Sportsman’s Warehouse Holdings, Inc. (NASDAQ:SPWH) Q3 2023 Earnings Call Transcript
Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) Q3 2023 Earnings Call Transcript December 6, 2023
Sportsman's Warehouse Holdings, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.11.
Operator: Greetings, and welcome to the Sportsman's Warehouse Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Riley Timmer, Vice President of Investor Relations. Thank you. Riley, you may begin.
Riley Timmer: Thank you, operator. Participating with me on the call today is Paul Stone, our Chief Executive Officer, 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, which includes 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. Those are 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 99.1 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 will now turn the call over to Paul.
Paul Stone: Thank you, Riley, and good afternoon, everyone. It's an honor to be here, and I'm excited to lead the Sportsman's Warehouse team as the next CEO. As one of the leading specialty outdoor retailers, I look forward to partnering with our more than 5,000 dedicated associates across the organization for what I believe is a very promising future. The mission of Sportsman's Warehouse is clear: we provide outstanding gear and exceptional service to inspire outdoor memories. This is the core of who we are as a retailer and one of the key reasons why I chose to join and lead this great company. During my time with the competing large outdoor retailer, I quickly learned that all those who participate in the outdoor share a passion that is unmatched.
When one of our customers walk through our doors, they expect to talk with someone knowledgeable and feel their passion for the outdoors, whether it be hunting, fishing, or camping. As a company who prides itself on having that local, homegrown image and feel, it's critical that we serve our customers with vigor and passion. We will continue to build on being the outdoor company of choice, not for retail theatrics, but for the value, the deep assortment and the absolute unmatched service we provide. Looking now at our Q3 results. Sales for the quarter came in above our stated expectation, led by our hunting and shooting sports category. However, the difficult microenvironment continues to pressure consumer discretionary spend, creating a continued headwind for the business.
While there were some bright spots in our hunting and fishing categories during the months of August and September, soft sales trends persisted during these two months of Q3. In early October, unfortunate world events resulted in sales improvements in our shooting sports category, which was the key contributor to our beat of expectations. While we are in no doubt faced with some short-term challenges, the careful execution on the key areas of the company has never been more important. It is critical that we carefully navigate and adjust the business to the current environment. Our objective is to further position the business for a successful future. To that end, during the third quarter, we made significant progress on our short-term initiatives.
The team did a great job executing at a high level of success at each of the key areas, which is reflected in our Q3 results. I'm going to be focused along with the team on a successful closeout of the fiscal year. This includes providing customers with a positive holiday shopping experience and further execution on the following areas of the business: inventory management, specifically the reduction of our apparel and footwear inventory; omni-channel and e-commerce; cost reduction and control measures; and capital allocation priorities. During the third quarter, the team took swift action to address each of these areas with meaningful results achieved. First, in regards to inventory management, we made significant progress through a series of promotions and markdowns to reduce our apparel and footwear inventory.
Starting in early Q3, the team laid out a solid plan to move through this inventory during the back half of the year, and I'm pleased with the progress. However, given the tough micro environment and the deep markdowns we are seeing by competitors, we will be more aggressive in Q4 to move this inventory. These aggressive markdowns will put additional pressure on our Q4 gross margins. It is critical to end the year with healthy inventory so we can invest in the right merchandise that appeals to our core customer. I am pleased that during the quarter we reduced our total inventory and paid down our debt by approximately $20 million versus last quarter, improving our total liquidity. We will continue our plans to refine how we manage inventory across our wide range of locations in order to leverage our strengths in omni-channel and keep our deep assortment of brands locally and seasonally relevant.
Our goal is to continue refining our processes, invest in better tools, and build stronger partnerships with our key vendors to improve the overall customer experience and deepen brand loyalty. Second, e-commerce, which once again outpaced the performance of the overall business in the third quarter and continued to comp positive. This is an area where we will continue to improve our capabilities, evolve our programs, and invest strategically. These are all critical pieces to enable us to leverage our omni-channel platform to drive additional sales and serve more customers outside of our geographic areas. Third, in regards to our cost reduction effort, I am proud of the team for how swiftly they reacted to right-size SG&A costs to our current business trends.
