Q2 2023 Sportsmans Warehouse Holdings Inc Earnings Call
Participants
Jeffrey Justin White; CFO & Company Secretary; Sportsman's Warehouse Holdings, Inc.
Joseph P. Schneider; Interim President, Interim CEO & Executive Chairman; Sportsman's Warehouse Holdings, Inc.
Riley Timmer; VP of IR & Corporate Development; Sportsman's Warehouse Holdings, Inc.
Eric Christian Wold; Senior Equity Analyst; B. Riley Securities, Inc., Research Division
Justin E. Kleber; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Mark Eric Smith; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Ryan Ronald Sigdahl; Partner & Senior Research Analyst of Institutional Research; Craig-Hallum Capital Group LLC, Research Division
Presentation
Operator
Greetings. Welcome to Sportsman's Warehouse Second Quarter 2023 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Riley Timmer, Vice President, Investor Relations. Thank you. You may begin.
Riley Timmer
Thank you, operator. Participating with me on the call today is Joe Schneider, our Interim CEO and Chair of the Board; and Jeff White, our Chief Financial Officer. I will now remind everyone of the company's safe harbor language.
The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which include statements regarding expectations about our future results of operations, demand for our products and growth of our industry. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described 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. Definitions of such non-GAAP measures as well as reconciliations to the most directly comparable GAAP financial measures are provided as supplemental financial information in our press release included as Exhibit 991 to the Form 8-K we furnished to the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com.
I'll now turn the call over to Joe.
Joseph P. Schneider
Thank you, Riley, and good afternoon, everyone. I'll begin my prepared remarks by first providing an update on our CEO search. Next, I'll talk through the key areas with the leadership team and I have been focused, then review our second quarter results, followed by the actions we are taking.
The search for Sportsman's Warehouse next CEO is the Board's #1 priority. This search is progressing well, and we are very pleased with the quality and experience we are seeing in candidates. The search committee continues to filter candidates, and the Board is expecting to fill the position soon. We'll keep you posted.
Frankly, the second quarter was a disappointment from a net sales, gross margin and profitability perspective. Sales in the quarter were down nearly 12% versus last year, with comp sales down 16%, both lower than we expected. Gross margins were 32.6%, which is 90 basis points lower than the second quarter last year. In addition, adjusted EBITDA was 4.2%, which is down from 8.7% versus last year.
In the quarter, we saw a deterioration in revenue as we did not see store traffic improved from the first quarter like we had anticipated. This resulted in year-over-year declines in each of our departments. While we did experience a late start to our spring selling season and later in the quarter unseasonable warm weather, we believe that the difficult macro environment -- macroeconomic environment is leaving fewer dollars available for discretionary spending.
We did, however, see a bright spot in our omnichannel business when e-commerce continued to outpace the performance of our stores.
Since I stepped in as interim CEO, and I've been working with our strong management team looking at all aspects of our business. Specifically, we've been focusing on the following areas: supply chain and inventory, real estate, omnichannel and e-commerce and operating expense CapEx.
We quickly reviewed these 4 key areas and a result of the performance took immediate action to address the following steps to reduce our total inventory and have identified the areas of inventory that need to be accelerated for short-term promotions and markdowns, adjusted the company's expense structure to rightsize to the current sales trends and significantly reduce investments in future new stores openings and other capital spend.
These aggressive actions we are taking to reduce inventory, combined with increasing store traffic through short-term focused promotions and markdowns will further reduce gross margins during the back half of this year. In addition, we will continue to streamline our expense structure and focus our debt paydown. So we are well poised to start fiscal 2024 in a strong position to return Sportsman's Warehouse to profitable growth.
Over the last several months, we have added additional talent in both our merchandising group and our distribution center. Bryn Westfall, our Chief Merchant, brings nearly 30 years of specialty outdoor retail experience to the team, having worked in senior roles for both Cabela's and Academy Sports. Bryn is driving our inventory and merchandising realignment efforts, and I'm confident in his ability to execute at a very high level.
While I'm not happy with our Q2 performance, we are taking swift and aggressive action to get the business back on track to return to profitability. I'm very confident in the team the adjustments we have made in our ability to execute with a sense of urgency. We are confident that we will successfully navigate through challenging business environment.
