Sportsman's Warehouse Holdings, Inc. (SPWH) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Sportsman's Warehouse Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Schacter. Please go ahead.

Thank you. Good afternoon, everyone. With me on the call is Jon Barker, Chief Executive Officer and Kevan Talbot, Chief Financial Officer. Before we get started, I would like to remind you of the Company's Safe Harbor language. The statements we make today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include statements regarding 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 10-K for the year ended February 03, 2018, 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 at the Investor Relations section of our Website at investors.sportsmanswarehouse.com. As a reminder, fiscal year 2017 was a 53-week year with the impact of the 53rd week described in their earnings press release. Same-store sales are comparable numbers, so all figures are presented on a 13-week basis for the fourth quarter and 52-week basis for the full year. Our fiscal 2018 same-store sales compares to the shifted corresponding week in fiscal 2017 which is the comparable period. Now, I would like to turn the call over to Jon Barker, Chief Executive Officer of Sportsman's Warehouse.

Thank you, Rachel. Good afternoon, everyone and thank you for joining us today. I will begin by reviewing the highlights of our fourth quarter and full year performance and then discuss the progress on our strategic initiatives and thoughts on the coming fiscal year. Kevan will then go over our financial results in more details and review our outlook, after which, we will open up the call to your questions. Let me start by saying I’m honored to be leading Sportsman's Warehouse as CEO and working along such a strong group of associates. As many of you know I’ve been with Sportsman's Warehouse since March 2017. My decision to join the company a year ago was a relatively easy one. Similar to our customer’s, I’m an avid outdoor enthusiast with a passion and commitment to the outdoors. I love to hunt, fish, camp and participate in shooting sports, which makes me a long time buyer and user of many of the Sportsman's Warehouse products. As a loyal customer, I have a firsthand appreciation for distinguishing attributes of the Sportsman's Warehouse model and continue to be genuinely excited about the business. Since joining the company, I’ve dug deep into our business by spending time in our stores, getting to know our customers, developing relationships with our employees and working closely with our vendors. I’ve come away with many learning’s, but one asset that has stood out the most to me is the extreme cash and loyalty of our customers. Our customers thrive on the many outdoor experiences available to them and trust us to provide the products and expertise that they need for those experiences. They are drawn to Sportsman's Warehouse for our differentiated shopping environment, customized localization strategy, expensive breadth of product distortment, knowledgeable associate and importantly, our great everyday value. Our strong value proposition creates a special niche in the outdoor Sporting Goods industry for Sportsman's Warehouse. These distinguishing attributes provided foundation that we can leverage to further strengthen our position and grow our market share. Based on my learning’s and the evolving retail environment an important focus during the last few months has been developing an omni-channel strategy and roadmap for Sportsman's Warehouse. As the lines between brick and mortar and e-commerce channels continue to blur further across retail, we have a significant opportunity to strengthen existing relationships and forge new ones with customers through an improved omni-channel experience. Given our omni-channel focus, we believe it makes sense to produce same-store sales, holistically as opposed to a separate by channel. Therefore starting today and going forward, we will report same-store sales including e-commerce. For Q4, given we have just made the transition, we are also reporting same-store sales excluding e-commerce. Moving onto our results, for the fourth quarter, our topline results were inline with our expectation. Total sales grew 9.8% to $243.2 million for the quarter. Same-store sales declined 4.5% or 5.2% excluding e-commerce versus the prior year. Drilling down further on the composition of same-store sales, ammunition declined 4.7% or 5% without e-commerce in Q4, an improvement from Q3’s 18.8% decline or 19.4% excluding e-commerce. This sequential improvement is a combination of the easier comparison in Q4 because we had already anniversaried the strong 2016 results leading up to the Presidential election as well as vendor supported promotions. Our non-hunting categories declined 3.2% or 5.1% without e-commerce for the quarter. Within our non-hunting categories, soft goods declined 4.6% or 5.4% without e-commerce, given the warmer than expected winter weather in the West. This weather pattern