Q2 2022 Sportsmans Warehouse Holdings Inc Earnings Call
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Greetings. Welcome to the Sportsman's Warehouse second quarter 2022 earnings call.
At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded.
I will now turn the conference over to your host, Riley Zimmer. You may begin.
Thank you, operator. With me on the call today is John Barker, Chief Executive Officer, and Jeff White, Chief Financial Officer of Sportsman's Warehouse. I will now remind everyone 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 our expectations about our 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 most recent Form 10-K and the company's other filings made with the SEC. We will also disclose non-GAAP financial measures during today's call. Features of such non-GAAP measures, as well as reconciliations to the most directly comparable GAAP financial measures, are provided as supplemental financial information on our press release, included as Exhibit 99-1 to the Form 8-K we finished to the SEC today.
which is also available on the investor relations section of our website at Sportsman.com. I would also like to note that today's materials include an earnings conference called PowerPoint presentation, which is available at Sportsman.com in the investor relations section of the website. You can utilize this deck as a reference with today's prepared remarks. I will now turn the call over to John Barker, our CEO .
Thank you, Riley. Good afternoon to everyone on the call and thank you for joining us today. I'll begin by reviewing the highlights of our 2nd quarter performance, comment on the current trends we are seeing with our consumers, and review a few key elements of the growth strategy for our omnichannel business model. Following my comments, Jeff will provide additional details on our 2nd quarter results, as well as discuss our outlook for the 3rd quarter of 2022.
Finally, we will open up the call for questions. Our second quarter results were stronger than we originally anticipated, exceeding the high end of our guidance for both sales and earnings per share. To highlight the overall strength of our business, we will compare certain financial and non-financial metrics to our 2019 results.
The ongoing participation in the outdoors is greater than it's been in decades. And whether it's hiking, camping, or hunting, we continue to see strong demand for the merchandise consumers need to enjoy these outdoor activities. For example, according to KOA's 2022 camping report, 40% of all leisure travel in North America involved a camping trip. Leisure travelers have found a new form of recreating, which for many is now the preferred method of choice for their travel.
Stats such as these increase our confidence in the future. And while 2020 and 2021 were aided by people forced to stay close to home, the new norm for many now includes participating in some form of outdoor activity.
Now turning to performance. In the second quarter, same store sales performed slightly better than guidance, down about 10% compared to the second quarter of 2021. As compared to the second quarter of 2019, same store sales were up nearly 32%.
Our hunting category performed above expectations during the second quarter, driven by sales of firearms in certain categories, which benefited from political rhetoric and elevated media exposure.
Other categories of firearms such as centerfire rifles continue to perform well.
Seasonal demand for these products remains strong as consumers continue to participate in outdoor activities such as hunting and shooting sports.
Comparing our hunting and shooting category to 2019, it has increased 61%. This reflects both an increase in participation and additional market share capture.
Ammunition sales were very strong during the quarter as certain ammo types came back in stock after nearly two years of supply shortages.
These improvements help drive traffic to both our stores and our website. Through operating execution and industry market share gains, our ammo sales were up 82% versus 2019. We continue to focus our efforts on serving our customers to capitalize on this ammo demand by leveraging our omni-channel capabilities.
Moving on to other categories, we are pleased with our apparel and footwear category performance in relation to the overall performance of the business.
We continue to improve our merchandising efforts in this category to expand both our in-store and online assortment.
As we expand our vendor base, we are able to leverage our omni-channel capabilities, allowing us to acquire and retain customers through increased assortment with limited investments in inventory.
Compared to 2019, apparel is up 21% and footwear is up 25%.
Along these same lines, we are making good progress expanding our private label program with our first hunting boot coming to market in the next few weeks, just in time for the core hunting season. We are also excited to launch a new technical camouflage pattern within the Killick premium brand. This pattern is designed to be used in a variety of geographies.
By leveraging our private brands to fill in our good, better, best merchandising strategy, we continue to serve all levels of consumers.
These initiatives support our long-term strategy of building a high single-digit, penetrated, private brand business.