With that, I'll turn the call over to Jeff.
Jeffrey Justin White
Thank you, Joe. I'll begin my remarks today with a review of our second quarter fiscal 2023 financial results, then cover our outlook for the third quarter of 2023. Net sales for the second quarter of fiscal 2023 were $309.5 million compared to $351 million in the second quarter of 2022. Same-store sales decreased 16.1% compared to the second quarter of 2022.
In looking at comparable sales by department, first, our hunting department same-store sales were down 17.5% versus last year. Breaking it down further, ammunition comp sales were down 30%, accounting for the majority of the departmental decrease in the quarter. In last year's second quarter, there was a significant pull forward of demand as we started to return to normal in-stocks on key ammo calibers. These calibers have been very challenging to procure over the prior 2 years, making for a difficult year-over-year comparison.
Our firearm sales on a comparable basis were down 10.9%. In reviewing our performance for the quarter versus the adjusted NICS data, a key indicator of firearm sales, we continue to outperform this industry measure, which was down 12.7% in the same period. We believe this demonstrates that although sales were down year-over-year, we are gaining market share in this key category to our business.
Looking now at other departments within our business. Our fishing department was down 11.1% versus last year on a comparable store basis. Continuing the same trend as Q1, we experienced soft trends in fishing as we enter the second quarter. However, we saw month-over-month improvements in comparable store sales through the end of the quarter and into the beginning of the third quarter.
During the second quarter, we also experienced softness in our apparel, camping and footwear departments as pressures on consumer discretionary spend continues to weigh heavily on these categories. These categories were down 20.7%, 19.4% and 13.8%, respectively, on a comparable basis.
Second quarter gross margin was 32.6% for the quarter versus 33.5% in the prior year comparable period. This decrease as a percentage of sales was due to increased promotional activities and reduced product margins on ammunition.
SG&A expense as a percentage of net sales was 33.1% compared with 27.6% in the second quarter of last year. This increase was primarily driven by increases in total rent, depreciation and new store opening expenses. This was partially offset by a decrease in our total payroll expense as we quickly adapted our store labor to changes in product demand. On a per store basis, payroll was down about 11% versus last year and other operating expenses were down approximately 8%.
Net loss for the second quarter was $3.3 million or negative $0.09 per diluted share compared to net income of $14.6 million or $0.35 per diluted share in the prior year period. Adjusted net loss in the second quarter of 2023 was $1.6 million or negative $0.04 per diluted share compared to adjusted net income of $15.1 million or $0.36 per diluted share in the second quarter of the prior year.
Adjusted EBITDA for the second quarter was $13.1 million or 4.2% of net sales compared to $30.6 million or 8.7% of net sales in the prior year period.
Turning to our balance sheet and liquidity. Second quarter ending inventory was $457.2 million compared to $437.4 million at the end of the second quarter of 2022. On a per store basis, inventory was down nearly 6% versus last year's Q2 and just over 5% compared with Q1 2023. As Joe discussed, we will move swiftly with the greater velocity of promotions and markdowns to lower our total inventory levels and drive more traffic to our stores.
Looking at cash flow for the first half of 2023. Cash used in operating activities was $58.3 million versus cash provided by operating activities of $8 million for the first 6 months of 2022. The increase in our cash outflows was primarily due to the additional inventory for our 14 new stores and a net loss in the first half of this year compared to net income during the prior year 6-month period.
Regarding liquidity, we ended the second quarter with $203.1 million outstanding on our line of credit and $2.9 million of cash on hand. We have approximately $96 million available under our credit facility. We expect the outstanding balance on our line of credit to substantially decrease during the second half of the year as we lower our inventory levels, complete construction on our final 2 new stores and reduce our operating costs, freeing up excess cash for debt paydown.
During the second quarter, we bought back about 430,000 shares under our current buyback program for an investment of $2.1 million. At the end of the quarter, we have approximately $7.5 million remaining under the authorized share repurchase program, and we'll continue to opportunistically execute in the open market.
As you've heard from Joe, the impact on our business from the challenging macroeconomic conditions has been greater than expected. We did not see the improvement to in-store traffic during Q2 that we had anticipated, causing sales and demand for our products in each of our departments to decline significantly.