also had a negative impact on categories such as generators, heaters and other weather driven product that fall within our camping category. Firearm units on a same-store sales basis were up 3.2% as we continue to gain market share in the states where we serve. Firearm revenue declined 2.5% on a same-store sales basis for the fourth quarter, a continued sequential improvement from the second and third quarters as we have now anniversaried the significant runoffs of 2016. For the quarter, our adjusted earnings per share was $0.20 per share, which was lower than our guidance due to primarily the following three factors; number one, during the holiday season, we increased our promotions in response to competitive activity, negatively impacting our gross margins for the fourth quarter. Number two, with the passing of the tax reform, we elected to pay one-time bonus to more than 600 non-executive associates, which impacted our SG&A expenses and third, given the rising interest rate environment our interest expense was higher than the prior year. Turning to our full year results, the industry backdrop remains challenging in 2017 as we lap some difficult comparisons from 2016 and navigated a heightened promotional environment in fiscal year 2017, which was a 53-week year net sales increased 3.8% to $809.7 million. Same-store sales decreased 6.5% were down 6.9% excluding e-commerce. Adjusted net income decreased 27.1% and adjusted earnings per share decreased to $0.50 from $0.69 in the prior year period. Despite this difficult backdrop and increased promotional activity in the second half, we increased gross margins by 10 basis points for the year. In addition through rigorous inventory management while opening 12 new stores we generated positive free cash flow in 2017 that allowed us to reduce debt by $2.3 million, thereby reducing leverage on our balance sheet. We will remain focused on disciplined capital allocation to reduce our leverage even further in 2018. Now let me briefly discuss our operational accomplishments in fiscal year 2017, as well outline the areas that we are focused on in fiscal year 2018. In fiscal 2017, we completed our planned, our 12-planned store openings or an 11.3% square footage growth. We are pleased with the performance of our class of 2017 stores, and we are on track to deliver our targeted ROIC of 20% with our 2017 new store class. Our two primary measurements for customer engagement both showed nice growth for the year, with our loyalty customer base increasing by 28% to end the year at just under 1.6 million customers, and are active email file growing by 22% during the year. Our e-commerce business which we now defined as any sale that originates online irrespective of where it’s picked up is still in its infancy. During 2017, we grew the revenue driven from the website by 81% over fiscal year 2016 and had encouraging learning’s from our testing efforts, which I will discuss in a moment. Our everyday low pricing online remains market competitive and we are seeing that in our results across all categories. During the fourth quarter, we increase our assortment online through expanded drop shift [ph] relationships with key vendors across multiple categories. We are also seeing success online with our higher ticket categories, including outdoor cooking, paddle sports and high consideration fishing products, which gives us an increased confidence in our ability to sell all categories online. In addition, we continue to make progress on our vendor partnerships that allow us to test new categories and expand our offering online without increasing our inventory investment. We believe, these partnerships will allow us to engage new customers online and drive traffic to our stores. Our 2018 priorities are focused on three areas, number one, our omni-channel growth strategy both in-store and online. Number two, our customer acquisition and engagement and number three, our merchandising assortment. Starting with our omni-channel strategy, we see significant opportunity ahead to build on our market share, through a combination of continued, measured, retail expansion and e-commerce growth, as a convergence of brick-and-mortar and online has become the customer expectation. We see even more opportunity to interact with not only our existing customers, but also to attract new customers who are not within driving distance of our store base. With the announcement today of two additional stores, our 2018 class of stores has been finalized at five locations. These five stores will bring our total store count to 92 stores across 23 states at the end of fiscal 2018, and will represent 3% square footage growth over fiscal year 2017. The prudent moderation from 2017’s 12-store openings will allow us to allocate more free cash flow to pay down debt. Of the five stores, two will be our smaller format 15,000 square foot stores, a flexible store format that provides us with the opportunity to reach customers in smaller markets that are more insulated from our