Q2 2020 Sportsmans Warehouse Holdings Inc Earnings Call

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At this time all participants are in listen only mode. They question answer session will follow the formal presentation.

Anyone should require operator assistance during a conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host Caitlin House, Vice President corporate development and Investor Relations. Thank you Ms., how you may begin.

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

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 1995.

Which include statements regarding your 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.

So the caption risk factors in the company's 10-K for the year ended February 1st 2020, and the company's 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 a 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 our website at sportsmen dotcom.

I would also like to note that today's materials, including earnings conference call Powerpoint presentation, which is available at sports ins Dot Com any investor Relations section of the website you may utilize this deck to follow along with today's prepared remarks.

I would now like to turn the call over to John Barker, Chief Executive Officer fourth is warehouse.

Thank you Caitlin good afternoon, everyone and thank you for joining US today I Hope you and your family So continue to stay safe and healthy.

I will begin my remarks by providing an update on cobot 19, as it pertains to sports fans warehouse.

We'll also comment on industry trends and discuss high level results from the second quarter. Following my comments Robert will provide specifics on our Q2 in first half financial results as well as some updated commentary on full year 2020 expectations.

Finally, we will open up the call for questions.

I'm going to start on slide four of the presentation.

During the second quarter, we continue to prioritize the health and safety of our associates, while remaining open in all markets I cannot overstate, how proud I am of the sports men's wearhouse team.

They continued to safely serve customers, while we navigated a sustained surgeon our business.

In the stores, we continue to focus on cleaning <unk> sanitizing and utilizing face mask.

To ensure customers associates and their families states say.

E. Commerce also continued to be an increasingly crucial part of our retail strategy.

Allowing us to serve customers, while limiting person to person contact.

In the second quarter demand was elevated across all of our major categories with significant increases in firearms ammunition fishing and camping.

White simply demand outstrips supply for many of our products.

Although we're not satisfied with our current inventory levels, we believe based on our market share gains that in most cases, we're better positioned than our competition, which is a testament to our teams planning processes and vendor relationships.

As was the case in Q1, we will not be providing forward guidance today due to the uncertainty in the economic environment.

Turning to slide five we're highly encouraged by the significant increase in participants in outdoor activities across the US. In addition to the increase in fishing and hunting camping and hiking activities. Most state National Park attendance is up versus prior year across the country. Many Americans are transit.

Turning their resources away from travel and entertainment toward spending time with family and friends and the outdoors.

The firearm industry has seen a historic surge of new customers in 2020 during the first seven months of this calendar year, nearly 5 million people purchase a fire arm for the first time is important to note that a firearm customer has the highest lifetime value of any segment within our customer base and drive.

Significant value across other product categories in our business.

History has shown that outdoor activities, particularly those done with family and friends typically have remarkable participation resilience, especially during recessionary times.

We are optimistic that the new participants an outdoor activities, including hunting and fishing bode well for outdoor specialty retail in general and sports fans warehouse in particular.

During Q2, we grew our loyalty program to nearly 2.5 million customers and increase our overall email database by 68% year over year. We believe we are in the early innings of capitalizing on our best in class loyalty program and our expanded database to bear.

To engage with customers.

Turning to slide six combination of multiple factors in Q2 led by market share gains the surge in outdoor participation and social unrest resulted in very favorable financial results in the second quarter of Twentytwenty net sales were $381 million and increase.

Yes of 80% year over year.

Same store sales for Q2 increased 61%.

Same store sales for firearms and ammunition were up 123, and 75% respectively.

Total sports warehouse firearm unit sales increased 171% during the quarter, while the adjusted Nics checks were up 111%.

Our unit sales materially exceed the nics checks increased for the quarter, which confirms that we are continuing to gain market share and new customers.

Footwear and apparel also recovered nicely in the second quarter, we saw particular strength in our functional footwear apparel, such as hunting boots waiters and camouflage. We believe we have a right to win in the sub categories and we will continue to evolve our assortment to better serve our customers.

The higher proportion of firearms and ammunition revenue continued to materially impact our gross margin during Q2, Robert will discuss product mix and margin implications in greater detail during his prepared remarks.

Turning now to slide seven I will comment on our ecommerce result, and Omnichannel strategy since launching our new E. Commerce platform in late 2018, we've continued to build the team tools and capabilities to adapt to changing consumer behaviors.

Events of 2020, especially KOVA 19, and social unrest accelerated adoption of our E commerce platform, including BOPUS and ship to home.

In Q2 E commerce sales growth accelerated even further during the quarter ecommerce driven sales grew over 300% versus the prior year through the first half of 2020 ecommerce driven sales now account for more than 10% of total net sales, which has exceeded our exceeded.

Our expectations and timeline.

Therefore, we will continue to invest in our platform and capabilities to enable future growth in this channel.

We also continued to expand our store footprint.

We opened our first small format store and Laramie, Wyoming in early August at roughly 7500 square feet. This stores currently the smallest in our portfolio and an ideal approach to further penetrate small to midsize markets, where our national competitors cannot perform we are highly encouraged by the.

Storage results, so far and we believe our flexible store format will continue to serve as a competitive advantage moving forward.

We have opened four new sports warehouse stores year to date and have plans to open another three for a total of seven new sports warehouse stores in 2020, the three new stores will be located in Chambersburg, Pennsylvania, which is set to open in late September Brentwood, California, and Rona, California, which are planned.

For later.

In Q3 or early Q4.

In addition, our first legacy shooting center opened in March of this year and is performing ahead of expectations. As a result, we will be assessing expansion opportunities for this concept in 2021.

Finally, I would like to highlight the astonishing improvement in our balance sheet and financial position.

Over the last year.

We have reduced net debt by $150 million and improve liquidity by $130 million compared to this time last year.

We ended Q2 with a net debt to EBITDA ratio of less than 0.1, reflecting our nearly debt free position.

Turning to slide eight.

In summary, with the recent increase in outdoor participants we believe there are significant momentum in our core business coming out of Q2, we have gained a tremendous number of new customers and have grown our email database exponentially over the last two quarters as we reengaged with these new customers across categories. There are substantial.

The opportunity to grow sales and further increase customer lifetime value.

In the near term, we view the upcoming election cycle and economic uncertainty as to factors that could influence our business. However, we remain optimistic that over the long run there are significant opportunity for continued market share gain ecommerce growth and physical store expansion we.

We believe these factors and are laser focused on execution for both an operational and strategic perspective position sportsman warehouse for long term growth and profitability.

We look forward to speaking with you again in early December when we report our third quarter results.

With that I'll turn the call over to Robert to discuss should discuss our financial results.

Thanks, John.

I'll begin my remarks today with a review of our Q2 and first half 2020 financial results.

As John mentioned earlier, we're not providing forward guidance at this time, however, I will update the commentary provided on the last earnings call regarding full year 2020 expectations for some key financial metrics.

Turning now to slide 10 presentation.

Second quarter 2020, net sales were $381.0 million compared to 211.8 million in the second quarter of 2019.

An increase of $169.2 million or 79.9% over the prior year period.

Same store sales increased 61% in the quarter led by firearms and ammunition, which increased 123% in 75% respectively.

Camping and fishing also had strong quarters, increasing over the prior year period by 46% in 45% respectively.

Finally, footwear and apparel also increased nicely over prior year up 30% in 19% respectively.

All on a same store basis.

Q2, 2020 gross profit was $129.1 million.

Compared to 73.2 million in the second quarter of 2019, an increase of $55.9 billion or 76.4%.

Gross margin was 33.9% for the quarter, a decline of 70 basis points versus prior year.

This decline can be attributed to several factors.

Product and channel mix cost in 250 basis point headwind gross margin due to a higher proportion of revenue coming from firearms and ammunition and more sales coming through our E Commerce platform.

This gross margin decline was partially offset by higher product margins volume incentives and other adjustments, which positively impacted gross margin by 180 basis points.

SGN expense of $83.6 million for Q2, 2020 was an increase of $20.1 million or 12% compared to the second quarter of 2019.

However, SGN a leverage improved approximately 800 basis points with SGN a expense coming in at 21.9% of net sales for the quarter.

