Sportsman's Warehouse Holdings Inc. Q4 2023 Earnings Call

Speaker 1: pandemic started to subside and consumers moved back to post-pandemic working, recreating and shopping behaviors.

Speaker 1: At the same time, Russia's war on Ukraine began, causing a significant increase in fuel prices and added to the growing consumer uncertainty.

Speaker 1: This, coupled with high inflation, put immense constraints on the consumer spending behaviors, creating a challenging operating environment for much of 2022.

Speaker 1: Despite these challenges, we opened nine new stores, strengthened our management team, further expanded our omnichannel capabilities, and returned nearly $65 million in capital to our shareholders through our stock buyback program.

Speaker 1: Turning now to our Q4 performance. Our fourth quarter results beat the midpoint of our guidance range for both sales and earnings per share. We achieved net sales of $379 million compared to $416 million in Q4 of 2021.

Speaker 1: The decrease was primarily driven by lower sales demands from consumer inflationary pressures and recession concerns partially offset by the opening of nine new stores over the prior year. Same store sales decreased 12.5% in the quarter compared with the same quarter of fiscal year 2021.

Speaker 1: However, compared to the fourth quarter of pre-pandemic fiscal year 2019, total net sales increased 46.9% and same store sales increased 24.9%.

Speaker 1: We achieved significant increases in most categories compared to pre-COVID Q4 2019, with footwear up 42.8%, apparel up 42.1%, hunting up 26.8%, camping up 6.6%,

Speaker 1: optics, electronics, and accessories up 9.9%.

Speaker 1: Although the consumer continues to be pressured by inflation, the business has maintained sales that are elevated over pre-pandemic levels, reflecting the continued strong participation in outdoor activities that we support.

Speaker 1: Gross margin was 32.4% for the quarter, a decrease of 40 basis points versus the prior year fourth quarter period. During the fourth quarter of 2022, particularly during the holiday season, customers' average basket composition focused more on promotion-driven merchandise and these experiences.

Speaker 1: during the last few years.

Speaker 1: While overall transportation costs were down year over year, the average basket margin was lower than we experienced in the prior year.

Speaker 1: As a percentage of sales, SG&A expense increased to 28.1% compared to 27.2% in the fourth quarter of the prior year. This increase was primarily due to higher rent and depreciation expenses from the addition of nine news stores open during 2022.

Speaker 1: and the stores refreshed over the last two years.

Speaker 1: For full year 2022, we finished with sales of approximately $1.4 billion and adjusted to a GPS of $1.06.

Speaker 1: We ended 2022 with a total of 131 stores in 30 states and improved our omnichannel capabilities with e-comm driven sales now in excess of 15% of total sales.

Speaker 1: Comparing to the pre-COVID year of 2019, we have increased sales nearly 60%, added over 30 new stores to our growing footprint, strengthened our balance sheet with minimal debt, and successfully executed on our omnichannel strategy by more than doubling the amount of revenue that comes from our website. From

Speaker 1: As we navigate through 2022, the business experience, a return to pre-pandemic seasonal trends, inventory availability across two categories improved, and marketing and promotional activities returned to a normal cadence.

Speaker 1: While sales levels are still significantly elevated over pre-pandemic 2019, the persistent inflationary pressures felt by our consumers weighed on ourselves.

Speaker 1: As we mentioned on our last few calls, many consumers put discretionary purchases on hold, especially on high ticket durable goods, slowing down their normal trade up cycle.

Speaker 1: As we move through 2023, we will continue executing our strategies to increase our share of an estimated $70 billion a year total addressable market while keeping focus on the overall health of the consumer. For more information, visit www.fema.gov

Speaker 1: Our strategic growth drivers for 2023 to maintain our position as the fastest growing outdoor specialty retailer and leverage our omni channel platform are the following. One, grow our store footprint using our flexible store approach. Two, grow our store footprint using our flexible store approach.

