quickly.

To footwear and apparel.

The weeks that we started to see what was happening with cold the 19 and retail potentially getting shut down we started to pull back on our apparel and footwear purchases no having lived through this downturn in the economic cycle in retail a couple of times that tends to be one of the areas. It has the longest lead time and so.

We're seeing and you end up with too much inventory to pull back a very quickly we feel good about our apparel and footwear inventory position.

When you think about what's what's likely to happen we feel good about the functional apparel that were in the camouflage fishing apparel were in very good spot hiking on the footwear side is showing some really nice trends and while it's early we believe that hunting could see a nice uptick.

This year as people think more about field to table.

And outdoor activities I think that that leads into an opportunity on the hunting boots. This summer and into early fall and Peter I'll add one more thing ill answer it within the context of financial context in gross margin.

It is likely though even where while there might be some improvements in footwear alone and in apparel I think throughout the year you should expect the in firearms and ammunition will skew more heavily in our total revenue in apparel and footwear will be a lower proportion.

Of our total revenue.

Going forward in that it on a full year basis this year.

That is correct rubber thank you.

Fair enough. One last question for you intrigued with all of the new customers you might be getting is there any way you could give us the total loyalty members at quarter end and how that looks on a year on year basis.

I don't have that number in front of me.

Let me, but a circle back on that one.

Okay fair enough. Thanks, a lot guys. Good luck.

Thank you.

Thank you our next questions come from the line of Mark Smith of Lake Street. Please proceed with your questions.

Hi, guys I want to circle back to the inventory a little bit and just look specifically guns and ammo. If we can can you talk about maybe how that slowed during the quarter, where theyre periods in March or April where maybe it was lower.

Then where you ended the quarter and then any insight you can give us into kind of what you're seeing in the supply chain from vendors coming in in May.

Thanks.

So again, let's.

Let's go back to what we saw all in volume are just to ensure we set the table and this is just on a same store basis firearms and ammunition were up 65 and 90% respectively.

During the period. So you think about from a forecasting inflow.

We were very optimistic coming into the year, but I don't think anybody here in the business would have forecasted are expected to 65 and 90 on a same store not including the new stores that we put up so.

We started to see some.

Some flow issues kind of third fourth week, the March and we've been working intimately with our vendors to try to keep the flow moving.

It hasn't been a situation where any one vendor has been perfect and others have been challenged it's been an overall situation and not specific to vendors we've had our own bumps in the road along the way.

With attendance et cetera, and moving moving product so.

I think it kind of started the third week of March 4th week, the March and it is continued.

I will tell you, though it is now branched out as customers are spending more time fishing camping and hiking, we're seeing other categories in our business and the industry not just specific to sportsman that are look and then I'm sure Mark you've probably been in the store and you've noticed some of the terminal tackle in the lower than the re robbery.

Combos.

It is very thin and we are working very hard to restock their shelves, both internally and with our vendors.

Okay.

And then as we look at some of those very picked over categories. What are you seeing as far as pricing that you're paying for specifically as we look ammunition and firearms and your ability to pass that any price increases onto the customer.

So again we've.

And really good communication with the vendor based on the firearms and ammunition, we historically see a price increase.

Each year early in the year, we have seen.

Some.

Some additional increases and I think those increases are related to the fact that factories are working overtime they've had to pay extra pay.

For coal, but they are doing extra work within their factories and in our situation, we've maintained or improved our margins across the business and kept up with those changes I do believe it's important for us.

As a business and as an industry to ensure that we are providing fair prices to our customers, we will not gal to our consumers in this situation where demand is far outstripping supply, but on the other hand, we need to make sure if costs of materials or cost of labor cost of product from the manufacturers are increasing we back.

Balance that.

With the elasticity in pricing.

Okay.

And then I just wanted to look at the cadence of firearm sales you did a good job kind of walking through what you saw during the quarter, but and this maybe just a little different can you give us any insight into maybe where you trended higher than the nics data was it pretty flat that delta throughout the quarter or when you say.