We incurred additional payroll expense of $13.6 million versus prior year, including $1.5 million of Hirel pay for our frontline in non executive back office associates.

Remaining increases primarily due to minimum wage increases and new store growth.

Rent expense increase approximately $2.2 million, primarily due to new store openings.

Other operating expense increase approximately $3.9 million versus the prior year, which is primarily a result of higher credit card fees due to increased sales volume.

Income from operations was $45.5 million in Q2, 2020 compared to $9.8 million into prior year period, an increase of $35.7 million.

Interest expense in Q2, 2020 was $1.0 million compared to 2.4 million in Q2, 2019, a reduction of $1.4 million.

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

We reported income tax expense of $12.0 million in Q2, 2020 compared to 1.9 million in Q2 2019. This increase as a result of improved profitability year over year.

Net income for the quarter was $32.5 million or 75 cents per diluted share as compared to net income of $5.5 million or 13 cents per diluted share in the prior year period. This represents a year over year improvement of 62 cents per diluted share.

Adjusted net income in Q2, 2020 was $33.6 million or 76 cents per diluted share compared to adjusted net income of $5.7 million are 13 cents per diluted share in Q2 2019.

This also represents a year over year improvement of 62 cents per diluted share on an adjusted basis.

Adjusted EBITDA for Q2, 2020 was $53.6 million compared to 15.8 million in the prior year period, an increase of $37.8 million.

Turning now to slide 11 of the presentation.

First half 2020, net sales were $627.8 million compared to 385.8 million in the first half of 2019, an increase of $242 million or 62.7%.

Same store sales increased 47% in the first half of 2020.

First half 2020, gross profit was $203.9 million compared to $127.4 million in the first half of 2019, an increase of $76.5 million.

Gross margin was 32.5% for the first half of 2020, a decline of 60 basis points versus the prior year period.

As seen a expense of $158.8 million for the first half of 2020 was an increase of $35.8 million or 15% compared to the first half of 2019.

As a percentage of net sales SGN, a leverage improved approximately 660 basis points to 25.3% of net sales for the first half of 2020.

Income from operations was $45.0 million in the first half the 22000 compared to 4.4 million in the prior year period.

Interest expense in the first half of 2020 was $2.6 million compared to 4.5 million in the first half of 2019.

We recorded income tax expense of $11.2 million in the first half of 20 to 20 compared to an income tax benefit of 0.1 million in the first half of 2019.

Net income for the first half of 2020 was $31.3 million or 72 cents per diluted share count.

Compared to zero net income in dollars or zero cents per diluted share in the prior year period.

Adjusted net income in the first half of 2020 was $34.0 million or 77 cents per diluted share.

Compared to adjusted net income of zero point $5 million or one cents per diluted share in the first half of 2019.

First half 2020, adjusted EBITDA was $61.8 million compared to 16.2 million in the prior year period.

Turning to slide 12, I will now comments on our balance sheet and liquidity.

Q2, 2020, ending inventory was $297 million compared to $289 million at the end of Q2 2019.

And the increase of $8 million.

We have added 16, new stores in close one store. During this time period inventory is down 9% on a per store basis compared to prior year.

We incurred $12 million a net capital expenditures in the second quarter of 2020 compared to 14.5 million in Q2 2019, an increase of two and a half million dollars.

First half 2020 operating cash flow was $145.7 million versus 35.4 million for Q2 2019.

This 110 million dollar improvement in operating cash flow year over year is primarily due to higher accounts payable balances associated with increased sales volume higher net income and higher accrued expenses versus prior year.

While our accounts payable balance increased year over year, our days payable outstanding metric has remained relatively flat to prior year.

Our liquidity continues to improve as we ended Q2 with $3 million in net outstanding borrowings on our line and credit.

Compared to $127 million at the end of Q2 2019.

This reduction was achieved while holding an incremental $11 million in cash balances versus prior year in order to provide maximum flexibility during these uncertain times.

At the end of second quarter 2020, we had approximately $171 million of availability on our revolving credit facility.

The outstanding balance on our term loan was $16 million at the end of Q2 2020 compared to $32 million at the end of Q2 2019, a reduction of $16 million. This includes an accelerated payment on our term loan of $10 million made early in Q2.

Our total liquidity, including cash on hand at the end of Q2, 2020 was $183 million compared to $53 million in the prior year period.

Turning now to slide 13 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 environment.

However, I would like to provide some updated data points as it relates expected full year 2020 results.

Starting with new store growth, we are on track to open a total of seven news forces warehouse stores and one legacy shooting center in 2020.

With respect to gross margin, we expect to continued higher than normal pour portion of revenue to come from firearms and ammunition and a higher volume of sales will be conducted through our E commerce platform in the back half of the year.

Both of these factors will continue to put pressure on gross margin.

However, we also expect product margin expansion and higher volume incentives to continue as well.

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

Fiscal year 2020 interest expense is estimated to be approximately $4 billion.

Finally, full year 2020 capital expenditures are anticipated to be approximately $20 million to $25 million.

We look forward to updating you on our business and financial results during our Q3 earnings call in early December.

With that I will now turn the call back over to the operator for questions.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is in the question to you May Press Star too if you would like to remove your question from the Q.

For participants using speaker equipment, and maybe necessary to pick up your handset before pressing authority.

Our first question coming from the line Seth Sigman with Credit Suisse. Please proceed with your question.

You guys good afternoon, and congrats on the quarter, obviously, a very strong results I'm curious about the consistency in results across your regions. You obviously have been very diverse footprint. So what did you see across the us and then.

The adjusted Nics looked like in August it will still strong, but it did decelerate. So curious what you're seeing early in the third quarter.

It would be helpful. Thanks.

Hey, Seth it's John Good speaking with you a regionally we saw very consistent demand across all categories, maybe the one outlier in the entire business and it was strong just not the same level was Alaska.

That was partially impacted by the lack of travel, which certainly slowed down the fishing and hunting season, but those stores continued to perform very well just not at the rate of the rest of the country. As you think about the slow down or that the change in mix growth that was announced this morning are yesterday pardon me the adjusted next.

I think what you're seeing Seth is not necessarily a change in demand what youre seeing is demand outstripping supply in certain categories of firearms and.

Again, we perform extremely well against the adjusted mix in Q2, which is a testament to what the team has been able to do through the relationships and they're planning and forecasting with the vendors and we expect that to continue going forward.

Okay. That's helpful. Just on that point what is your sense.

How inventory phases here as you look into the back half the year youre headed into a seasonally bigger period for the business.

So how are you planning for your inventory position.

Actually we feel like we're in a better positioned than most going into the back half of the year now with that said, there's probably going to be some spots within.

The chain that we'll have some somethin inventory of its teams working diligently everyday to fill in those gaps the manufacturers of course and the vendors are working diligently, but as you can imagine the supply chain in general as you'll see some impact from Covidien and the things that are related to the regulatory and attendance that might be occurring and up to.

Secular locations. So each one of those unique we're feeling pretty good about our ability to be successful across the board in the back half of the year, knowing there'll be some spots there will be a little light.

Okay.

Just one follow up on the gross margin in a good seems stronger despite the big mix impact I think you mentioned volume incentives and higher merchandise margin based units also less promotional activity in the period.

Can you talk about sustainability of some of those positive offsets.

Thank you talked about some of the volume and some goods continuing was nature of that if you could just elaborate on that and you've got something more structural or more unique to the current environment. Thank you.

Yes. This is Robert.

Certainly them the mix the headwinds that are created by mix over some time should normalize we do not expect firearms and ammunition to continue to be this high up a proportion of our total sales and so.

That should abate capture some period of time some of the offsets are more structural and we would expect to continue.

The rate variants that we see within a product category, where we've seen you know it's incremental improvement, but some improvement in just about every category and the vendor incentives.

Is structural in terms of how the program is designed but it is also affected by volume. So we're seeing higher than normal incentive dollars due to higher than normal volume that will also abate over some period of time and we'll go back to normal.

But the program is in place in so that is structural in that regard if I may Robert to add to that south on the promotional side of the business as you can imagine a throughout the end of Q1 in all through Q2, there's been very little promotional activity in the market around firearms ammunition.