We will continue to closely manage the business, look for areas where we can further reduce expenses, and invest only in areas that are value-add and provide a measurable return on investment. I am proud of our employees for how they reacted to these difficult changes and continued providing passionate service to our customers. And fourth, capital allocation priorities. On November 16th, we opened our final store for 2023 in South Tucson, Arizona. As we look forward on new stores, we reviewed our capital allocation priorities and considered the current macroeconomic conditions and its impact on our sales. Given these conditions, we've made the decision not to open any new stores during fiscal 2024. However, as I think about the future for our new store growth for Sportsman's Warehouse, I do see meaningful opportunity and significant white space across the country.
I believe our unique store size flexibility, which allows us to open stores in areas that our competitors simply cannot, provides us with a distinct competitive advantage. This coupled with the significant white space available leaves new store openings as a significant piece of our in-development long-term growth plans. I am truly excited to be part of Sportsman's Warehouse as we carefully but swiftly adjust, adapt, and refine our business to the current demands of our passionate customer. As I continue my review of the business and the efficiency and effectiveness of our systems, people and internal processes, it's critical that we have all the foundational pieces firmly in place to successfully support our stores and the customers we serve.
Having spent nearly 28 years in stores and overseeing operations with a Fortune 1 retailer, spending time in our stores, meeting with our associates and customers is critical. We have a unique company and opportunity. I firmly believe we will make the necessary improvements to grow this company and increase shareholder value. On our year-end earnings call in March, I will provide an update to our shareholders and analysts on the short- and long-term strategy for Sportsman's Warehouse. The foundation of this company is strong and I'm very excited to be here to lead us through our next evolution of growth. With that, I'll turn the call over to Jeff.
Jeff White: Thank you, Paul. I'll begin my remarks today with a review of our third quarter fiscal 2023 financial results, then cover our outlook for the fourth quarter of 2023. Net sales for the third quarter of fiscal 2023 were $340.6 million compared to $359.7 million in the third quarter of 2022, a decline of 5.3%. Same store sales decreased 11.4% compared to the third quarter of 2022. In looking at comparable sales by department, our hunting department same store sales were down 10.6% versus last year. Breaking it down further, ammunition comp sales were down 10.6% with firearms down 5.2% in the quarter. While the first two months of Q3 saw pressure from the macroeconomic environment and consumer discretionary spending, sales in early October turned positive in these two categories due to the tragic events that took place in Israel, leading to war and social unrest.
These events led to the majority of our guidance beat on a top- and bottom-line basis for Q3 2023 compared to guidance. Looking now at our other departments. On our last call, we highlighted the need to begin strategically promoting and marking down portions of our apparel and footwear inventory as we move through the second half of this year. I am pleased with our progress. However, we are executing a more aggressive strategy with our promotions during Q4 to ensure that we achieve our planned inventory goals and end the year in a much healthier position. It's important to note that this is a one-time effort to quickly eliminate non-go-forward brands, styles, and slow-moving inventory that does not resonate with our customer. This will, however, allow us to expand the breadth and depth of the products and brands that our customers are seeking when they shop our stores and websites.
When looking at total apparel sales, we were down slightly at 2.1% versus last year with footwear up 1.8% over the prior year. These were both significantly better than the run rate of the company, given the promotional activity to clear out inventory, but was the main contributor to the 330 basis point decline in gross margins over the prior year. While our fishing department was down 5.8% versus last year on a comparable store basis, trends in this department outpaced our other departments with total fishing sales up 2.7% versus prior year. This is a department where we see future opportunities to capture additional market share and we'll make strategic investments in inventory going forward. Turning now to our other key items on the P&L.