Transitioning to the progress within our supply chain.
While many large retailers have communicated elevated inventories causing significant markdowns within certain categories, we are comfortable with the overall health of our inventory. Although we are not 100% insulated, a large portion of what we carry is hard goods that are not exposed to seasonal trends or at risk of going out of fashion.
The team has done a great job of managing our supply chain to keep our in-stock positions healthy and key product categories while managing inventory levels to meet changing consumer demand trends.
It's important that we are well positioned to support the seasonal needs of our customers, while not over weighting us in areas where discounting may be needed to flush through excess inventory. As the majority of our inventory is purchased through vendors, this provides us the flexibility to quickly adjust to changes in demand.
Given our investments over the last few years in technology and omni-channel capabilities, we continue to increase the leverage of our existing store footprint through forward deployment of inventory.
Over 70% of our online sales during Q2 were serviced through our stores and dropship partners.
This allows us to serve the customer faster while managing expenses through reduced freight and labor.
The success of this initiative will allow us to gain 1 additional year from our existing distribution center. Questioning
the permanent need for a second distribution center into 2024.
Looking ahead to Q3, we have several exciting new growth initiatives coming soon that are both e-comm and digitally focused to acquire more consumers and capture additional market share.
During this quarter we are launching Knives.com, a new online only brand. This e-comm expansion will allow us to leverage our existing inventory and infrastructure, offering a premier range of top quality knives and cutlery.
This will include premium brands and a user-friendly shopping experience with featured products and special curations endorsed by industry experts and relatable influencers.
We are excited about this organic go-to-market strategy to attract an adjacent customer that expands beyond our current reach.
During the third quarter, we expect to add four new stores to our fleet, bringing our total to 130 stores in 30 states before the holiday season.
This will include our 16th store in California, our 8th store in Colorado, our second store in the state of Florida, and our first ever store in the state of Ohio.
We also expect to open one additional store in early Q4.
With these 5 new stores, we will open a total of 9 during calendar 2022. Given the timing of construction, our 10th store will likely push into 2023.
As we've mentioned in the past, we have a robust funnel of real estate and development and remain committed to executing on our store footprint growth.
We have a strategically unique formula for expanding our geographic reach through our flexible store format, providing us the opportunity to continue to be the fastest growing outdoor retailer in the country.
In closing, we remain confident in both the short and long term growth strategies of Sportsman's Warehouse. Leveraging our knowledgeable associates, flexible store formats, and fast growing website is key to maintaining our position as the premier outdoor specialty retailer.
Our company has never been stronger or better positioned to successfully navigate a macro environment like we're in today.
With that said, I will turn the call over to Jeff to review our second quarter 2022 results and discuss our Q3 guidance.
Thank you, John . I'll begin my remarks today with a review of our second quarter fiscal 2022 financial results. I will then review our outlook for the third quarter of 2022. Net sales for the second quarter of fiscal 2022 were 351 million dollars compared to 361.8 million dollars in the second quarter of 2021. A decrease of 3% over the prior year period, but above the high end of our guidance.
This decrease was primarily driven by lower demand from consumer inflationary pressures.
Partially offset by the opening of 12 new stores since July 31st, 2021.
Same-store sales decreased 9.4% in the quarter compared with the same quarter of the prior year. This decrease was primarily driven by lower sales demand across our product categories due to inflationary pressures and tough year-over-year comps.
Comparing our same-store sales results to the second quarter of 2019, we were up 31.7%. We saw double-digit increases in the following categories as compared to Q2 2019, with hunting up 60.9%, footwear up 25%, apparel up 20.7%, camping up 19.8%, and optics, electronics, and accessories up 10.5%.
These trends provide us continued confidence that our overall customer base has had a step function increase and continues to be very healthy.
2nd quarter 2022 gross profit was 117.5 million dollars compared to 120.1 million dollars in the 2nd quarter of 2021, a decrease of 2.6 million dollars.
Growth margin percentage was 33.5% for the quarter, an improvement of 30 basis points versus the prior year comparable period.