Some competitors that close their doors, where years you saw an expansion and where you really took market share was there anything else that really led to your gains in market share this quarter, yet again, Mark I think.

Underlying in the data you would see that personal protection categories were the primary driver of the increase in mixed check for the industry.

Meaning handguns and personal protection shotguns, and what we did see though in the cycle that I shared was little higher price point handgun.

Early in the process.

Then offset by the more entry level firearms shotgun and when the entry level consumer the new consumer came in around in the co bid process. That's when personal protection shotguns tended to increase more than handgun again, I think there was a little bit of it's my first firearm I need to protect myself what's the.

Safest way to do that.

And certainly a personal protection shot and that's not as we got into the stimulus checks. We saw a nice return to a more normal mix I just I would tell you, it's still a little bit heavier on the handguns than.

And it was prior last year, but the price point has improved.

The last few days and again I want to call that's a trend because I hopefully as a as a society where we are.

Working together to try to limit some of the activity that's been happening that's created a few days of uptick it's been more of a return to the entry level personal protection handgun and shotgun.

Okay and last one for me, maybe maybe for Robert SGN aid levels as you walk through some of that can you just give us anymore insight into kind of what you viewed as.

Maybe onetime in nature that drove maybe SGN $8, a little bit higher you kind of any insight you can give us into the rest of the year on how you think that trend.

Yes, so in Q ones, we did incur as I mentioned earlier about $1 million of no hero pay for our frontline associates, which is certainly a onetime incremental.

Type expense Expensed and the other sort of coal bid related to our specific to the unique expenses.

In Q1 was probably about a half a million dollars between cleaning supplies and other.

Other extraordinary items to react to the situation.

And so we saw tremendous leverage based on the incremental.

The incremental revenue Theres also a one time effect of the closure of the one store, which was also about a million dollar so.

Those three items, there's about two and a half million dollars worth of sort of unusual expense.

I would say that going forward is you should see excluding these unusual items pretty stable environment, you will see a lower SDMA as a percentage of revenue as we have our normal seasonality in in the higher revenue.

In the quarters to come for the year.

Okay. That's helpful. Thank you.

Thanks Mark.

Thank you. Our next question, it's comforting the line of Peter Benedict.

Baird <unk> company. Please proceed with your questions.

Hi, guys most might have been taken here, but it just a just a couple first on the on the 250 basis points of mix within gross margin was that pretty equal between the categories versus the channel shift or was was one of those two more material.

Yes, we're estimating the channel the ecommerce channel mix is roughly 50 basis points was 40 to 50 basis points to the mix created by the higher firearms and ammunition. It was about 200 basis points.

Hi, Robert Thank you and then on the the 50 basis points of product margin is.

How much of that is was what was there still impact from just a field in stream inventory that you guys have been clear going through.

Was that.

What basically got you the 50 or is that are behind us and not really a factor anymore.

No that is completely behind us and not a factor at all it is a continuation of a trend as we had talked about before in our last quarter.

That we've been seeing improved product margins really across every category.

And so thats been a continuation of that same trend that has nothing to do.

With the the purchase of the field midstream inventory at a discount.

Got you good and then.

Just a strategy to two or what's been the shopping behavior of these new customers from you obviously had the big surge.

Are these folks coming back.

And then what's your strategy for.

I guess communicating to them going forward.

No. John you said, you maybe get back to still loyalty stats, but.

These folks signing up for the loyalty program, where they just kind of coming in getting that firearm and then and then moving on.

Yeah, it's been a mix Peter for a few weeks there at the at the peak of the Cobot situation. These customers were coming in getting their item and getting out fairly quickly. We've now seen more of a normal seed to where consumers on the fishing hiking in camping categories that are either reengaging or.

So they're signing up for the loyalty program, we are starting to help them.

With their needs using the expertise in the store to fulfill whatever that need as for the outdoors, that's providing us an opportunity not only to.

Engage the first time, but reengage through arc database or E Mail program, our loyalty program. So.