Speaker 1: Grow our omnichannel platform and sales generated from Sportsrooms.com. Three, engage the customer by leveraging our databases and improving our digital marketing efforts. And four, improve our local assortment and grow our private brands to fill in our Get Better Best merchandising strategy.

Speaker 1: Looking at the accelerated expansion of our retail store footprint, our strategy for opening new stores will continue to leverage our ability to flex the size of any given store to match the needs of that market.

Speaker 1: This approach allows us to reach consumers and go to underserved markets where our larger competitors simply can't go.

Speaker 1: We are pleased to announce that we have successfully negotiated lease terms and plan to open 15 new stores in 2023.

Speaker 1: We have outlined the locations, timing, and box sizes of these new stores in the press release issued earlier today. Based on the announced new store openings, we will end fiscal 2023 with a total of 146 stores in 32 states.

Speaker 1: We also plan to refresh two stores during 2023. Over the last two years, we have refreshed 29 of our stores and invested about $12 million of capital in these refreshes.

Speaker 1: Keeping our fleet of stores relevant and aesthetically pleasing was the key driver of our decision to remodel these older stores.

Speaker 1: Regarding our ecommerce platform growth, during 2023, we see Sportsman.com as a way to drive additional sales through reaching new customers outside our geographic area, continuing to leverage our fleet-wide inventory and increase assortment through the introduction of new, relevant products to our website.

Speaker 1: We are pleased with the growth of our e-commerce driven sales and continue to see that part of the business outperforming the trends of other parts of the business and increasing year over year.

Speaker 1: Turning now to customer engagement and leveraging our growing databases.

Speaker 1: Over the last few years, we experienced significant increases to our customer data files.

Speaker 1: We now have more emails, loyalty members, and credit card customers than ever before.

Speaker 1: Sales from loyalty customers continues to penetrate at approximately 50% of our business, with the number of loyalty members now in excess of 3.8 million.

Speaker 1: Our strategic efforts in 2023 will be centered on continuously improving our capabilities with digital and print marketing to become even more efficient and effective with customer engagement.

Speaker 1: As we look to the future, we have immense opportunities to grow and leverage our databases, increase retention, and maximize the lifetime value of our customers.

Speaker 1: Now to improving our local assortment and private brand strategy. We pride ourselves in our ability to assort with the right balance of national brands that our customers expect to find and augment that selection with our private brand offerings to fill in gaps in our good, better, best merchandising strategy.

Speaker 1: During 2023, we will continue to invest in the development and expansion of our private brands.

Speaker 1: We will also continue to invest in our visual merchandising to enhance the look and feel of our stores to provide our customers with an enjoyable shopping experience.

Speaker 1: We continue to work together with more of our key vendor partners to further build out our store-in-a-store strategy. These in-store shops provide a visually appealing way to highlight certain geographically relevant brands and provide the customer with an improved in-store experience.

Speaker 1: I now want to take a minute and review our balance sheet and liquidity.

Speaker 1: Full year 2022 ending inventory was $399.1 million compared to $386.6 million at the end of 2021, an increase of $12.5 million.

Speaker 1: Compared to the end of third quarter inventory is down approximately 86 million dollars.

Speaker 1: We are very confident in the overall health of our year-end inventory and believe our stores are well positioned to handle our current sales trend.

Speaker 1: With a plan of 15 new stores opening in 2023, four of which fall in Q1, we expect our normal inventory increases and decreases to be impacted by these openings throughout the year.

Speaker 1: As a reminder, the initial load-in of inventory is about $2.5 million per store.

Speaker 1: For the full year 2022, we incurred approximately $60 million of net capital expenditures, primarily related to the construction of nine new stores and the refurbishment of nine existing stores during the year.

Speaker 1: Our liquidity continues to be a strength as we end 2022 with $87.5 million on our line of credit and with a debt to adjusted EBITDA leverage ratio of less than one.

Speaker 1: Our total liquidity, including cash on hand at the end of 2022, was $161.5 million.