destination based competitors. And on the e-commerce side, we know, we can do a far better job bringing to life our unique in-store retail experience when customers engage with our brand online regardless of their location or device used. This is our focus as we develop a more engaging and easy-to-use front end experience. Customer feedback is confirmed thus in 2017 and we are utilizing these learning in our go-forward plans for 2018 and beyond. As such, we will continue to make prudent investment in our e-commerce systems and infrastructure in 2018 to support our omni-channel strategy. In 2018, we will invest approximately $3.5 million of tax reform benefits into an expanded e-commerce team, and a more robust customer centric e-commerce platform. We recently selected SAP Hybris, a complete tier 1 cloud based omni-channel platform which will provide improved capabilities across the business. These capabilities included in the platform are a complete new user experience, adaptive weather designed to meet the ever-changing mobile option, the ability for the customer to see in-store inventory, shipped from our stores and same day buy online and pick up within our stores. To ensure a smooth and methodical transitional platforms, we’ve engaged a third-party integrator that is knowledgeable about both our new and our existing platform. We will also be hiring key personnel that will help execute our omni-channel strategy, including a new VP of marketing with significant industry and omni-channel experience who will be joining us soon. We expect 2018 will be an investment year from an e-commerce perspective with the initial improved capabilities visible to the customer in early 2019. In terms of customer acquisition and engagement, our personalized marketing strategies aimed at our nearly 1.6 million loyalty members are providing to be effective. In the fourth quarter, we began testing and providing our loyalty members with targeted offers and included special pricing and first choices on limited availability products. We were encouraged by the initial customer response and in 2018; we will continue to segment and personalize our marketing strategies around specific items and promotions for our loyalty customer base as we continue to further strengthen our engagement. As of the end of fiscal year 2017, greater than 45% of total sales were generated by our loyalty members and we expect this number to increase in fiscal year 2018. We see additional opportunity to increase transactions from our loyalty members to our most passionate customer segment. Furthermore, we are planning to allocate more dollars towards digital marketing, which will be included as part of our e-commerce investment that I just discussed. Turning to merchandising, with our strong customer base and industry position, we are a valuable partner to our vendors. We will increase our collaboration with them and leverage their support and cooperative merchandising efforts. We are seeing increased participation from our vendors, relevant related to in-store visual merchandising improvements, opportunities of first-to-market goods, allocated products as well as increased partnerships with vendor managed inventory. We continue to expand our comprehensive assortment of brand-name products, both in-store and online. Our private-label offering continues to resonate with our customers as well. We have seen strong acceptance of Killik, our hunting and casual clothing private label brand, both in our channel as well as logo tees and hats. We have improved and increased the Killik brand offerings and will continue to build on the strong value proposition of this brand by extending its presence into the fishing, clothing category. We plan to expand our offering of private label products in 2018, particularly in our camping and other hard good categories. Kevan will discuss our 2018 Outlook, but as you saw from our reduced pace of store openings, we will once again prioritize debt paydown in 2018 as we remain disciplined with capital allocation and operating expense management. In summary, 2017 was a productive year for us, we achieved our store opening goal of 12 stores, generated important learning’s that are informing our omni-channel strategy, delivered an over 80% increase in e-commerce driven sales, increased customer engagement with our growing loyalty member base and targeted marketing efforts and we generated free cash flow and reduced debt by $2.3 million. Our extensive offering of brand-name products, everyday low pricing strategy and knowledgeable customer service combined with our focused market specific localization strategy continues to resonate with customers. We look forward to strengthening our competitive position in 2018, which will better position us to further our market share gain. Before turning the call over to Kevan, I want to thank all of our passionate and committed team members for the great job they do, day in and day out. With that, I’ll turn it over to Kevan to discuss our financials. Kevan?