As Joe mentioned, during the quarter, we successfully executed certain cost reductions and continue to find ways to streamline our overall cost structure to be more leaner and more efficient. We anticipate these ongoing efforts will yield up to $25 million in annual savings and will align our business for the current demand trends we are seeing.
Regarding our 2024 new store funnel. This is another area of our business impacted by the challenging macroeconomic environment. Availability is at an all-time low, making it more difficult for us to find real estate in markets where we have the right to win and ensure achievement of our new store financial hurdles. As such, we expect the number of new stores we will open in 2024 to be significantly fewer than 2023, given the pressure on our sales availability of real estate and capital allocation priority now directed to paying down debt.
Turning now to our guidance. Given the difficult retail environment that we are operating in, we expect to see continued pressure on our top line sales. In effort to reduce inventory and drive traffic, we will be more promotional in the back half of 2023 than we have historically been. We will also continue to look at ways to reduce our operating expenses and better leverage the assets of the business. Executing these items will position Sportsman's Warehouse to be much healthier as we move into 2024.
Now focusing in on our third quarter guidance. We expect net sales to be in the range of $310 million to $330 million. We expect that our promotional activity during the quarter will impact gross margins between 250 and 350 basis points versus prior year.
Same-store sales in the third quarter are anticipated to be in the range of down 19% to down 14% and adjusted EPS for the third quarter is expected to be in the range of negative $0.20 and to negative $0.05 per diluted share, driven primarily by the reduction in gross margins. This reduction in gross margins will be partially offset as we continue to implement our cost savings initiatives highlighted earlier in my remarks.
That concludes our prepared remarks today. I will now turn the call back over to the operator to facilitate any questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question is from Ryan Sigdahl with Craig Hallum Capital Group.
Ryan Ronald Sigdahl
I want to start with kind of guidance or the current Q3 quarter-to-date, are you seeing any specific categories that you're planning to increase promotions and discounts? Or is that generally across the entire business and company?
Jeffrey Justin White
Ryan, it's Jeff. Great question. As we look into the Q3 guidance, the main areas you're going to see us to be more promotional in than we have historically been is going to be in the apparel and footwear category. I think it's something that you're seeing across all sorts of industries, those are kind of the areas where additional promotions are necessary. So that's going to be some of the key drivers of the promotional activity you see during Q3.
Ryan Ronald Sigdahl
Anything across the other ones where maybe it's less severe but increased promotions? Or is hunting, camping kind of the other categories generally similar year-over-year?
Jeffrey Justin White
There's going to be normal promotions throughout other categories. Within hunting, you're going to see us a little more promotional in the boat category. But that's a very small portion of the overall hunting business. But everything else you should see a normal cadence throughout the back half of the year in terms of promotional activity.
Ryan Ronald Sigdahl
Great. And then as you think about kind of the pressure on margins in the near term, you guys put out some medium-term margin targets for 8% to 10% EBITDA margins. I guess, how comfortable are you still achieving that when things normalize versus is there anything structurally changed from the business or the industry today?
Jeffrey Justin White
Yes. As we look at the margin headwinds that we're going through right now, I do view them as short term. This is something where we need to work through the back half of the year and through the consumer headwinds. As we move on into a healthier position in 2024 and beyond and the consumer returns to normal behavior, I see gross margins and our margin profile returning back to a more normal cadence but it is something that we have to work through right now in the short term.
Operator
Our next question is from Eric Wold with B. Riley Securities.
Eric Christian Wold
A couple of questions. I guess follow-up on the last one around inventory and margins. Do you expect the margin impact to be localized completely in the back half of this year? Or are there some categories, some products that seasonally you have to carry into next year before you can really start promoting those and so there might be some margin impact next year as well?
Jeffrey Justin White
Our anticipation is that we move through all of these additional promotional items we have to do in the back half of the year and are able to go into 2024 in a healthier position, where we then transition more to just seasonal cadences of flowing goods in and out of the stores.