Speaker 1: During the fourth quarter, we repurchased approximately 260,000 shares in the open market for an investment of $2.3 million.

Speaker 1: For the full fiscal year, 2022, we repurchase a total of 6.8 million shares for a total return of capital of $64.7 million.

Speaker 1: As of the fiscal end of the year, we had approximately $10.3 million of remaining capacity under the share repurchase program.

Speaker 1: We will continue our open market repurchase strategy and execute opportunistically as market conditions dictate.

Speaker 1: Turning now to our guidance, starting with our net sales outlook, we estimate first quarter net sales to be in the range of $265 million to $270 million. Same-store sales in the first quarter of 2023 are anticipated to be in the range of down 19% to down 17%.

Speaker 1: EPS for the first quarter of 2023 is expected to be in the range of negative 40 cents to negative 35 cents.

Speaker 1: To add more color to our Q1 guidance, we believe that weather has been a significant headwind for us, especially in the western half of the United States.

Speaker 1: A combination of unusually high amounts of rain and snow is influencing the timing of the spring fishing and camping seasons, likely pushing these to later than normal.

Speaker 1: However, the much needed water we received in the West should open up more streams, rivers, reservoirs, and campgrounds for better fishing and fewer wildfires, allowing people to enjoy the outdoors more than we've seen in the prior years.

Speaker 1: In quantifying the impact, we believe the impact due to weather on top line sales is somewhere between 17 and 20 million dollars and 15 to 20 cents of EPS in the first quarter. We have been adjusting inventory accordingly and merchandising our impacted stores to provide customers what they need once the weather breaks.

Speaker 1: and the outdoor spring season begins. While participation in the outdoors remains strong, the macro environment and inflationary pressure continues to weigh on the consumer and how they are spending. These trends, coupled with the headwinds from weather and tough year-over-year comps, are factored into our first quarter guidance.

Speaker 1: It is critical that we maintain rigor and discipline as we navigate this environment. However, we remain optimistic about the overall strategic position of the business and health of the outdoor industry.

Speaker 1: That concludes our prepared remarks today. I will now turn the call back to the operator to facilitate questions for me and our interim CEO Joe Schneider.

Speaker 2: I will now be conducting a question and answer session. If you would like to ask a question, please press star 1.

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Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

Speaker 2: One moment please while we pull for questions.

Speaker 2: Thank you. Our next question is from Ryan Sigdow with Craig Hallam Capital Group. Please proceed with your questions.

Speaker 3: I want to start with guidance for Q1. For Q3 we have Adam Lin, Marc Thomas.

Speaker 3: I get the weather impact and the macro issues, etc. But are there any categories that are performing well still in Q1, or is this kind of an across the board impact to the business?

Speaker 1: Yeah, right and this is Jeff. It's a great question. You know, in Q1, even given the headwinds that we're seeing, we're still seeing really good traction on the firearm segment of the business. I can say that we're definitely gaining market share. We're seeing really good in stocks. We're increasing our assortment online. So that's a scenario of the business that we're very pleased with in Q1.

Speaker 1: selling through the residual inventory that we have in those locations.

Speaker 3: Good. You quantified the impact from those two things. I don't believe you did on the store openings, but do you have kind of the pre-opening costs and what the impact to EPS, either on an absolute dollar or EPS, that will be? demo

Speaker 1: Yeah, I think if you look at the historical pre-opening we've had per store, it runs in the range roughly between 300 to 350 thousand dollars per store. So there was that in Q1 that's going to impact earnings as well as some of the pre-opening that we're starting to incur for the openings during Q2. So, I think with that, Matt, you can.

Speaker 1: Put the put it to paper and figure out what the impact was in our guidance.

Speaker 3: Then just the last one, are you willing to comment directionally if you think we can get back to positive same-store sales comps at some point this year later in the year?

Speaker 1: Yeah, listen, I think we have some short-term headwinds with the weather impact that we have for Q1. With how much snow I see in the western part of the United States, I do think that that probably bleeds into early Q2. As we start to get to the back half of the year and we start to anniversary the significant inflationary pressures that we experienced last year, I'm very optimistic.