Thanks, Jon. Good afternoon everyone. I’ll begin my remarks with a review of our fourth-quarter and full-year results, and then discuss our outlook for fiscal year 2018. My comments today will focus on adjusted results. We have provided these results as well as an explanation of each line item and reconciliation to GAAP net income and earnings per share in our earnings press release which was issued earlier today. Before I begin, as reminder, fiscal year 2017 included the 53rd week, while fiscal year 2016 was a 52-week year. The impact of the additional week on fiscal year 2017 was approximately $10.6 million in revenue. Same-store sales are presented on a 13-week or 52-week comparative basis. As Jon mentioned, we will now be including e-commerce and are reported same-store sales given our omni-channel focus and the continued convergence of brick-and-mortar and e-commerce. Given the transition, in Q4 we are providing comps both excluding and including e-commerce but starting in Q1 you will hear us report only one number. Turning now to our fourth-quarter results. Net sales for the fourth quarter of fiscal year 2017 increased 9.8% to $243.2 million from $221.4 million in the fourth quarter of last year. Sales were in line with expectations amid a heightened promotional backdrop particularly within hard goods. Same-store sales decreased 4.5% or 5.2% without e-commerce for the quarter. We opened one store in Pueblo, Colorado during the fourth quarter and into the quarter with 87 stores in 22 states or square footage growth of 11.3% from the end of the fourth quarter of fiscal year 2016. Turning to our same-store sales by each of our three retail store groupings, which are one, base stores, two, new stores or acquired stores that have been into the comp base for three years or less and three, stores that were subject to competitive openings which we defined as a new competitive entrant into the market within the past 18 months. In the fourth quarter, excluding the three stores in our comp base that were subject to new competitive openings, our same-store sales decreased 3.9% compared to the fourth quarter of last year. Our 52 base store saw same-store sales decreases of 4.1% in the fourth quarter. In addition, our 20 new store saw a same-store sales decrease of 3.1% in the fourth quarter compared to the corresponding period of the prior year. Finally, our three stores that were subject to new competitive openings experienced a same-store sales decrease of 23.7%. Our competitive headwinds were approximately 130 basis points during the quarter. We saw an inflection point in our nine stores in oil and gas markets, not only did these stores provide a 70 basis point same-store sales tailwind in the fourth quarter, but collectively as a group, these stores achieved a positive same-store sales of 1.5%. We expect this trend to continue into 2018 as the economies in these markets rebound. Gross profit increased 7.2% to $79.7 million, compared to $74.3 million in the fourth quarter of fiscal year 2016. During the during the fourth quarter fiscal year 2017, gross profit as a percentage of net sales decreased 80 basis points to 32.8% from 33.6% in the prior year period. The majority of the 80 basis point decrease was due to increased promotions in an effort to remain competitive in a more promotional environment than we expected. As a result, our product gross margins were lower than the prior year and our expectations. SG&A increased 18.6% to $63.1 million for the fourth quarter of fiscal year 2017 from $53.2 million in the fourth quarter of fiscal year 2016. As a percentage of net sales, SG&A expenses in the quarter increased approximately 190 basis points to 25.9% from 24% due to a combination of a 900,000 one-time bonus and a 516,000 write-off of software assets related to the transition of our e-commerce platform, the latter of which was excluded in our adjusted results. As Jon mentioned, the bonus was paid to more than 600 non-executive employees, which we issued in connection with the Tax Cuts and Jobs Act that was not included in our guidance. Income from operations for the quarter was $16.6 million as compared to $21.1 million in the fourth quarter of fiscal year 2016. Our net interest expense in the fourth quarter of fiscal year 2017 was $3.7 million compared to $3.3 million in the prior year period. Interest expense was higher than the prior year because of interest rate increases. During 2017, the rising interest rate environment also caused LIBOR to exceed the interest rate floor on our term loan during the fourth quarter for the first time, causing higher interest expense on our term loan. We recorded income tax expense of $7 million for the 13 weeks ended February 3, 2018 compared to $7.3 million in the corresponding period of fiscal year 2016. Our reported tax expense was negatively impacted by a $2.6 million one-time charge related to the revaluation of deferred tax assets in connection with the recently enacted Tax Cut and Jobs Act partially offset by a $400,000 benefit from the lower corporate blended rate for our fiscal year. Net income for the quarter was $5.8 million or $0.14 per diluted share based on a diluted weighted average share count of 42.6 million shares as compared to $10.5 million or $0.25 per share based on a diluted weighted average share count of 42.6 million shares last year. Adjusted net income which excludes the net impact of tax reform and the asset write-off was $8.4 million or $0.20 per diluted share. Adjusted EBITDA for the fourth quarter decreased to $23 million compared to $26.4 million in the prior year. Looking at our fiscal year 2017 results, we grew square footage by 11.3% with the opening