Even fishing and in some parts of camping, so we've been able to keep our margins.

In really good spot as a category level, given the lack of promotional activity by our competition.

That's great thanks very much.

Our next question comes from the line of Daniel Hofkin with William Blair and company. Please proceed with your question.

Good afternoon.

Hi, just one question I would have as you know to what degree and it sounds like.

If we're hearing you correctly like continued.

Strong trends, thus far and expectations of outperforming mix.

So what degree, especially for firearms, which are not.

Consumable product the way that ammo was.

Could you know current demand sort of pull forward from future demand you know, let's say next year.

You know to what degree do you think that's a factor is there anything you can look to historically to took to tell you about that that's my first question.

And Dan as John Hele false well you know as we think about this year's demand in firearms, specifically is unique to anything we've ever seen in the industry and the reason I'd say that is the number of new first time customers into the industry. We're estimating 5 million first time buyers of a firearms.

Last year and that means that's not a pull forward of our traditional customer.

Some of those customers are going to start participating and shooting activity, that's going to lead them to their second third fourth firearm of course some of them may decide not to buy a second one but we're actually optimistic about what we've seen on the first time buyer talents that that can help offset any pull forward.

Toward that might happen due to an election cycle, where our traditional customers buying one more firearm that he or she is concerned about in the political process.

Okay.

And then maybe could you give.

Maybe a little more color about different categories.

For on.

Better or worse, then obviously kind of firearms and ammo or kind of a standout, but just kind of any any variance among other categories.

Including by region, I know you talked about Alaska being.

Weaker regionally, but just any color on performance of the categories overall relative to each other and by region would be helpful.

Yes, a downside to give it to some high level, what we've seen on the participation again, starting in kind of late April early may as I think people were assessing having been inside for weeks in weeks under a cold that lock down and again I think some of this is specific to the physical location you were at as to how long you were inside when.

Do you actually started to go up stores I think people start to assess how they're going to spend their time their money in the resources and the outdoors is a great fit for somebody that maybe isn't going to travel this year.

Maybe doesn't have the resources to travel because of financial concerns economic concerns. We saw an immediate uptick in fishing I think if you look at the fishing license sales across this country.

They exceeded anything we've seen a decade and we saw that in our stores.

This combination of first time buyers the customer coming in looking for that Rob real combo. They wanted to take their kids fishing and we heard a lot of folks say I haven't finished in 10 15, 20 years I need a new Rotten real combo, what's exciting about that as that's a that's an activity. Once you do it a few times you start to get hooked on it no pun intended and your back now.

Last year, and instead of buying $69 combo, maybe you're looking for a $200 Ron rail and that can lead to $1000 with the gear. So we're excited about what we saw on fishing a same old strewn camping.

We saw lots of new participants and if you spend any time in upstate Parker National Park. This summer you've seen the number of folks that are outdoors and again I believe that those customers. Many of them will decide they like at this is not at one time activity for them to go out and camp with our family and we're going to see those.

Those folks return in the future here, so we've really seen nice uptick across everything.

Certainly in the camping on trend that apparel and footwear, the functional part of those meaning the hiking boots.

The trekking poles.

The camouflage in Turkey season, and now what we're seeing camouflage going into the early archery seasons, showing very well for us with the customer.

Great.

Thank you very much best of luck.

Thank you.

Our next question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.

Hi, guys. Thanks, Thanks for taking my question great quarter, obviously.

Turning to supply chain I know, there's the short term stuff here, but how.

Assuming these you know these activities and demand for these products fishing camping firearms and ammo are going to sustain for bit what is there anything going on in the supply chain you can help us with.

That reflects kind of the ability of supply product for next year.

Even beyond that I mean, what are you hearing from your vendor partners is our capacity being added what can you tell us on that I.

I think it depends on the the sector Peter but we are seeing all the manufacturing ramp up and most of you you certainly got the insights at what some of the public companies are doing in the U.S. with there.

Sales of firearms and ammunition and that certainly direct reflection of their ability to ramp up production to meet the demand some of the categories. The longer lead time to ramp up that production other primarily overseas and I think the forecasting that we're working through it industry. This fall and winter will be.

Critical in the factories ability to meet the demands next spring summer and fall for the outdoor activities. So.

Certainly everybody is stretched right now and the supply chain because the demand.

But we are in pretty good shape, as we think about the future and ramping up to meet the demand.

Okay, Great and John one more for you just stood.

Comment on the mix.

Calmer sales, how how that is trending how it compares maybe how it differs from what you see in the store.

And the fulfillment.

E Commerce, How's that looking right now and kind of utilization of your third party.

Partners I'm just curious on how that's looking during this time of elevated demand.

Peter will make sure I understand your question as far as E com demand hauser performing or that will not exactly mix more mix of sales maybe across categories. How does the category mix of ecommerce have agreed commerce channel compared to what you've got going on the stores and then how are those being fulfilled and all the stores are consuming a lot of those.

Orders, but you also have your third party firearm vendors around the country that can fulfill orders for you just curious how about mixing out yeah. Thank you Peter the mix of products across the E. Com business is pretty consistent with what we see in the store the delivery mode is materially different as you can imagine so if you think about the percentage of.

Of footwear, and apparel being 5% nature et cetera, and this quarter, we're seeing a similar trend on E commerce as a percentage of the total ecommerce. However, when you think about the delivery the stores are still seeing a larger percentage of the product transacted through the store, meaning picked up in the store.

We're curbside from the store that we are seeing delivered to the home delivered to the home either through our distribution centers are dropship vendor integrations or own store fulfillment and we expect that to continue.

The third party program that you mentioned due to elevated demand Peter we pause that have to take care of our core customers first that are serving are coming to our stores for firearms. We'll continue to evaluate the right time to Reengage to third party program on our website and use our partnership to expand.

Our geographic reach of firearm sales.

Okay, Great. That's helpful and then Robert maybe for you two quick questions first the 250 basis point mix headwinds. The gross margin can you give us any color between.

Maybe magnitude.

Product margin versus channel mix, and then what's what's the future or the outlook here for hero pay I apologize. If you mentioned that earlier, but just curious what you or your thoughts or here in the second half year in terms of Herofive. Thanks sure. So on your first question I would say that you know sort of in round numbers about three quarters of the mix issue is.

Product mix in about a quarter of it is channel mix just in round numbers and that stayed pretty consistent first quarter. This second quarter.

As it relates to Hirel pay that's something that we have evaluated each quarter.

Given the circumstances, it's we've made no commitments to continue to do further hero pay.

But I also wouldn't rule it out depending on again, the circumstances and in the situation. So.

Thats, a TBD I guess on here okay.

Not that makes sense well thanks, congratulations on the great quarter and also the balance sheet progress, it's great to see thanks guys.

Thanks Peter.

Our next question comes from the line of Ryan's to go with Craig Hallum Capital Group. Please proceed with your question.

Good afternoon, guys and congrats on the strong results.

The first want to ask you know what if you can say directionally or quantify but the sales cadence within the quarter and then also what you've seen.

Yes.

The sales Hey, Ryan it's John in your first question was to sales cadence by month with in Q2, we saw very consistent a curve on demand in Q2 to previous years Q2.

And it was a pretty consistent.

Traffic demand, both online and in store in a pretty consistent.

Demand in the store it wasn't a material change as far as Q3 at this point Ram, we're not going to pre providing any guidance or or insight into how august or Q3 might be performing.

Gotcha, then just on inventory.

Down a similar percent kind of on a per store basis exited Q1 is Q2, but maybe within that or I guess, how do you feel about your inventory position relative to where you guys were at three months ago exiting Q1, two three are today better worse similar.

Very similar Ryan.

The trend has been its changed a little bit from category to category.

With some cannibal categories being consistent overall that were about in the same place as far as in stocks go today as compared to where we might we would like to be at this point.

Last one for me and then I'll hop back in the queue balance sheet significantly improved.

Any change in thoughts on kind of the near and medium term store expansion strategy.

You know big opportunity accelerated participation balance sheets, and better place any thoughts on accelerating new store openings Sir.

I.

I don't think that we would say that our plan is to accelerate new store openings, we talked about the ones that are into Q.