This year-over-year improvement was due to improved shipping, freight, and logistical expenses as we slowed inventory receipts in response to changing consumer demand. We anticipate continued improvements to our gross margins during the back half of 2022 as we continue to have easier comps on freight and work on other operational efficiencies.
SG&A expense of $97 million for the second quarter of 2022 was an increase of $1.1 million, or 1.2%, compared to the second quarter of the prior year.
As a percentage of net sales, SG&A expense increased to 27.6% compared to 26.5% in the second quarter of the prior year. This increase was primarily driven by resuming our normal marketing and travel related activities during the quarter and new store opening expenses.
During the quarter, the store operations team adapted quickly to changes in consumer demand, decreasing our variable operating costs, which helped to offset our SG&A expense in the quarter. We will continue to closely manage our non-fixed operating costs on a store-by-store basis to keep expenses in balance with our sales.
Income from operations was $20.5 million in the second quarter of 2022 compared to $24.2 million in the prior year period, a decrease of $3.7 million.
Net income for the second quarter was $14.6 million, or 35 cents per diluted share, as compared to net income of $17.7 million, or 40 cents per diluted share in the prior year period.
Adjusted net income in the second quarter of 2022 was $15.1 million, or 36 cents per diluted share, compared to adjusted net income of $19.5 million, or 44 cents per diluted share in the second quarter of the prior year.
Adjusted EBITDA for the second quarter of 2022 was $30.6 million, or 8.7% of net sales, compared to $35.2 million, or 9.7% of net sales in the prior year period.
Turning to our balance sheet in liquidity, second quarter 2022 ending inventory was $437.4 million compared to $436.4 million at the end of the first quarter of 2022.
As we look at inventory, our level of reserves as an overall percentage of gross inventory remains consistent to where we have run historically.
This provides us comfort in the overall health of our inventory and we are confident we are in a solid position to serve our customers' needs.
Looking at cash flow for the first half of 2022, cash provided by operating activities was $8 million versus cash used in operating activities of $67.8 million for the first six months of 2021.
This increase in our cash inflows was due to the normalization of our inventory levels versus the buildup needed during the prior year's six-month period in 2021.
Our liquidity continues to be strong as we ended the second quarter of 2022 with $105.7 million outstanding on our line of credit. With our new credit agreement in place, we have approximately 203 million available under our facility.
During the second quarter, we successfully executed on our share buyback program, repurchasing a total of 5.3 million shares in the open market.
Utilizing our cash on hand, we were able to return $52.1 million of capital to our shareholders.
The low stock price we purchased the shares at, relative to the intrinsic value of this company, resulted in approximately 12% of the shares outstanding being removed from the market.
At the end of the quarter, we have approximately $22.9 million remaining under the authorized share repurchase program and will continue to opportunistically execute in the open market.
Turning now to our guidance. Starting with our net sales outlook, we estimate 3rd quarter net sales to be in the range of 345 million dollars to 365 million dollars.
Same store sales in the third quarter of 2022 are anticipated to be in the range of down 17% to down 12%.
An adjusted EPS for the third quarter of 2022 is expected to be in the range of 24 cents to 32 cents per diluted share.
This guidance considers the current inflationary pressures on consumers, which are specifically impacting our higher ticket items where the trade-up cycle has slowed.
to give you some additional perspectives on the full year.
As John mentioned, we currently expect a total of 9 new stores to be open before the holiday season in 2022 with 4 stores scheduled to open in Q3 and 1 store in early Q4. Given construction constraints, we expect the 10th store to slide to early 2023.
For the back half of the year, we anticipate that the trade-up cycle will continue to see pressure, specifically on high-ticket durable goods.
As we've shown over the last few quarters, we expect continued improvements to our gross margins, coupled with discipline management of our variable operating expenses.
While we will see a difficult macroeconomic landscape for the back half of 2022, we remain confident in our ability to achieve our target of high single digit adjusted EBITDA margins for the full year.