of 12 new stores and increased net sales by 3.8% to $809.7 million from $780 million in fiscal year 2016. Same-store sales for the year decreased by 6.4% or 6.9% excluding our e-commerce sales from the same period of the prior year. Adjusted income from operations decreased 20.6% to $48.8 million as compared to $60.8 million in the fiscal year 2016. Interest expense increased 2.5% to $13.7 million in fiscal year 2017 from $13.4 million in the prior year. Our annual effective tax rate was 46%, excluding the impact of the $2.6 million dollars related to the U.S. Tax Reform; our annual effective tax rate was 39.2%. Adjusted net income in fiscal year 2017 decreased 27.1% to $21.3 million or $0.50 per share compared to $29.2 million or $0.69 per share in fiscal year 2016, both earnings-per-share numbers are based on a weighted average diluted share count of 42.5 million shares. For the full fiscal year 2017, adjusted EBITDA decreased 11.5% to $72.8 million compared to $82.3 million in fiscal year 2016. Turning to our balance sheet, as of February 3, 2018 ending inventory was $270.6 million as compared to $246.3 million as of the end of the prior year period. On a per store basis, inventory decreased by 5.3%. Our liquidity remained strong as we ended the quarter with $60 million in outstanding borrowings on our $150 million credit facility. As Jon mentioned, we are very pleased with our ability to have reduced our debt by $2.3 million during 2017, while opening 12 new stores. We incurred approximately $2 million in capital expenditures during the fourth quarter. For the full fiscal year, we incurred approximately $41.2 million in gross capital expenditures, or net capital expenditures of $21.5 million, inclusive of $19.7 million in deemed sale-leaseback transactions and landlord incentives. Turning to our outlook, as we look towards fiscal year 2018, we are considering the following items in our guidance. We expect the promotional headwinds to lessen as the disruption from industry consolidation dissipates and inventory positions normalize in the back half of the year. In 2018, we will anniversary more stable performance in firearms as we believe the industry is establishing a baseline after a few years of volatility. Given raw material cost pressures, we expect to see a 2% to 3% price increase on ammunition in the back half of fiscal year 2018, which will put continued pressure on the category. We anticipate the same-store sales headwind from competitive stores to be approximately 60 to 80 basis points for the year. As Jon already mentioned, we are planning for an approximate $3.5 million e-commerce investment which will largely be expensed in SG&A. We do not expect to see major revenue benefits of this investment until fiscal year 2019. The e-commerce platform initiative has started and the investments will ramp up over the first half of the year. We expect cost headwinds primary related to state minimum wage increases that will impact our payroll by just under $1 million. We assume approximately $15 million in interest expense for fiscal year 2018, which factors in the expectation of two additional rate hikes this year. We expect the recently enacted Tax Cut and Jobs Act to result in tax saving of approximately $3.5 million to $4.5 million as our expected effective tax rate will decrease from 39.2% to approximately 25.1%. As we mentioned, we have already invested a portion of this savings in our associates and will invest the remainder in our e-commerce initiative. For fiscal year 2018, we are planning to open five stores or approximately 3% total square footage growth. This prudent moderation will allow us to continue to pay down debt in 2018 as reducing our leverage remains a priority. Taking these factors into account, our outlook for the first quarter is as follows; revenue in the range of $173 million to $180 million. The same-store sales increase in the range of 2% to 6% compared to the first quarter of fiscal year 2017 of adjusted diluted share loss per share of $0.08 to $0.11 on a weighted average of approximately $42.8 million estimated common shares outstanding. Embedded in this first quarter guidance is an expectation of flat to declining operating margins driven by SG&A deleverage that more than offset gross margin improvement versus Q1 last year, while we expect the promotional activity to continue high in Q1, we do not expect it to be as high as it was in Q1 for fiscal year 2017 when we lost 100 basis points of gross margin to promotional activity. Also excluded from our adjusted net income outlook for the first quarter is a $2.6 million one-time expense incurred in connection with the announcement of the retirement of our former Chief Executive Officer, John Schaefer in the first quarter of fiscal year 2018. For fiscal year 2018 we expect revenue of $830 million to $860 million. We expect the same store sales change in the range of down 1% to positive 2% compared to fiscal year 2017. Our fiscal year 2018 expectations for adjusted earnings per diluted share are $0.52 to $0.64 on a weighted average of approximately 43 million estimated common shares outstanding. As it relates to capital expenditures, we expect to incur approximately $20 million to $26 million in total capital expenditures in fiscal year 2018 or net capital expenditures of $15 million to $20 million inclusive of approximate $5 million to $6 million in deemed sale-leaseback transactions and landlord incentives that we expect to receive for the year. Approximately $600,000 of our CapEx for fiscal year 2018 will be attributed to the e-commerce investment. With that, I will now turn the call over to the operator to open up the call to questions.