Speaker 4: Thanks, good afternoon and I'll also echo John . Great work, great to see you and I'm excited to see you go. I'm not to say anything about Jeff, but I'll put a question on him.

Speaker 4: Two things, I guess one on the inventory.

Speaker 4: situation. You talked about you're comfortable with the level of inventory in the stores and where you're positioned. Maybe just talk about the composite of that inventory. I know that you're looking to...

Speaker 4: fill in some of the good, better, best, and the private label. Is that, how are you kind of thinking about that with the new stores you open? I know you kind of, as you asked a different way, with existing stores, you're kind of rotating inventory possibly towards some of the lower price private label to kind of take advantage of where the consumer is now. Is that impacting to any big degree how you initially stock?

Speaker 1: the new stores this year versus what your strategy may have been in the past? Eric, it's Jeff. Thanks for the question. You know, as we look at new store inventory load in an existing store inventory composition, it's important to remember that we pride ourselves in being a retailer of brands. So the mix of having the appropriate vendor brand, and then augmenting our good, better, best selection and filling in the gaps with our private label is

Speaker 4: And then just last question on the pipeline. Congratulations on lining up the 15 stores for this year and getting those leases signed. How do you think about going beyond 23? How are the discussions with

Speaker 4: developers and landlords and whatnot as you look beyond 23. Are the discussions as easy as you had with 23? Is it getting more difficult, either finding locations that meet the terms you want or getting the terms of a lease the way you want? Maybe think about beyond 23.

Speaker 1: Eric, great question. As we've stated on any given day we have a hundred stores that we're looking at hundred locations within our funnel. I will tell you that good real estate is good real estate so if we're looking at an A location in a power center we most likely have three or four other retailers right behind us looking at the same box so that's the landscape that we're dealing with but that has not changed significantly since last year.

Speaker 1: So as we work through our openings and our lease signings for 24 and beyond, we're still intently focused on the long-range plan that we laid out of having 190 to 210 stores by the end of fiscal year 25. And right now there's nothing that I see in my pipeline that would not cause me to be confident in those in that number.

Speaker 4: That's great. Thanks, Jeff. I appreciate it.

Speaker 2: Thank you. Our next question is from Justin Keebler with Baird. Please proceed with your question.

Speaker 2: Our next question is from Justin Keebler with Baird. Please proceed with your questions.

Speaker 5: Hey everyone, it's Justin Clayburg-Baird. John , let me add my congrats on your retirement as well. It's been great working with you. Couple questions from me. Just to start off, Jeff, you mentioned the strength in firearms business. Is that broad-based across the footprint? I'm just wondering if you could comment on what you're seeing in states like Oregon and Washington where we've seen, legislation.

Speaker 1: that follow those. There's fear buying of people not being able to get what they think is going to be taken away. So we see bumps. I will tell you that the Oregon bump in Q4 was not material or else we would have notated such in the business. Going forward you know we see changes in states like Washington. There's been some laxing of regulations in states.

Speaker 1: like North Carolina that are contributing to the increase in firearm sales, but overall our ability to offer the broad assortment, the best assortment in the industry in firearms on our website and in store is what I feel is really driving the win that we have on the firearm category.

Speaker 5: Okay, got it. Maybe a question here on SGA.

Speaker 5: You talked about just lower payroll expenses.

Speaker 5: in the press release, how much more room do you have to reduce store payroll if the revenue backdrop?

Speaker 5: remains difficult. I'm trying to understand where you sit from a

Speaker 5: store payroll respect, you know, relative to like just minimum staffing levels.

Speaker 1: Justin, that's a great question. We executed very well in Q4 controlling our variable expenses. As we think about the Q1 guidance and the pressures on top line sales, the flow through the EPS I would tell you is what you're seeing in terms of what our fixed costs are to keep the stores open, keep the lights on.