Gross margin was 30.3% for the third quarter versus 33.6% in the prior year comparable period. Gross margins for the quarter came in as we expected, given the aggressive promotional activity in our apparel and footwear departments as we cleaned up inventory. Lower margins on ammunition compared to last year also contributed to the decline in gross margin as ammo margins have normalized and category inventory is now readily in stock and available. SG&A expense as a percentage of net sales was 29.4% or $100.1 million compared to 28.4% or $102.3 million in the third quarter of last year. While we increased as a percentage of net sales, in absolute dollars, operating expenses were down $2.2 million versus last year, which includes the expenses of 15 additional stores in our fleet.
Last quarter, we laid out a plan to reduce and streamline our operating costs. We made significant progress in our cost-cutting efforts, with payroll and other OpEx down $8.4 million versus Q3 of last year. We will continue to execute on our planned expense cuts and manage our other variable expenses very closely to keep costs aligned with the current trends in the business. Net loss for the third quarter was $1.3 million or negative $0.04 per diluted share compared to net income of $12.9 million or $0.33 per diluted share in the prior-year period. Adjusted net loss in the third quarter of 2023 was $0.2 million or negative $0.01 per diluted share compared to adjusted net income of $13.1 million or $0.34 per diluted share in the third quarter of the prior year.
Adjusted EBITDA for the third quarter was $16.2 million or 4.8% of net sales compared to $27.7 million or 7.7% of net sales in the prior-year period. Turning to our balance sheet and liquidity. Third quarter ending inventory was $446.3 million compared to $485.2 million at the end of the third quarter of 2022. On a per-store basis inventory was down 8% versus last year's third quarter and 2.4% compared with Q2 2023. We are pleased with the progress made to our inventory in Q3 and we'll continue to reduce our inventory levels through the balance of the year. Our plan as we move through the end of the year is to reduce our on-hand inventory to a level below $375 million. Regarding liquidity, we ended the third quarter with $185.4 million on our $350 million line of credit and $2.9 million of cash on hand.
We have approximately $111 million available under our credit facility for borrowing. We expect the outstanding balance on our line of credit to end the year below $135 million as we continue to reduce inventory and closely manage expenses. With over $45 million of capital invested in our new store and store refreshes this year, our primary focus in terms of capital allocation heading into 2024 will be the paydown on our line of credit. We will continue to prioritize the best use of capital and will provide more details on this when we announce our strategic plan for 2024 on our year-end earnings call in March. Looking at cash flow for the first nine months of 2023. Cash used in operating activities was $16.6 million versus cash provided by operating activities of $14.5 million for the first nine months of 2022.
The increase in our cash outflows was primarily due to additional inventory for our 15 new stores and a net loss in the first nine months of this year compared to net income during the prior-year nine-months period. Turning now to our guidance. The underlying business continues to see pressure from the difficult macroeconomic environment weighing on consumer discretionary spend and our top-line sales. We will continue our efforts to drive both store and online traffic with additional promotional activities planned for the balance of the quarter. I am pleased at how the team has executed thus far during holiday, and we are seeing positive trends in our inventory reduction efforts and debt paydown, and we'll end 2023 in a much healthier position.
Now focusing on our fourth quarter guidance. We expect net sales to be in the range of $365 million to $390 million. We expect that our more aggressive promotional activities during the fourth quarter will reduce gross margins between 600 basis points to 800 basis points versus the prior year. Same store sales in the fourth quarter are anticipated to be in the range of down 11% to down 6%, and adjusted EPS for the fourth quarter is expected to be in the range of negative $0.35 to negative $0.25 per diluted share, driven primarily by the reduction in gross margin. This reduction in gross margin will be partially offset as we continue to implement our cost saving initiatives throughout the quarter. As a reminder, the fourth quarter of 2023 will include a 53rd week, which we have included in our guidance.
We anticipate this extra week will add between $14 million and $17 million in additional top-line sales and run at an EPS loss of between $0.04 and $0.06. That concludes our prepared remarks today. I will now turn the call back over to the operator to facilitate any questions.
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