We're going to continue to be opportunistic and as you mentioned you know the balance sheet puts us in a position.

But to continue to look for opportunities for expansion, which we've done in it in a variety of different ways over the last year.

In so if opportunities presented themselves, we would take advantage of it but I wouldn't call that a change in strategy that sort of a similar to to how we've been operating in kind of business as usual.

Great. Thanks, guys. Good luck.

Thanks, Ron.

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

Hi, Thanks for taking the question.

Obviously, great quarter, John I'd I'd complement you for ramping up the E comm capabilities I don't I don't think two years ago, you guys would be able to maximize that that he can grow so nice work.

From a big picture perspective, looking at the the 61% comp have you given any thought on on breaking that down between what amount is being driven by just general demand growth and what amount of being driven by by market share gains.

Yes, Peter this is Robert I would say I'll, let John landed there're. So many factors in there. So many moving pieces that are occurring right now that it's hard to be very precise and trying to bifurcate where the the growth is coming from we we know for sure there.

We are gaining share and we know for sure that we're getting some benefit from extraneous events and trying to.

Break that out in.

Categorize how much is coming from aegis really really difficult we'd like to have it. It's just hard to hard to do that math that that Peter This is John thanks for the comment.

That is hard to really parse out, but what I think some important about that question and how we're thinking as we can see how many new customers. We've gained over the last two quarters and that's really what's important we've introduced sports men's wearhouse stores and sportsmen statcom to an incredibly large amount of new.

Customers that purchase from a from us they became loyalty customers that are either they are in our email database and the opportunity for us to continue to grow this organization and continued to grow market share is through retaining those customers and reengaging them across the categories. So while it's hard for us to say exactly how much of this.

This growth is.

Market share versus extremely extra ordinary activities.

What I think we really want to focus on is how we take those new customers in those new participants in the outdoors and continue to reengage them to built lifetime value for the long run.

Right, So maybe as a follow on John with.

With the new customers that that you've acquired here year to date.

Have you made any observations around the purchasing behavior I wouldn't be by that is or are you seeing now a repeat visits at a similar rates as before maybe at a stepped up rate.

Curious on.

How the new customers or are behaving already with you.

Yes, that's great question I, Peter I'll give you some generalisations I, probably can't speak to the exact repeat rate of new customers on a data point, but I can't tell you as we've seen a return to more normal shopping behavior inside the store and online and what I mean by that in Q1 people are really questing to get what they need and.

Get out and we saw that in the basket analysis, we saw that in the quantity of customers signing up for loyalty that cut quantity of customers signing up for our new credit card in Q2, we start to see normal shopping behavior again.

Sorry, I apologize.

All shopping behavior inside the store, but customers were moving from department to Department and actually their basket analysis was looking more similar to what it would have last summer. So I think from our perspective, we're excited to see some normalization and that activity, we're seeing a great improvement in our new credit card fees.

While growth, our new loyalty customer growth and our email growth on the web site and all those things together give us optimism that we're getting more to a normal shopping behavior, which will allow us to be better at that retention component and increasing the repeat at sportsman dot com and in the store.

Yes.

Okay. Good maybe one last one for me just a follow up on Ryans question on the the cadence.

Is it fair to say that the quarter finished as strong as it started and then also I know when it coming in Q3, but any kind of early signs on on hunting season, particularly with a large chunks of college football cancelled or any any early purchase activity there.

Peter I'll take the first part of your question I'll, let John answer the second.

If I understand it correctly, you know you're probably thinking about how the cadence changed in Q1, when we reported our Q1 results and we said the first month of the quarter was sort of normal and then the next two months hit these elevated levels in Q2, what we saw is real consistency every single month had very.

Very similar total growth in same store growth throughout the quarter. So there was no change in trend up or down. It did it we started to two at a level and we ended at that level in a pretty much stayed that way throughout the quarter in terms of growth both total in same store.

I think that if I could Peter one things to the it's worth mentioning and this applies to both fishing licenses and hunting licenses.

On the hunting side, we've seen a greater gross so far this June and July. This is not sportsman data. This is state data that we have a better participation rate. This year than we've had in many many many years and in some cases licenses sold out in minutes that in the past may have taken weeks are never.

Sold out at all so I think theres going to be more people in the field. This year more people participating on again I think that early data would indicate that the hunting season will be good for the overall industry.

Sounds great. Thanks for all the feedback and keep up good work.

Thank you.

Our next question comes from the line of Mark Smith with Lake Street Capital markets. Please ask your question.

Hey, guys first off for me I was impressed with the apparel and footwear sales during the quarter can you talk at all about margins in those those businesses did you have some clear out of some things in spring that maybe impeded that or did you really just see strength across the board in those categories.

Yes, Mark this is Robert and I agree with you we saw a really nice progress in those categories. Those categories are traditionally much higher margin product categories, and say firearms and ammunition. However, there was some pressure.

On gross margin within those categories, and what I would refer to the rate product rate.

As we sort or are looking at our assortments and thinking about where we have a right to win and we really want to focus on the technical.

Sort of apparel in selling so.

We didn't see the same increase in rates within that category. However, sales within that category continued to be at a much higher margin that our average.

Okay.

And then any change as we look at we'll call it.

Broadly stimulus spending any changes that you saw in consumer behavior, as maybe stimulus checks wound down or as maybe higher unemployment rates rolled off in July.

Not really Mark this is John one things I will add on the apparel side. There were a lot of map holidays from our key vendors. This summer, which were unique and I didn't mean to just to add color, but I.

I think that that probably put a little bit more of a rate variance in apparel. This summer that we traditionally it's in these are the big brands. So I think they probably were over inventory with the pullback from some retailers on apparel and we did see some map holidays come through which again go right to our bottom line in.

In a in margin.

Okay.

Then I think that last one from me.

As we look at kind of a shift into winter and hunting season, or you just talked about this a little bit but maybe can you talk about two trends as far as any changes that you've seen.

And then maybe how well your position on inventory first as we look at archery you know how that category has trended maybe during the quarter as well as into Q3, and then also as we look at firearms and ammunition within a more on to kind of caliber.

Instead of looking at nine millimeter looking at traditional huntoon rounds within ammunition and what inventory you haven't firearms on your shops are you seeing that bump as we move into kind of a more historical sales trends offer those those rounds and that those categories sure sure Mark Let me if I give you some color first let's talk about premium.

Primitive.

Weapons.

Both combination a compound crossbill and muzzle loaders first of all we've got some new buying talen spin in the organization for for a little while now and that team has really done a nice job positioning us in those primitive categories better than we have in the last few years US we have new brand.

Got a really really strong positioning and market strategy inventory as a good good shape and we are seeing demand and we started seeing it not not just the last week's has really started kind of early summer as people started thinking about getting into the field in the fall we started hunting in the west three weeks ago I too.

The half weeks ago, and archery and the sales have been fantastic. So again I think from a sports warehouse perspective, we were felt well positioned for archery, we're well positioned for primitive muzzle loader and crossbows, where their legal and we are seeing a nice participation rate.

So I think about going into firearm season.

With firearm bolt bolt action Centerfire rifles of for hunting season ammunition. We're in very good good shape NRC. That's that's kind of a core how we built this business was on hunting and hunting rifles, and we are an exceptional shape. We've had some exclusive firearms that we've partnered with key vendors on this.

Here and we're really happy with the performance in those ammunition is those can be a little spotty to be fair. There are certain calibers that Ah maybe somebody normally buy two boxes. They were in the summer. They bought four boxes just to be sure. So we've seen some some then spots on centerfire right.

But nothing to the extent, we've seen in handgun ammo or NATO animal.

Okay. That's helpful. Thank you.

There are no further questions in the queue I'd like to end the call back to management for closing remarks.

This is John and I want to thank everyone for their time today, a very special thanks to all of our associates in our stores distribution Center care Center and at our corporate office.

I'm very proud of the team's dedication and contributions not only during the second quarter, but this entire year I want to say, thank you again and was that we will close the call.

Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Yes.

[noise].

[music].

Greetings and welcome to sports men's Wearhouse second quarter, and first half 2020 earnings conference call.