Joseph P. Schneider
And Eric, this is Joe. As we mentioned, we brought in a seasoned veteran, Bryn Westfall, who is helping us navigate this and address the core inventory items and get back to a normal cadence on our inventory, which then impacts our margins, which should improve in 2024. So we're addressing it, taking the corrective action and getting back on track.
Eric Christian Wold
Okay. And then on the store growth plan changes, I mean, you threw out a lot of things between kind of the current economic climate of what you're seeing with your customer base, the inability to maybe find real estate that fits your goals, your return goals also desire to pay down debt and focus cash flow there. Maybe help us understand how much of the change in store growth plans for '24 is really kind of a short-term focus on balance sheet, start to focus on preserving cash flow, getting back to normalized positions versus -- has anything changed in your view longer term around the strength of certain categories? Are you seeing something with recent store openings that hasn't been working that makes you rethink just kind of even longer-term plan? Or is it really more all kind of short-term economic balance sheet related versus a long-term strategy shift?
Jeffrey Justin White
Yes, Eric, that's a great question. This is Jeff. Long-term strategy for Sportsman's, we still see immense amount of white space and expansion opportunities for Sportsman's to continue to take market share -- we continue to see retraction from our competition in our core categories. So as we look at the 2024 real estate plan, I would frame it up that this is a short-term pause on what we're doing in terms of making sure our balance sheet is healthy as we then start to focus more on long-term growth objectives.
Operator
Our next question is from Mark Smith with Lake Street Capital Markets.
Mark Eric Smith
First off for me, I just want to clarify and ask stores opened during the quarter, maybe what's opened since the quarter ended and kind of where the store count is and I think, Jeff, you said you've got 2 more to go. But any additional numbers you can give us on that?
Jeffrey Justin White
Yes, Mark, great question. So as we sit here today, we have opened 13 of the 15 that we had planned for the year. So we have 2 more stores remaining to open. One of them will open in mid-September. The other one will open more towards mid-November.
Mark Eric Smith
Perfect. And then I wanted to dig in just to the ammo space a little bit. I think you said that was down 30% on a comp basis. What are your thoughts around that segment? I know in the past, you guys have talked about ammo being kind of like the milk at the grocery store? Is there things you can do to drive additional sales there as we've seen inventory come back up? Or is there a hesitancy to get -- you don't want to get overly promotional? Maybe walk through your thoughts on that segment.
Jeffrey Justin White
Mark, that's a great question. I think it's a fine balance. We have to make sure we stay competitive in the market and look at the pricing that we're seeing across our competitive landscape. And to your point, we also need to use it to drive traffic into our stores. So as we think about the go forward, I expect that we're going to continue to see pressures similar to what we saw during Q2.
We highlighted that, that was the #1 cause of margin degradation in Q2 as we looked at the comp sales on a year-over-year basis. So I don't think that, that's going to stop, especially in the consumer environment we're in today, where people are really stretching every single dollar that they have.
Mark Eric Smith
Okay. And then as we think about the larger hunt/shoot kind of category, we're still early in to kind of fall in some early hunting seasons, but any additional thoughts around demand, what you're seeing from these consumers, even license data? Kind of anything you can give us for outlook as you guys think about this really important fall hunting seasons and then moving into the holidays?
Jeffrey Justin White
Yes. As we look at the Q3 guidance, I'll tell you one thing we consider is the -- while there are still people participating in hunting and buying hunting licenses, where we're seeing hesitation is the upgrading of their equipment or purchasing new equipment. So the individual that's going out to hunt is making their rifle last another year.
They're extending the life of their hunting boots they're not buying a new backpack to go into [back] country. So while the consumer is pressured, I think that trend continues, once the consumer gets healthier, I think we start seeing the refresh of the upgrade cycle start again. But when that happens, I think it's anyone's best guess.
Mark Eric Smith
Okay. And then maybe last question for me is we think about getting more promotional here over the next quarter or 2 and a lot of this is being focused within apparel and footwear. Can you talk about using -- being promotional around your private label brands versus kind of national brands?
Jeffrey Justin White
Yes. Our promotions will be more focused on the national brands. Our private label brands were able to manage very closely and make sure that we're still hitting the sell-through and margin targets on those. So you'll see the promotional activities more centered towards national brands.
Operator
Our next question is from Justin Kleber with Robert W. Baird.