Again, the couple of weeks uncoated were somewhat unique and the way people shopping we're seeing much more of a return to it now and as I spend time in the stores interacting with consumers.

Literally watching people come in Simon's missed in 10 years I need a couple of new combos.

Golan trout fishing on won't bass fishing, it's been interesting to watch that.

Reengagement from consumers that maybe haven't been around the while so we see that has really nice long term opportunity for sports men's wearhouse and the overall outdoor industry.

Yeah, no where I feel good to hear thanks, Thanks, and good luck. Thanks guys.

Thanks Peter.

There are no further questions at this time I'll now pass the call back over to management for any closing remarks.

Thank you I want to thank everyone for their time today and especial. Thanks to all of our associates in our stores distribution Center care Center and our corporate headquarters, we especially appreciate your commitment impressive presser appearance. During this extra extra ordinary times. Thank you and we will conclude the call.

This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.

[music].

Greetings and welcome to the sportsmen warehouse first quarter 2020 earnings conference call.

All participants are in I'll listen only mode.

A question answer session will follow the formal presentation.

Once you require operators.

During the conference. Please press Star zero on your telephone keypad.

A reminder, this conference is being recorded.

Now I'd like to turn the conference over to Caitlin how others. So relations. Thank you. Please begin.

Thank you with me on the call today is Jon Parker, Chief Executive Officer, and Robert Julian Chief Financial Officer Sportboats warehouse.

Before we get started I'd like to remind you of the company's safe Harbor language. The statements. We make today will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of Nineteenone.

Which includes statements regarding our expectations about future results of operations.

Demand for our product and growth of our industry.

Actual future results may differ materially from those suggested any such statements due to a number of risks and uncertainties, including those described under the caption risk factors and the company's 10 CAD for the year ended February 1st 2020, and the company other filings made with the FCC.

We will 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 supplemental financial information in our press release included as exhibit 99.1, so the.

Form 8-K, we furnished to the FCC today, which is also available on the Investor Relations section of the section of our website at <unk> Dot com.

I'd also like to know that today's materials include an earnings conference call Powerpoint presentation, which is available at <unk> Dot com any investor Relations section of the website you can utilize this doctor to follow along with today's prepared remarks.

I would now like to turn the call over to John Walker, Chief Executive Officer at sportswear.

John Thank you Kate good afternoon, everyone and thank you for joining US today I Hope you and your families are safe and healthy during these challenging times.

I will begin my remarks by addressing the coldest 19th situation as it pertains to sports men's Wearhouse I will then discuss key metrics from the first quarter well also provide updates on our omni channel growth strategy.

Robert will then provide a summary of our Q1 2020 financial result, as well as some commentary on full year 2020.

Finally, we will open up the call for questions.

I'm now on slide four of the Investor presentation, and will address the cobot 19 situation. While the last few months has been challenging for many retailers. We have been fortunate to keep the majority of our stores open throughout the crisis I could not be prouder of importance warehouse team and navigating both the global.

Pandemic and the surge in our business during this time.

While remaining open.

We've also leveraged our ecommerce capabilities like ship to home and BOPUS and use our own platform recently launched curbside pickup which allows us to serve customers, while limiting person to person contact.

With respect to cobot 19 impact on our supply chain, we did see some interruption in Q1 with products sourced from China, primarily related to camping and fishing.

China related interruption has largely subsided however, as the disruption to our supply chain due to covert 19 has continued into the second quarter within certain pockets of our business.

This disruption has been compounded by surging demand, creating shortages in firearms ammunition and fishing.

Our merchandising and demand planning teams continue to do an exceptional job of working with our vendors to limit the disruption.

Well, we've seen significant increases in sales to date, there is tremendous uncertainty and variability in the economic environment. Therefore, we will not be providing forward guidance today.

Given the uncertainty surrounding cobot 19, we will continue to invest in our frontline associates and their safety. Additionally, we will remain financially disciplined as we limit discretionary expenses reduced our debt load and preserve our our liquidity to effectively navigate these uncertain.