Sorry, all participants are to listen only mode like once you're done after such as well for 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.

It's now my pleasure to introduce your host take what else Vice President corporate development and Investor Relations like it was all you may begin.

Thank you with me on the call today is John Barker, Chief Executive Officer, and Robert Julian Chief Financial Officer of Sports and 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 1995.

Which includes statements regarding your 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 in the company's 10-K for the year ended February Onest 2020, and the company's 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.

Our provided a supplemental financial information in our press release included as exhibit 99.1 to the form 8-K, we furnished to the FCC today, which is also available on the Investor Relations section of our website at sportsmen Dot com.

I would also like to note that today's materials, including earnings conference call Powerpoint presentation, which is available at sports fans Dotcom any investor Relations section of the web site you may utilize this deck to follow along with today's prepared remarks.

I would now like to turn the call over to John Barker, Chief Executive Officer affords men's wearhouse.

Thank you Caitlin good afternoon, everyone and thank you for joining us today.

I hope you in your family so continue to stay safe and healthy.

I will begin my remarks by providing an update on cobot 19, as it pertains to sports men's wearhouse.

Also comment on industry trends and discuss high level results for the second quarter. Following my comments Robert will provide specifics on our Q2 at first half financial results as well as some updated commentary on full year 2020 expectations.

Finally, we will open up the call for questions.

I'm going to start on slide four of the presentation. During the second quarter, we continue to prioritize the health and safety of our associates, while remaining open in all markets I cannot overstate, how proud I am up the sports men's wearhouse team.

They continue to safely serve customers, while we navigated a sustained surgeon our business.

In the stores, we continue to focus on cleaning <unk> sanitizing and utilizing face masks to ensure customers associates and their families stay safe.

E. Commerce also continued to be an increasingly crucial part of our retail strategy.

Following us to serve customers, while limiting person to person contact.

In the second quarter demand was elevated across all of our major categories with significant increases in firearms ammunition fishing and camping.

Simply demand outstrips supply for many of our products.

Although we're not satisfied with our current inventory levels, we believe based on our market share gains that in most cases, we're better positioned than our competition, which is a testament to our team is planning processes and vendor relationships.

As was the case in Q1, we will not be providing forward guidance today due to the uncertainty in the economic environment.

Turning to slide five we're highly encouraged by the significant increase in participants in the outdoor activities across the us.

In addition to the increase in fishing and hunting camping and hiking activities. Most state National Park attendance is up versus prior year across the country. Many Americans are transitioning their resources away from travel and entertainment toward spending time with family and friends and the outdoors.

The firearm industry has seen a historic surge of new customers in 2020.

During the first seven months of this calendar year, nearly 5 million people purchase the firearm for the first time.

It is important to note that in firearm customer has the highest lifetime value of any segment within our customer base and drive significant value across other product categories in our business.

History has shown that outdoor activities, particularly those done with family and friends typically have remarkable participation resilience, especially during recessionary times.

We are optimistic that the new participants and outdoor activities, including hunting and fishing bode well for outdoor specialty retail in general and sports men's wearhouse in particular.

During Q2, we grew our loyalty program to nearly 2.5 million customers and increase our overall email database by 68% year over year. We believe we are the early innings of capitalizing on our best in class loyalty program and our expanded database to better.

Engage with customers.

Turning to slide six combination of multiple factors in Q2 led by market share gain the surge in outdoor participation and social unrest resulted in very favorable financial results in the second quarter of Twentytwenty net sales were $381 million and increase.

Most of 80% year over year.

Same store sales for Q2 increased 61%.

Same store sales for firearms and ammunition were up 123, and 75% respectively.

Total sports fans warehouse firearm unit sales increased 171% during the quarter, while the adjusted Nics checks were up 111%.

Our unit sales materially exceed the nics checks increased for the quarter, which confirms that we are continuing to gain market share and new customers.

Footwear and apparel also recovered nicely in the second quarter, we saw particular strength in our functional footwear apparel, such as hunting boots waiters and camouflage.

We believe we have a right to win in the sub categories and we will continue to evolve our assortment to better serve our customers.

The higher proportion of firearms and ammunition revenue continued to materially impact our gross margin during Q2.

Robert will discuss product mix and margin implications in greater detail during his prepared remarks.

Turning now to slide seven.

I will comment on our ecommerce result, and Omnichannel strategy since launching our new ecommerce platform in late 2018, we've continued to build the team tools and capabilities to adapt to changing consumer behaviors.

The events of 2020, especially KOVA 19, and social unrest accelerated adoption of our ecommerce platform, including BOPUS and shipped to haul.

In Q2 ecommerce sales growth accelerated even further during the quarter E Commerce, driven sales grew over 300% versus the prior year through the first half of 2020 E. Commerce, driven sales now account for more than 10% of total net sales, which has exceeded our exceeded.

Our expectations and timeline.

Therefore, we will continue to invest in our platform and capabilities to enable future growth in this channel.

We also continue to expand our store footprint.

We opened our first small format store and Laramie, Wyoming in early August.

Roughly 7500 square feet. This stores currently the smallest in our portfolio and an ideal approach to further penetrate small to midsize markets, where our national competitors cannot perform we are highly encouraged by the storage results. So far and we believe our flexible store format will continue to see.

Sure as a competitive advantage moving forward.

We have opened four new sports was warehouse stores year to date and have plans to open another three for a total of seven new sports warehouse stores in 2023, new stores will be located in Chambersburg, Pennsylvania, which is set to open in late September Brent, what California, and Rona, California, which are planned.

For later.

In Q3 or early Q4.

In addition, our first legacy shooting center opened in March of this year and is performing ahead of expectations. As a result, we will be assessing expansion opportunities for this concept in 2021.

Finally, I would like to highlight the astonishing improvement in our balance sheet and financial position.

Over the last year.

We have reduced net debt by $150 million and improve liquidity by $130 million compared to this time last year.

We ended Q2 with a net debt to EBITDA ratio of less than 0.1, reflecting our nearly debt free position.

Turning to slide eight.

In summary, with the recent increase in outdoor participants we believe there are significant momentum in our core business coming out of Q2.

We have gained a tremendous number of new customers and have grown our email database exponentially over the last two quarters as we reengaged with these new customers across categories. There are substantial opportunity to grow sales and further increase customer lifetime value.

In the near term, we view the upcoming election cycle and economic uncertainty as to factors that could influence our business. However, we remain optimistic that over the long run there are significant opportunity for continued market share gains ecommerce growth and physical store expansion.

We believe these factors and our laser focus on execution for both an operational and strategic perspective position sportsman is warehouse for long term growth and profitability.

We look forward to speaking with you again in early December when we report our third quarter results.

With that I'll turn the call over to Robert to discuss should discuss our financial results.

Thanks, John.

I'll begin my remarks today with a review of our Q2 and first half 2020 financial results.

John mentioned earlier, we're not providing forward guidance as tough however, I will update the commentary provided on the last earnings call regarding full year 2020 expectations for some key financial metrics.

Turning now to slide 10 of the presentation.

Second quarter 2020, net sales were $381.0 million compared to 211.8 million in the second quarter 2019.

An increase of $169.2 million or 79.9% over the prior year period.

Same store sales increased 61% in the quarter led by firearms and ammunition, which increased 123% in 75% respectively.

I've been in fishing also that strong quarters, increasing over the prior year period by 46% in 45% respectively.

Finally, footwear and apparel also increased nicely over prior year up 30% in 19%, respectively. All on a same store basis.

Q2, 2020, gross profit was $129.1 million compared to 73.2 million in the second quarter of 2019, an increase of $55.9 billion or 76.4%.

Gross margin was 33.9% for the quarter, a decline of 70 basis points versus prior year.

Just decline can be attributed to several factors.

Product and channel mix cost in 250 basis point headwind in gross margin.

Due to a higher proportion of revenue coming from firearms and ammunition and more sales coming through our E Commerce platform.

This gross margin decline was partially offset by higher product margins volume incentives and other adjustments, which positively impacted gross margin by 180 basis points.

SGN expense of $83.6 million for Q2, 2020 was an increase of $20.1 million or 12% compared to the second quarter of 2019.