That concludes our prepared remarks today. With that, I will now turn the call back over to the operator to facilitate any questions.
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One moment please while we poll for questions.
Our first question is from Ryan Sigdahl with Craig Harlem Capital Group. Please proceed with your question.
Thanks for taking my question.
Hey Ryan.
Maybe you want to start with the guidance, kind of where you finish. We'll start there. So you're maintaining the high single-digit EBITDA margin for the year, assuming the weaker Q3, I guess, implies a nice balance back in Q4. There's a wide range of what high single-digit can mean, but can you talk through, I guess, what's built into that expectation from Q3 to Q4?
Yeah, Ryan, this is Jeff. It's a good question. You know, we define high single EBITDA margins as 7 to 9%, and as we've shown throughout the first half of the year, even with the sales being lower than expected or lower than our prior year, we've been able to maintain in that range of high single EBITDA margins. As we look to the Q3 guidance, given where sales came in and then looking at our ability to manage our variable expenses, we felt confident in reiterating that guidance of being able to achieve the target of high single EBITDA margins.
there but just any kind of directional change and trends throughout the quarter and subsequent month.
Hey Ryan, it's John . As it relates to Q2 trends, we actually saw consistent trends across all categories except firearms throughout the quarter as we had iterated or communicated in our last call, wrapping up Q1 and laying out Q2. The variance we did see was related to firearms and some accessories that were elevated for several weeks.
as an outcome from various regulatory discussions and political rhetoric and media coverage from events. Otherwise, the business performed very consistent.
week to week throughout Q2.
As we thought about the Q3 guidance, I would tell you that the trends that we are seeing in the business led us to put out the guidance that we did. We have not seen a material change in consumer behavior, again, with a real focus on the durable goods and goods that are associated with trade up cycles. So, we are continuing to see those headwinds in the consumer spending.
So relatively similar trends in Q2 expected in Q3 excluding that kind of mini surge we saw in guns.
Yep, that's the right way to look at it.
Got it. One for me, and then I'll turn it over to the others. So big ticket items getting impacted, but what about just within categories, the good, better, best assortments? Have you seen any trade down from consumers, even on an apples to apples similar product?
I think we've seen less trade down cycles occur. I think what really is in the consumer right now what's happening is they're postponing the trade up cycle. They're not necessarily trading down to a lesser priced item. They're just postponing the purchase overall. They have something that they can extend the life of for maybe another season, so they're just not purchasing it at all. Where we're still seeing good trends though, Ryan, is in the consumable side, which leads us to believe that participation is still very helpful.
to a higher-end product, we're still seeing that they're coming in to buy the products that they use to participate.
Makes sense. Thanks, John . Jeff. Good luck, guys.
Thanks, Brian .
Our next question is from Eric Wold with B Riley, please proceed with your question.
Thank you. So two questions and you kind of hit on at the end when you spoke about consumables. I want to hit on that. So is it fair to say that you had traffic?
is staying solid into the store, people coming in still consuming and still showing their activity participating, but it's not paying up to that trade up, which gives you some confidence that maybe once budgets free up a little bit, they will be coming back with someone exiting the activity altogether. I'm setting up there.
Yeah, Eric, this is John . Generally, you're accurate. I'll share that our same-store traffic numbers as compared to 19 still show really healthy business metrics. We are starting as you communicated, the trade-up cycle is putting pressure on top-line revenue as those customers visit. The other part of the business, the econ business, is still showing very, very strong traffic and actually growing.
year over year, quarter over quarter, and that part of the business continues to gain traction.
And then the second question, obviously you're taking advantage of what seems to be a dislocation between a stock price and your outlook for the outro precipitation and your position in that. Aside from the one store moving into early 20th instruction, you know, is there an, I know you're not talking about 23 yet, but is there an opportunity to accelerate store development in 23 or 24 to kind of above historical level to really take advantage of?
that outlook you're seeing in position the company for further market share game.