Times.

Im now on slide five the surge in demand resulted in very favorable financial results in the first quarter of 2020 net sales were 247 million an increase of 42% year over year. We believe the exceptional demand to date is driven by multiple factors, including the cobot.

19 situation.

Exit the exit of competitors and our core categories and the current election cycle. However, parsing out the exact contribution of each factor it's not possible.

Same store sales for Q1 increased 28.6%.

Fire App firearms, and ammunition were up 65, and 90% respectively. While nics checks were up 56% for the quarter. Our sales increased significantly exceeded the nics checks, which gives us confidence that were not only growing sales well, we are continuing to take market share in our core categories.

Additionally, during the Q1 surge in demand many customers entered our stores or ordered from our website for the very first time.

This gives us the opportunity to expose newcomers to sportsman warehouse brand and to our extensive product offering.

We believe this bodes well for developing repeat customers by reengaging across new categories building, our loyalty program and customer days database and ultimately growing our business.

In contrast to firearms and ammunition apparel and footwear were down materially in the first quarter. During the height of the coven 19 crisis in Q1 customer for what I referred to as questing, they were far less likely to browse browse the store and Everest and as a result, we did not experience in traditional sales mix.

Cross category.

Turning now to slide six.

Thing and required people stay at home customers embrace these services, even more accelerating our online penetration sportsman dotcom saw a massive surge in demand during the quarter with our E Commerce chip channel sales growing over 200% year over year.

During the first quarter. We also completed the rollout of ship from store and we are now utilizing our stores as fulfillment nodes orders placed online we've made great progress, but we must continue to invest in our case capabilities to remain relevant in the increasingly ecommerce driven retail environment.

With respect to our physical store footprint, we have opened three new sports men's wearhouse stores year to date, including two prior field in stream stores located in Crescent Springs, Kentucky, and Kalamazoo, Michigan.

Additionally, we closed a store and Milpitas, California during Q1 in a typical year sportsman is warehouse will open eight to 12 new stores as we're all aware. This year is not typical with recent permitting and construction delays our store expansion strategy has been impacted way.

Back to open five to seven total new stores in fiscal year 2020.

Turning to slide seven.

In summary, we couldn't be more excited with the momentum in our core business coming out of Q1 in the near term we view the upcoming election cycle as a potential catalysts for our business. Furthermore, we believe cobot 19 is changing consumer behavior and motivating people to spend more time outdoors.

Products, our products that exceptionally well and then in an environment in which consumers are spending more time fishing camping hiking and hunting.

We will continue to work with our vendors to ensure we have our stores and websites stock with the product our customers demand and the medium term there is significant uncertainty in the economic environment and we are monitoring this evolving situation very closely and the long term. We believe we are uniquely positioned to capitalize on me.

Market share opportunities and changing consumer behavior become a larger and more profitable company.

These factors as the backdrop, we continued to make progress on our growth initiatives, including enhancing our online platform and expanding our store footprint. We look forward to speaking to you again in early September when we report our second quarter results with that I'll turn the call over to Robert.

To discuss our financial results.

Thank you John.

I'll begin my remarks today with a review of our Q1 2020 financial results.

As John mentioned earlier, we're not providing forward guidance at this time however.

I will provide a few parameters for thinking about our expected full year 2020 financial results.

Turning now to slide nine of the presentation.

First quarter 2020, net sales were $246.8 million compared to 174.0 million in the first quarter of 2019.

An increase of $72.8 million are 41.8%.

Same store sales increased 28.6% in the quarter led by firearms and ammunition.

Starting in April camping, and fishing also rebounded nicely for the quarter.

Increasing over the prior year period by 16.6% and 8.5% respectively on a same store basis.

Q1, 2020, gross profit was $74.8 million compared to 54.2 million in the first quarter of 2019.

An increase of $20.6 million.

Gross margin was 30.3% for the quarter, a decline of 80 basis points versus prior year.