However, SGN a leverage improved approximately 800 basis points with SGN a expense coming in at 21.9% of net sales for the quarter.

We incurred additional payroll expense of $13.6 million versus prior year, including $1.5 million of Hirel pay for our frontline in non executive back office associates.

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

Rent expense increase approximately $2.2 million, primarily due to new store openings.

Other operating expense increased approximately $3.9 million versus the prior year, which was primarily a result of higher credit card fees due to increased sales volume.

Income from operations was $45.5 million in Q2, 2020 compared to $9.8 million into prior year period, an increase of $35.7 million.

Interest expense in Q2, 2020 was $1.0 million compared to 2.4 million in Q2 2019, a reduction of $1.4 million. This improvement is result of lower total borrowings and lower interest rates.

We recorded income tax expense of $12.0 million in Q2, 2020 compared to 1.9 million in Q2 2019. This increases the result of improved profitability year over year.

Net income for the quarter was $32.5 million or 75 cents per diluted share as compared to net income of $5.5 million or 13 cents per diluted share in the prior year period.

This represents a year over year improvement of 62 cents per diluted share.

Adjusted net income in Q2, 2020 was $33.6 million or 76 cents per diluted share compared to adjusted net income of $5.7 million are 13 cents per diluted share in Q2 2019.

This also represents a year over year improvement of 62 cents per diluted share on an adjusted basis.

Adjusted EBITDA for Q2, 2020 was $53.6 million compared to 15.8 million in the prior year period, an increase of $37.8 million.

Turning now to slide 11 of the presentation.

First half 2020, net sales were $627.8 billion compared to 385.8 billion in the first half of 2019, an increase of $242 million or 62.7%.

Same store sales increased 47% in the first half of 2020.

First half 2020 gross profit was $203.9 million compared to 127.4 million in the first half of 2019, an increase of $76.5 million.

Gross margin was 32.5% for the first half of 2020, a decline of 60 basis points versus the prior year period.

As seen in expense of $158.8 million for the first half of 2020 was an increase of $35.8 million or 15% compared to the first half of 2019.

As a percentage of net sales actually in a leverage improved approximately 660 basis points to 25.3% of net sales for the first half of 2012.

Income from operations was $45.0 billion in the first half a 2020 compared to 4.4 million in the prior year period.

Interest expense in the first half of 2020.

$2.6 million compared to 4.5 million in the first half of 2019.

We reported income tax expense of $11.2 million in the first half 20 to 20 compared to an income tax benefit of 0.1 million in the first half of 2019.

Net income for the first half of 2020 was $31.3 million or 72 cents per diluted share count.

Compared to zero net income in dollars or zero cents per diluted share in the prior year period.

Adjusted net income in the first half of 2020 was $34.0 million or 77 cents per diluted share count.

Compared to adjusted net income of zero point $5 billion or one cents per diluted share in the first half of 2019.

First half 2020, adjusted EBITDA was $61.8 million compared to 16.2 million in the prior year period.

Turning to slide 12, I will now I'll comment on our balance sheet and liquidity.

Q2, 2020, ending inventory was $297 million compared to $289 million at the end of Q2 2019.

And the increase of $8 million.

We have added 16, new stores in close one store. During this time period inventory is down 9% on a per store basis compared to prior year.

We incurred $12 million of net capital expenditures in the second quarter 2020, compared to 14.5 million in Q2 2019, an increase of two and a half million dollars.

First half 2020 operating cash flow was $145.7 million versus 35.4 million for Q2 2019.

Just 110 billion dollar improvement in operating cash flow year over year is primarily due to higher accounts payable balances associated with increased sales volume higher net income and higher accrued expenses versus prior year.

While our accounts payable balance increased year over year, our days payable outstanding metric has remained relatively flat to prior year.

Our liquidity continues to improve as we ended Q2 with $3 million in net outstanding borrowings on our line of credit.

Compared to $127 million at the end of Q2 2019.

This reduction was achieved while holding an incremental $11 million in cash balances versus prior year in order to provide maximum flexibility during these uncertain to us.

At the end of second quarter 2020, we had approximately 171 million of availability on our revolving credit facility.

The outstanding balance on our term loan was $16 million at the end of Q2 2020 compared to $32 million at the end of Q2 2019, a reduction of $16 million. This includes an accelerated payment on our term loan of $10 million made early in Q2.

Our total liquidity, including cash on hand at the end of Q2, 2020 was $183 million compared to $53 million in the prior year period.

Turning now to slide 13 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 environment.

However, I would like to provide some updated data points as it relates to expected full year 2020 results.

Starting with new store growth, we are on track to open a total of seven news forces warehouse stores and one legacy shooting center in 2012.

With respect to gross margin, we expect that continued higher than normal proportion of revenue to come from firearms and ammunition and a higher volume of sales will be conducted through our E. Commerce platform in the back half of the year. Both of these factors will continue to put pressure on gross margin.

However, we also expect product margin expansion and higher volume incentives to continue as well.

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

Fiscal year 2020 interest expense is estimated to be approximately $4 billion.

Finally, full year 2020 capital expenditures are anticipated to be approximately $20 million to $25 million.

We look forward to updating you on our business and financial results during our Q3 earnings call in early December.

With that I will now I'll turn the call back over to the operator for questions.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer section if you'd like to ask a question you May press star one on your telephone keypad a confirmation internal indicate your line is my question to you May Press Star too if you would like from one of your question from the Q.

For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star team.

Our first question coming from the line Seth Sigman with Credit Suisse. Please proceed with your question.

You guys good afternoon, and congrats on the quarter, obviously, a very strong results I'm curious about the consistency in results across your region. You, obviously had a very diverse footprint. So.

What do you see across the us and then.

The adjusted Nics looked like in August it was still strong, but it did decelerate. So curious what you're seeing early in the third quarter.

It will be helpful. Thanks.

Seth It's John Good speaking with you.

Regionally, we saw very consistent demand across all categories, maybe the one outlier in the entire business and it was strong just not the same level was Alaska.

And that was partially impacted by the lack of travel, which certainly slowed down the fishing and hunting season, but those stores continued to perform very well just not at the rate of the rest of the country. As you think about the slow down or that the change in mix growth that was announced this morning are yesterday pardon me the adjusted next.

I think what you're seeing Seth is not necessarily a change in demand what youre seeing is demand outstripping supply in certain categories of firearms and.

Again, we perform extremely well against adjusted mix in Q2, which is a testament to what the team has been able to do through the relationships and they're planning and forecasting with the vendors and we expect that to continue going forward.

Okay. That's helpful. Just on that point, what is your sense of how inventory phases here as you look into the back half of the year youre headed into a seasonally bigger period for the business.

So how are you planning for your inventory position.

Actually we feel like we're in a better positioned than most going into the back half of the year now with that said there is probably going to be some spots within.

The chain that we'll have some some fin inventory of its teams working diligently everyday to fill in those gaps the manufacturers of course and the vendors are working diligently, but as you can imagine the supply chain in general as see some impact from Covidien and the things that are related to the regulatory and attendance that might be occurring.

In a particular locations. So each one of those unique we're feeling pretty good about our ability to be successful across the board in the back half of the year, knowing that we some spots there'll be a little light.

Okay.

Thats helpful. Just one follow up on the gross margin did seem stronger despite the big mix impact I think you mentioned volume incentives and higher merchandise margins I assume it's also less promotional activity in the period.

Can you talk about sustainability of some of those positive offsets.

I think you've talked about some of the volume incentives continuing was nature of that if you just elaborate on that and you've got something more structural or more unique to the current environment. Thank you.

Seth This is Robert.

Certainly the mix the headwinds that are created by mix over some time should normalize we do not expect firearms and ammunition to continue to be this high up a proportion of our total sales and so.

That should abate capture some period of time some of the offsets are more structural and we would expect to continue.

The rate variants that we see within a product category, where we've seen you know it's incremental improvement, but some improvement in just about every category and the vendor incentives.

As structural in terms of how the program is designed but it is also affected by volume. So we're seeing higher than normal incentive dollars due to higher than normal volumes that will also abate over some period of time it will go back to normal.