Yeah, Eric, again, John , you hit right on it. Look, we have some short-term headwinds that are directly related to the macro environment. But as we think about the long-term opportunity to grow this business, store growth provides a significant opportunity in the coming years. We've laid out a few times for the investors how our flexible store format, our value-engineered facilities and our everyday low-cost resonates with customers. In our funnel today, as we sit here, there's well over 100 locations that we're looking at.
With a path of 300 sites over the coming years. We haven't laid out yet, or we won't lay out in this call the exact number of stores for 2023 and beyond, but I can assure you we are very optimistic On the opportunities in front of us to continue to grow stores.
helpful.
Thanks.
Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.
Hi guys. First question for me is I wanted to dig just a little bit into August and ask about, have we returned to historical seasonality with August , I would assume, being a week or month and then the business really building as we go into September , October as we see weather shift and moving into key hunting season.
Yeah, Mark, it's a great question. I would tell you that from what we're seeing in the business, we have returned to normal seasonality. So you can take the trends out of the last two years where we had a lot of event-driven demand. And if you look historically pre-COVID at kind of the cycles of hunting, of fishing seasons, of holiday, I feel like we are really going right back into that demand cycle, which is, in my opinion, really well because it helps us plan the business.
which is why we're very comfortable with the guidance that we gave for Q3 because we can adequately forecast the trends.
Okay. And maybe remind us if we think about maybe where August typically sits and ranked in the 12 months, I would assume it's one of the lower volume months.
on the lower side you do have some hunts that are starting in early September some archery hunts that start early September so you do get some lift from individuals coming in that are preparing for those archery hunts but to your point a lot of the big game rifle hunt starts in the October time frame so that really starts to ramp up in September and October
Okay and then can you guys give us a quick update just thought as we think about you know Spike Camp store other new stores kind of how they're performing out of the gate.
Hey Mark, it's John . We opened two spike camps this year. There are 9,300 square foot value-engineered, ground-up construction. We opened one here in the state of Utah and one in Wyoming. Both of those stores out of the gate are showing exceptional performance against expectation. It provides us continued confidence in our ability to grow the brand using our flexible store format. you
in both rural markets like Wyoming or in growing markets where there's a traffic or congestion issue like we did here in Utah. So we're very excited about the Spike Camp opportunity in front of us.
Okay, it's still too early to really speak about initial results.
Yeah, as far as numbers, it's too early. We're not sharing specifics on the numbers, but I can tell you they're out of the gate performing exceptionally well against our revenue and our hurdle rates in the first couple of months.
Excellent. And I think the last one for me.
You know, you spoke about inventory and having, you know, comfort, it sounds like around kind of current inventory. Can you speak directly to ammunition, kind of where we're at in the rebuild of ammo inventory and kind of your comfort level and then any thoughts on how pricing is holding up in that category?
Great questions Mark. As far as the key categories within the ammunition business and this is somewhat industry-wide, we've seen a return to supply on...
pistol ammo, promo, 5.56 ammo, and rimfire equal to the demand. And that's the first time we've seen this continuous demand, supply and demand curve for several years. It's been 2019, so we feel really good as an industry about those components of the business.
On the centerfire hunting ammunition, which is again very, very important to Sportsman's Warehouse as we enter into the fall season, our vendors and our partnership with those vendors given our scale has provided us with the opportunity to improve immensely over the last few weeks. And I'm really proud of what the team has done and our vendors have done to help us get in stock for the hunting season. So I'm feeling better. It is not perfect, Mark, but I'll give it a B or B plus on centerfire hunting.
The area of the business that our industry is still struggling significantly is on shotgun shells. Across the board, whether that's light loads for shooting sports like sporting clay or target or skeet or hunting ammunition, steel shot for waterfowl, etcetera, we were woefully under-inventoried as an industry and the demand curve is still...demand is still extremely high. If you ask me how much inventory relates, probably $5 to $10 million worth of inventory.
the industry to ensure we're very well understanding of any pressures we might see at the top line as supply and demand returns to normal cycle.
Okay, perfect. Thank you guys.
Our next question is from Justin Kleber with Robert W. Baird. Please proceed with your question.