Justin E. Kleber
So first, just a clarification on the store traffic comment. Did store traffic get worse on a same-store basis relative to 1Q? Or did -- it just not improved as you had anticipated?
Jeffrey Justin White
Yes. Great question, Justin. It did not improve as we anticipated. So traffic stayed very flat to what we saw in terms of trends in Q1, and we just did not see the increase that we were expecting in Q2 to see.
Justin E. Kleber
Got it. Okay. And Jeff, on the $25 million in annualized cost savings that you cited, how much of that do you anticipate for realizing this year? And can you talk about the buckets, the bigger buckets where you're sourcing these savings from?
Jeffrey Justin White
Yes. The biggest bucket that we have in there, Justin, is going to be in the labor pool. So that's going to be an immediate savings that you recognize as you reduce your labor pool. And so we could -- we will start to see that flow through in the back half.
In terms of other expense cuts, we're looking at contracts. We're looking at any discretionary spend. Those types of things are going to take a little longer to make sure that they come to fruition as we exit contracts or reevaluate contracts and do those renegotiations. But I would say, to frame that up, the biggest portion of the expense cuts are going to be in the labor pool.
Justin E. Kleber
Okay. And then, Jeff, you mentioned the payroll, I think per store was down 11%. How much room do you have to cut before you reach what I assume is some level of minimum staffing in stores?
Joseph P. Schneider
Yes. This is Joe. And one thing we don't want to do, and we're very driven is we've got to continue to delight the customer and that customer experience and having an emotional attachment with Sportsman's Warehouse. So it's a little bit fluid on how much more we can do. We believe what we have done is taken the corrective action where the difference between a need and want. But again, the part that we do not want to cut is where we're disappointing our customer.
Justin E. Kleber
Yes. Totally makes sense. Last question for me, guys, just on CapEx. You spent $52 million year-to-date. I think your original guidance was $48 million to $56 million, if I go back to the fourth quarter. So you're already within that range. I guess, is that still the right range for CapEx, it's really going to slow that materially over the back half of the year? Or should we think -- should we be thinking about a higher number relative to that initial plan?
Jeffrey Justin White
Yes, Justin, great question. One little nuance on that. So on the cash flow, in that section, it's showing $52 million. We have landlord payments that we've received for TI dollars that actually show up in operations. So the guidance that we're giving is on a net basis, net of those landlord allowances. So the guidance that we gave in our CapEx guidance would take that into consideration. That's going to be the difference that you have. So I am still comfortable with the range that we've given.
Justin E. Kleber
Got it. Jeff, best of luck in the next quarter.
Operator
We now have a follow-up question from Eric Wold with B. Riley Securities.
Eric Christian Wold
Just got a follow-up question. I know it's always difficult to compare Sportsman's to other outdoor or kind of activity retailers given the product mix, merchandise mix differences, especially around hunting and ammo. But given kind of the comp trends and traffic trends you're seeing, anything you can read into the demographic profile that you're reaching that's different from others or something that you're seeing different in your regions that maybe just others -- maybe some of you kind of pointed that maybe why the trends you're seeing are maybe on the worst side comparatively?
Jeffrey Justin White
Eric, great question. I think a big contributor there is the average income portfolio of our customer versus some of the other public companies that you've seen go out. I would say that our average customer trends to be at a lower average income versus some of the public company comparables, that's significantly going to impact their ability for discretionary spend, which is really what Sportsman's is heavily penetrated in when you look at what we sell inside our store versus some of those other comparable public companies that have similar products, but it makes up a much smaller portion of our business.
Joseph P. Schneider
Yes. And Eric, to that end, we're really working very hard, a, getting more bodies through the door and then being productive with those consumers that come through the doors. We -- in some of the stores, we've done seasonal pads of assortment. We have more refined regional assortment. So we're really working hard on delighting the customer once they're in the door and capitalizing once we have them within the 4 walls.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Joe for closing remarks.
Joseph P. Schneider
Thank you for joining the call today, and thank you to all our dedicated employees around the country for their commitment to Sportsman's Warehouse. Together, we look forward to providing our customers with the best experience and customer service in the outdoor industry. Again, thank you.
Operator
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