But the program is in place in so that is structural in that regard if I may Robert to add to that south on the promotional side of the business as you can imagine.

Throughout the end of Q1 in all through Q2, there has been very little promotional activity in the market around firearms ammunition fishing and in some parts of camping. So we've been able to keep our margins.

In really good spot at the category level, given the lack of promotional activity by our competition.

That's great thanks very much.

Our next question comes on the line of Daniel Hofkin with William Blair and company. Please proceed with your question.

Good afternoon.

Hi, just one question I would have moves to what degree and it sounds like.

If we're hearing you correctly like continued.

Strong trends, thus far and expectations are outperforming mix.

Well, what degree, especially for firearms, which are not.

Consumable product the way that ammo was.

Could you know current demand sort of pulled forward from future demand.

Let's say next year.

To what degree do you think that's a factor is there anything you can look to historically to tell you about that that's my first question.

The Dan as John Hope all as well.

We think about.

This year's demand in firearms, specifically its unique to anything we've ever seen in the industry. The reason I'd say that is the number of new first time customers into the industry. We're estimating 5 million first time buyers of a fire on this year and that means that's not a pull forward of our traditional cut.

Customer up some of those customers are going to start participating and shooting activity, that's going to lead them to their second third fourth firearm of course some of them may decide not to buy a second one but we're actually optimistic about what we've seen on the first time buyer talents that that can help offset.

At any pull forward that might happen due to an election cycle, where our traditional customers buying one more firearm that he or she is concerned about in the political process.

Okay.

And then maybe could you give.

Maybe a little more color about different categories.

Performed.

Better or worse, then obviously kind of firearms and ammo or kind of a standout, but just kind of any any.

Variance among other categories.

Including by region, I know you talked about Alaska being.

Weaker regionally, but just any color on performance of the categories overall relative to each other and by region would be helpful.

Yes down trying to give you just some high level, what we've seen other participation against starting in kind of late April early may as I think people were assessing having been inside for weeks in weeks under a cobot locked down and again I think some of this is specific to the physical location you were at as to how long you were inside when.

Do you actually starting to go up stores I think people start to assess how they're going to spend their time their money in the resources and the outdoors is a great fit for somebody that maybe isn't going to travel this year.

Maybe doesn't have the resources to travel because of financial concerns economic concerns we saw an immediate uptick and fishing I think if you look at the fishing license sales across this country.

They exceeded anything we've seen a decade and we saw that in our stores. This combination of first time buyers the customer coming in looking for the Rob real combo. They wanted to take their kids fishing and we heard a lot of folks say I haven't fist and 10, 15, 20 years I need a new rod real Cabo what's exciting about that as that's a that's an active.

Thank you once you do it a few times you start to get hooked on it no pun intended and your back next year and instead of buying $69 combo, maybe you're looking for a $200 Ron rail and that can lead to $1000 with the gear. So we're excited about what we saw fishing a same old strewn camping.

We saw lots of new participants and if you spend any time in upstate Parker National Park. This summer you've seen the number of folks that are outdoors and again I believe that those customers. Many of will decide they like it and this is not at one time activity for them to go out and camp with their family and we're going to see those.

Those folks return in the future here, so we've really seen nice uptick across everything.

Certainly in the camping I'm, sorry, the apparel and footwear, the functional part of those meaning the hiking boots.

The trekking poles.

The camouflage in Turkey season, and now what we're seeing camouflage going into the early archery seasons as shown very well for us what the customer.

Great.

Thank you very much best of luck.

Thank you.

Our next question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.

Hi, guys. Thanks, Thanks for taking the question great quarter obviously.

On the supply chain I know, there's the short term stuck here, but how.

Assuming these these activities and demand for these products fishing camping firearms and ammo are going to sustain for a bit what is there anything going on in the supply chain you can help us with.

That reflects kind of the ability of supply product for next year.

Even beyond that I mean, what are you hearing from your vendor partners is our capacity being added what can you tell us on that.

I think it depends on the.

Sector, Peter but we are seeing all the manufacturing ramp up and most of you you certainly got the insights at what some of the public companies are doing in the U.S. with there.

Sales of firearms and ammunition and that certainly direct reflection of their ability to ramp up production to meet the demand some of the categories. The longer lead time to ramp up that production other primarily overseas and I think the forecasting that we're working through it industry. This fall and winter will be.

Critical in the factories the ability to meet the demands next spring summer and fall for the outdoor activities. So.

Certainly everybody is stretched right now and the supply chain because the demand.

What we are in pretty good shape, as we think about the future and ramping up to meet demand.

Okay, Great and try one more for you just go tongue.

Comment on the mix.

Tom or sales, how how that is trending how it compares maybe how it differs from what you see in the store.

And the fulfillment.

E Commerce, How's that looking right now and kind of utilization of your third party.

Partners I'm just curious on how that's looking during this time of elevated demand.

Peter will make sure I understand your question as far as E com demand Hauser performing or that wondering exactly neglecting our mix of sales maybe across categories. How does the category mix of ecommerce have agreed commerce channel compare what you've got going on the stores and then how are those being filled into the stores are feeling a lot of those.

Orders, but you also have your third party firearm vendors around the country that can fulfill orders for you just curious how about mixing out yes. Thank you Peter the mix of product across the E. Com business is pretty consistent with what we see in the store the delivery mode is materially different as you can imagine so if you think about the percentage.

Of footwear, and apparel being 5% age et cetera, and this quarter, we're seeing a similar trend on E commerce as a percentage of the total ecommerce. However, when you think about the delivery the stores are still seeing a larger percentage of the product transacted through the store, meaning picked up in the store.

Or curbside from the store that we are seeing delivered to the hall delivered to the home either through our distribution centers are dropship vendor integrations or own store fulfillment and we expect that to continue.

The third party program that you mentioned due to elevated demand Peter we pause that have to take care of our core customers first that are serving are coming to our stores for firearms. We'll continue to evaluate the right time to Reengage. The third party program on our website and use our partnership to expand.

Our geographic reach of firearm sales.

Okay, Great. That's helpful. And then Robert maybe for you two quick questions first the 250 basis point mix headwind to gross margin can you give us any color between.

Maybe magnitude the product margin versus channel mix, and then what's what's the future or the outlook here for hero pay I apologize. If you mentioned that earlier, but just curious what you are what your thoughts or here in the second half year in terms of Herofive. Thanks sure. So on your first question I would say that you know sort of in round numbers about three quarters.

Of the mix issue is product mix and about a quarter of it is channel mix just in round numbers and that stayed pretty consistent first quarter. This second quarter.

As it relates to Hirel pay that's something that we have evaluated each quarter.

Given the circumstances, it's we have made no commitments to continue to do further hero pay.

But I also want it rule it out depending on again, the circumstances and in the situation. So.

Thats, a TBD I guess on here okay.

Not that makes sense well thanks, congratulations on the great quarter and also the balance sheet progress great to see thanks guys.

Thanks Peter.

Our next question comes from the line of Ryan Seagal with Craig Hallum Capital Group. Please proceed with your question.

Good afternoon, guys and congrats on this front result.

First want to ask you know what if you can say directionally or quantify but the sales cadence within the quarter and then also what you've seen in August.

The sales K, Ryan as John and your first question was the sales cadence by month with in Q2, we felt very consistent.

Curve on demand in Q2 to previous years Q2.

And it was a pretty consistent.

Traffic demand, both online and in store in a pretty consistent.

Demand in the store it wasn't a material change as far as Q3 at this point Ram, we're not going to pre providing any guidance or or insight into how august or Q3 might be performing.

Gotcha, Ben just on inventory.

Down a similar percent kind of on a per store basis execute Q on Q2, but maybe within that or I guess, how do you feel about your inventory positioning relative to where you guys were at three months ago exiting Q1, two three are today better worse similar.

Very similar Ryan.

The trend has been its changed a little bit from category to category.

With some cattle categories being consistent overall, though we're about in the same place as far as in stocks go today as compared to where we might we would like to be at this point.

Last one for me in that I'll hop back in the queue, but balance sheet significantly improved.

Any change and thoughts on kind of the near and medium term store expansion strategy.

Big opportunity accelerated participation balance sheets, and better place any thoughts on accelerating new store openings Sir.