One of the first follow-up on the consumables commentary.
Are the units in those categories in aggregate up on a year-over-year basis? Certainly sounds like ammo is, but as you think about consumables holistically, are units up versus LY?
Justin, that's a great question. This is Jeff. I would say that they are representing a larger portion of our business. I think given the large demand that we saw last year, those are tough coms, but as a percentage of the total business, it represents a larger portion of our business, which is leading us to still feel confident in participation and the usage of those.
Thanks, Jeff. That's helpful. Maybe a follow-up or a question on just your… all the things we have that are being talked about, the little things we have that tv series
Your guidance if I look at the midpoint of comp in the midpoint of total sales
You know the Delta there is much narrower than what it's been across the first half of the year and store growth
doesn't look all that different, right, in terms of year over year percentage change. So anything you can share on the timing of openings in 3Q, the size of the format that would maybe be influencing, that new store productivity calculation.
And then just more broadly how you guys are feeling about the performance of new stores, opened up here over the last 12 to 18 months.
Yeah, I think both of your questions go hand in hand. We've been very pleased with the performance of our new store openings this year. Two of those to John's commentary have been the 9300 square foot spike camp formats in the beginning of the year. In the back half of the year most of these are 30,000 square feet or above. So we do expect more productivity especially as we open them during holiday season and see more attachment to our brand especially some introduction into
within that bucket, but how do you ensure you aren't sacrificing service levels?
you know, by tightly managing payroll.
Thank you. Yeah, that's a really good question. I would tell you that our store operator, Shane Miller, does a phenomenal job managing sales per labor hour, but also managing his customer satisfaction scores. So, those are two items that we track at a very granular level that as we think about turning down the lever on variable payroll, we're going to continue to make sure that those customer satisfaction scores are meeting our standards of excellence that we're requiring out of the stores.
at as we look at variable costs.
Thank you, I appreciate all of that color. Best of luck, guys. Thank you, thank you, thank you.
Our next question is from Peter Keith with Piper Sandler. Please proceed with your question.
Hey, this is Matt Edgar on for Peter. Thanks for taking our questions. First one from us. Just curious how you're thinking about maintaining or growing the share given the environment where grills and apparel, et cetera, are all challenged. Obviously, AMOs had a boost, but just curious with the overall holistic view of how you're thinking about maintaining or taking share. Obviously, as well, e-comm has done really well, but maybe anything else to share along e-comm and omni-channel as well would be great.
Yeah, it's a good question. As we look at the growth and continual customer capture of the company, I think the organic growth through our new stores, we're entering a couple of new markets. We're the first state in Ohio, so that's a place we've never been before. So that's a new customer to us. And then John had mentioned the continual increases in traffic and sales driven through our e-commerce, as well as our ability to market to them. Our digital marketing is something that...
we have effectively had turned off for the last two years. So as we ramp that up and turn it back on and get more into a normal cadence, re-engaging with some of the email addresses that we've gathered over the last few years, and telling customers who we are, what we have, and kind of broadcasting that story, to us, those are the keys for us to continue to drive market share gains and customer growth over the back half of the year.
Okay, great. And then just back on the store growth, I know you said you don't want to provide anything on 2023, but are you seeing any permitting delays or HVAC issues or anything else that might impact store growth in the near term? Thanks.
Hey, Matt, it's John you hit right on there's actually a couple of things that we are. Having to navigate, but we've been navigating those for a couple of years now, and we've had to get better at forecasting the openings as it relates to certain components of construction, such as H back units for the roof. Fire suppression panels, there's a handful of things that the lead times have definitely been longer, but our team has been able to navigate through. Then it has a pretty good handle at this point.
on ensuring that our construction cycle aligns with the component availability in the supply chain.
We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Thank you as we close. I want to thank you for joining the conversation today and thanks to all of the dedicated employees around the country for their commitment to making Sportsman's Warehouse the leading company in the outdoor industry. Together we look forward to continuing to serve our customers. Thank you.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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