This decline can be attributed to several factors.

Product and channel mix caused a 250 basis point decline in gross margin due to a higher proportion of revenue coming from firearms and ammunition.

And more sales volume coming from our E Commerce channel.

This was partially offset by higher vendor incentives and improved product margins, which positively impacted gross margin by 120 basis points and 50 basis points respectively.

As gene expense of $75.2 million for Q1, 2020 was an increase of $15.7 million are 26.3% compared to the first quarter of 2019.

As a percentage of net sales SGN, a decreased approximately 370 basis points to 30.5% for the quarter.

During the quarter, we closed one store that resulted in a non cash impairment charge of approximately $1 billion in Q1 2020.

We incurred additional payroll expense of $6.5 million versus prior year, including $1.1 million of hero pay for our front line associates.

The remaining increases primarily due to minimum wage increases and new store growth.

Rent expense increased approximately $1.6 million, primarily due to new store openings.

Other operating expense increased approximately $5.4 million versus prior year.

We incurred incremental marketing expense of $2.2 million.

Credit card fees increased $1.3 million due to the increase in sales volume and insurance expense increase zero point $3 million.

Store operating expenses, including utilities janitorial insecurity increased by zero point $6 million due to new store openings and additional cleaning performed due to the cobot 19 situation.

We incurred zero point $4 million Preopening expenses and transaction costs associated with the acquisition of two buildings stream stores.

Loss from operations was zero point $4 million in Q1, 2020 compared to a loss of 5.4 million in the prior year period.

Interest expense in Q1, 2020 was $1.5 million compared to 2.1 billion in Q1 of 2019.

Reduction of zero point $6 million.

This improvement is result of lower total borrowings and lower interest rates.

We recorded an income tax benefit of zero point $8 million in Q1, 2020 compared to a benefit of 2.0 million in Q1 2019.

The $1.2 million reduction in this benefit is primarily the result of our improved financial performance year over year.

Net loss for the quarter was $1.1 million worth three cents per diluted share as compared to a net loss of $5.5 million or 13 cents per diluted share in the prior year. This represents a year over year improvement of 10 cents per diluted share.

Adjusted net income in Q1, 2020 was positive zero point $4 million are one cent per diluted share compared to adjusted net loss of $5.2 million or negative 12 cents per diluted share in 2019.

This represents a year over year improvement of 13 cents per diluted share on an adjusted basis.

Adjusted EBITDA for Q1, 2020 was $8.2 million compared to zero point Fourmillion in the prior year period.

Turning to slide 10, I will now comment on our balance sheet and liquidity.

Q1, 2020, ending inventory was $301 million compared to $291 million at the end of Q1 2019, a 10, a $10 million increases.

We have added 14, new stores and closed one store during this time period.

Inventory is down 9.6% on a per store days as compared to prior year.

We incurred $4.8 million of net capital expenditures in the first quarter 2020, compared to 3.1 million in Q1, 2019, an increase of $1.7 million.

This increase was due to new store construction and maintenance on our existing stores.

First quarter 2020, operating cash flow was $31.3 million versus 3.4 million for Q1 2019.

27.9 million dollar improvement in operating cash flow year over year is primarily due to higher accounts payable associated with increased sales volume.

This reduction was achieved while holding an incremental $20 million of cash on our balance sheet in order to provide maximum flexibility during these uncertain times.

At the end of first quarter 2020, we had approximately $60.3 million of availability under revolving credit facility.

The outstanding balance on our term loan was $25.7 million that the end of Q1 2020 compared to 33.7 million at the end of Q1 2019.

The reduction of $7.9 million.

Our total liquidity, including cash on hand at the end of Q1, 2020 was $82.4 million compared to $41 million in the prior year.

Turning now to slide 11 of the presentation.

As I mentioned previously we will not be providing forward guidance at this time due to the significant uncertainty surrounding the current economic situation.

However, I would like to provide some data points and commentary on how we're thinking about expected full year 2020 results.