Speaker 1: You know the Q1 guidance does figure in a little bit more in things like utilities Where it's costing us more to heat the stores because it's still cold out here in some of the stores in the West But I think from a payroll perspective the pressures that you're seeing on Q1 with with the top line sales And the flow through the EPS is indicative of kind of that fixed cost base

Speaker 5: That is helpful. A follow-up question, not focused on preopening, Jeff, but just as we think about

opening up 15 stores this year.

you're going to have rent associated with those stores, depreciation. I mean, is there any sense you could give us just for the magnitude of the leverage or SG&A dollar increase related?

to these 15 store openings just as we try to better understand the flow through on different revenue scenarios.

Yeah, Justin, good question. Just to clarify on our pre-opening expense that does include the rent that we incur prior to the store opening. So that's part of that range that I gave. As we think about the long-term growth of the of the company, we knew that there was going to be an investment needed in order to hit our long-range targets that we gave. Part of that investment is in the capital outlay and the capital outlay.

And the last one for me, maybe for Joe, if I could ask you a question, what are the most important skill sets? Okay.

you and the board are looking for as you search for a new

CEO . Obviously, you have some big shoes still here with John leaving, so we just love any color on that. Thanks so much.

Sure. You know, obviously the individual.

needs to have a retail background combination of brick and mortar, omnichannel, preferably. A great understanding of the business, the outdoor business.

individual that, you know, has unbelievable emotional intelligence like John does, that can relate from our consumer to our associate in our distribution center to dealing with the various suppliers we have.

And so you know, there's a whole litany of things. The board is

It has all the criteria and we're working on that and certainly getting John's input and management and I'm sure we'll have some great candidates to select from and look forward to the next chapter of Sportsman's Warehouse. We've got a great opportunity.

Thanks so much for that. Best of luck, guys.

Thank you. Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question. Hi guys. I just want to echo John . Best of luck in retirement. Joe, welcome to the call here. Um

First question I have is really looking at the footprint of these new stores. It looks like a pretty diverse sizing. Any thoughts on, as you look at, we've got a couple here that are a little bit bigger, and then any thoughts that you have on Spike Camp stores? This doesn't look like maybe there's any in here.

any given market and then we adjust as the market needs C-Fit and as the available real estate. Some of the larger stores that you see presented an incredible opportunity to enter into new markets, under penetrated areas with a big consumer base and in a very lucrative box where you know the the rent was very appealing for that size.

there and we're going to continue to look at places to use those strategically. But for 23 it just fell that the real estate deals that were found, the markets that were available kind of fit right into our core real estate strategy of a 30,000 square foot average box.

Okay, and then looking geographically at where a lot of these stores are this year, you know, any updated thoughts on, you know, a new DC, maybe timing, or geographically maybe where that goes.

Yeah, the new DC as we presented our investor deck, we're still on track for having that DC opening, I would say mid 2024. We're going to probably start incurring some sort of capital outlay towards the end of this year. The search process for that as well underway. It is going to be Eastern focused in order to create a

Economies of scale on the number of stores we have growing out East as well as being able to service our event a lot of our vendor community that is centered out East as we move trucks across the country. So we'll continue to update that on a quarterly basis as we move forward. Okay, and I think the last one for me just, you know, firearms, you know, skew.

you know, maybe as it applies to NICS, as that's kind of the best indicator that we have. And lastly, as it's skewing, I assume, higher here in Q1, is that putting a decent amount of pressure here in Q1 margins.

Yeah, so lots of good questions. Let me address just the Q1 part of your question first. So absolutely in Q1 is we're not seeing sales through our sales mix be in a normal cadence, more centered or more penetrated towards camping, fishing, outdoor activities. We are seeing higher.

markets we feel very comfortable with our market share and the gains that we've had. You know if you look at our sales I would say that we're outperforming what you're seeing from some of the vendors so very happy with our place in the market, our penetration and then our opportunity to continue to grow and reach new customers.

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