I don't think that we would say that our plan is to accelerate new store openings, we talked about the ones that are into Q.

We're going to continue to be opportunistic and as you mentioned you know the balance sheet puts us in a position.

To continue to look for opportunities for expansion, which we've done in a in a variety of different ways over the last year.

So if opportunities presented themselves and we would take advantage of it but I wouldn't call that a change in strategy that sort of similar to to how we that operating in kind of business as usual.

Great. Thanks, guys. Good luck.

Thanks Ryan.

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

Hi, Thanks for taking the question.

Obviously, great quarter, John I'd I'd complements you for ramping up the E com capabilities I don't I don't think two years ago, you guys would be able to maximize that that he can grow so nice work.

From a big picture perspective, looking at the the 61% comp have you given any thought on on breaking that down between what amount is being driven by just general demand growth and what amount of being driven by by market share gains.

Yes, Peter this is Robert I would say I'll, let John landed there're. So many factors in there. So many moving pieces that are occurring right now that it's hard to be very precise and try to bifurcate, where the the growth is coming from we we know for sure.

We are gaining share and we know for sure that we're getting some benefit from extraneous events and trying to.

Break that out in.

Categorize how much is coming from Asia really really difficult we'd like to have it. It's just hard to hard to do that math that that Peter This is John thanks for the comment.

That is hard to really parse out, but what I think it's important to about that question and how we're thinking as we can see how many new customers. We've gained over the last two quarters and that's really what's important we've introduced sportsman is warehouse to stores and sportsman dotcom to an incredibly large amount of new.

Customers that purchase from a from us they became loyalty customers that are either they are in our email database and the opportunity for us to continue to grow this organization and continued to grow market share is through retaining those customers and reengaging them across the categories. So while it's hard for us to say exactly how much of this.

This growth is.

Market share versus extreme.

Extraordinary activities.

What I think we really want to focus on is how we take those new customers and those new participants in the outdoors and continue to reengage them to built lifetime value.

For the long run.

Great. So maybe as a follow on John with with the new customers that that you've acquired here year to date.

Have you made any observations around the purchasing behavior I would've made by that is are you seeing now a repeat visits.

At a similar rate this before maybe at a stepped up rate.

Curious on.

How did the new customers or are behaving already with you.

Let us that's great question, Peter I'll give you some generalisations I, probably can't speak to the exact repeat rate of new customers on a data point, but I can't tell you as we've seen a return to more normal shopping behavior inside the store and online and what I mean by that and Q1 people are really questing to get what they need and.

Get out and we saw that in the basket analysis, we saw that in the quantity of customers signing up for oil see that cut quantity of customers signing up for our new credit card in Q2, we start to see normal shopping behavior again.

Sorry, I apologize.

Shopping behavior inside the store, but customers were moving from department to Department and actually their basket analysis was looking more similar to what it would have last summer. So I think from our perspective, we're excited to see some normalization and that activity, we're seeing a great improvement in our new credit card fees.

While growth, our new loyalty customer growth and our email growth on the web site and all those things together gives us optimism that we're getting more to a normal shopping behavior, which will allow us to be better at that retention component and increasing the repeat at sportsman dot com and in the store.

Yes.

Okay. Good.

Maybe one last one for me just a follow up on Ryans question on the the cadence.

Is it fair to say that the quarter finished as strong as that started and then also a NATO when it coming in Q3, but any kind of early signs on on hunting season, particularly with a large chunks of college football cancelled or any any early purchase activity there.

Peter I'll take the first part of your question I'll, let John answer the second.

If I understand it correctly, you know you're probably thinking about how the cadence changed in Q1, when we reported our Q1 results and we said the first month of the quarter was sort of normal and then the next two months hit these elevated levels in Q2, what we saw is real consistency every single month had very.

Very similar total growth and same store growth throughout the quarter. So there was no change in trend up or down as did it we started to two at a level and we ended at that level in a pretty much stayed that way throughout the quarter in terms of growth both total in same store.

I think that if I could Peter one things to that's worth mentioning and this applies to both fishing licenses and hunting licenses.

On the hunting side, we've seen a greater gross so far this June and July. This is not fortunes data. This is state data that we have a better participation rate. This year than we've had in many many many years and in some cases licenses sold out in minutes that in the past may have taken weeks are never.

Sold out at all so I think theres going to be more people in the field. This year more people participating and again I think that early data would indicate that the hunting season will be good for the overall industry.

Sounds great. Thanks for all the feedback and but good work.

Thank you.

Our next question comes from the line of Mark Smith with Lake Street Capital markets. Please state your question.

Hey, guys first off for me I was impressed with the apparel and footwear sales during the quarter can you talk at all about margins in those those businesses did you have some clear out of some things in spring that maybe impeded that or did you really just see strength across the board in those categories.

Yes, Mark this is Robert and I agree with you we saw really nice progress in those categories. Both categories are traditionally much higher margin product categories than say firearms and ammunition. However, there was some pressure.

On gross margin within those categories, and what I would refer to a rate product rate.

As we sort or are looking at our assortment and thinking about where we have a right to win and we really want to focus on technical.

Sort of apparel insulin so.

We didn't see the same increase in rate within that category. However, sales within that category continues to be at a much higher margins than our average.

Okay.

And then any change as we look at we'll call it.

Broadly stimulus spending any changes that you saw on consumer behavior, as maybe stimulus checks wound down or as maybe higher unemployment rates rolled off in July.

Not really Mark this is John I'm, one of things I will add on the apparel side. There were a lot of map holidays from our key vendors. This summer, which were unique and I didn't mean to to add color, but I.

I think that that probably put a little bit more of a rate variance in the apparel. This summer that would traditionally it's in each of the big brands I think they probably were over inventory.

With the pullback from some retailers on apparel and we did see some map holidays come through which again go right to our bottom line in a in a in margin.

Okay.

And then I think the last one from me as we look at kind of a shift into winter and hunting season, or you just talked about this a little bit but maybe can you talk about two trends as far as any changes that you've seen.

And then maybe how well you're positioned on inventory first as we look at archery.

You know how that category has trended maybe during the quarter as well as into Q3, and then also as we look at firearms and ammunition within a more on to kind of caliber instead of looking at nine millimeter looking at traditional pontoon rounds within ammunition and what inventory you haven't firearms on your shell.

Sure you see that bump as we move into kind of a more historical sales trends offer those those are rounds and that those categories.

Sure sure Mark let me if I give you some color first let's talk about premium primitive.

Weapons.

Got both combination a compound crossbow and muzzle loaders first of all we've got some new buying talen spin in the organization for a little while now and that team has really done a nice job positioning us in those primitive category is better than we have in the last few years us we have newbrough.

And got a really really strong positioning and market strategy inventories and good good shape and we are seeing demand and we started seeing it not not just the last weeks. This really started kind of early summer as people started thinking about getting into the field in the fall we started hunting in the west three weeks ago right.

Two and a half weeks ago, and archery and the sales have been fantastic. So again I think from a sports warehouse perspective, we were about well positioned for archery, we're well positioned for pregnant mother loader and crossbows, where their legal and we're seeing.

A nice participation rate, they think about going into firearm season.

Firearm bolt bolt action Centerfire rifles for hunting season, and ammunition. We're in very good good shape in ours. That's that's kind of the core how we built this business was on hunting and hunting rifles, and we are an exceptional shape. We've had some exclusive firearms that we've partnered with key vendors on this year.

Sure and we're really happy with the performance in those ammunition is the can be a little spotty to be fair. There are certain calibers that maybe somebody normally buys to boxes. They were in the summer they bought or boxes just to be sure. So we've seen some.

Some then spots on Centerfire rifle, but nothing to the extent, we've seen in hand guns, <unk> ammo or natively on them.

Okay. That's helpful. Thank you.

There are no further questions in the queue I'd like to end the call back to management for closing remarks.

This is John and I want to thank everyone for their time today, a very special thanks to all of our associates in our stores distribution Center care Center and at our corporate office I'm very proud of the team's dedication and contributions not only during the second quarter, but this entire year I want to say thank you again.

And with that we will close the call.

Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.