[Operator Instructions] Our first question is from Matt Fassler with Goldman Sachs.

Thanks. This is Chandni Luthra on behalf of Matt Fassler. Thank you for taking my question. My question is regarding your fourth quarter gross margins. If you could throw some light on how much of margin weakness was attributed to mix shift away from say, generators or other basically you know weather driven categories versus promotional activity?

Absolutely, the majority with promotional activity as we anniversaried the significant decline in firearms sales in the fourth quarter of fiscal year 2016, there wasn't a lot of the mixture there. Most of it was attributable to the promotional activity.

Great. Thank you. And just a quick one in terms of Remington bankruptcy, do you see any impacts on your business from an inventory standpoint or any other impact for that matter?

This is Jon. We’ve had a great relationship with Remington. We expect to continue to have a great relationship with them going forward. Many of the other of vendors that are in similar or the same categories, we been in discussion with to make sure there's any breaks in the supply chain, they’re more than filled. And we’ve had a very positive and encouraging conversation so far regarding that.

Great. Thank you. Thank you so much.

Our next question is with Peter Benedict with Robert W. Baird. Please proceed with your question.

Hey, guys. Thanks. First question, just on the first quarter comps, just curious of the counter. Are those like weeks that are being compared, so is it the shifted calendar? Just trying to understand as we kind of do the work of a different fiscal calendar in 2018, how you guys are treating that?

It is the shifted calendar, Pete. We compared to the same week of the prior year. But because of the 53rd week that shifting one week, so it is a shifted calendar that we’re comparing to.

Okay, good. Good to hear that. Can you give us a sense for e-commerce penetration, where you see that as you’re making these investments? I know you said, you didn’t expect maybe much impact from the omni-channel stuff this year, but how should we think about the e-commerce penetration maybe in 2018 as you guys envision it and then Jon maybe longer-term where you see the business?

I would assume 2018 is going to be about 2% to 3% of our total sales when we round out the year. As far as the long-term three to five-year plan, there’s a significant opportunity in front of us to bring to life the same experience we have in the store online. And I’m really going to be looking at that in total as far as engagement. So, I guess it'll be a little while before I'm in a position to say whether 2% -- what becomes in the out years, but there's significant upside from where we’re at today.

Yes. That makes sense. And then my last question is just around the IT infrastructure that you’ve got there. In other words, an asset write-off in the fourth quarter, but Jon how do you kind of view the asset base right now? The capabilities that you need to add. Do you think you can accomplish the majority of this in 2018 or what’s kind of the roadmap we should think about beyond 2018?

Great question. So there are a couple of things that are really encouraging as far as the foundation that are in place. First of all, we have an incredible ERP system with Oracle. So that’s in place and running and that can support both all aspects of the business purchase orders all the way to the financial considerations plus store and e-comp. Our WMS system that’s in place already and our fulfillment distribution center handles both single pick and purchase orders to the stores. So we’ve got those two major components in place and to some extent those are two of the longer poles in the tent when you're building infrastructure in the platform. So, happy to have those in place and now I’ll have put those in. So our focused with the new platform with SAP will be kind of that middle layer of business tools, front-end customer experience, in-store and distribution center, OMS less allocation modules as step one, the first components of which we expect to have live for the customer to utilize in early 2019. But from there we will continue to add on other elements to optimize that. It will take, I would expect two to three years for us to get the platform to a position where it's scalable for the future.

Okay, great. Thanks so much.

Our next question is with Seth Sigman with Credit Suisse. Please proceed with your questions.

Hi, guys. This is Kieran McGrath for Seth Sigman. Just two quick questions from me. Firstly, on the Q1 comp guide, obviously you’re baking in a pretty material improvement from Q4, could you just talk to the drivers of that improvement? How much is firearms versus other categories? Thanks.

We are seeing an improvement in our firearm obviously that’s a large component of our business. That is no difference in the first quarter. Obviously we have a few weeks behind us. So hindsight is 20/20 with respect to various decisions made by our competitors with respect to firearms and their ongoing operations within the firearms industry that’s having an impact on our business. So that guide indicates what we've seen thus far. We’re currently evaluating whether this is a pull forward demand or if it's an increase in market share. So we have been cautious with respect to our full-year guidance, but our first quarter guidance is based upon what we’ve seen thus far and its primarily has been led by firearms, but it is also lifting the rest of the business and we’re seeing good results in other categories as well as more and more people are coming into the stores and are shopping us online.

Thanks. And then just the follow-up on the e-commerce business here, what categories are you seeing the growth most pronounced? And then just longer-term how you’re thinking about the profit implications as e-commerce becomes a bigger proportion? Thank you.

Yes. As far as categories we’re actually seeing all categories rise significantly. Of course some of the larger product, security product etcetera where the freight expense is a little different, we’re shipping those to the stores, so they may not be grown as high as a percent as great as some of the smaller unit pick items that can go parcel. But we are seeing nice solid growth in all categories. When it comes to profitability, certainly the unit economics on direct to consumer to home are going to be different at the unit level compared within the store. So due to the outbound freight, what we are seeing and expect to continue to see is the overall engagement with those customers in business total dollars spent and wallet share from those customers are increasing. So it will all work together in a positive form, but if you look at specific delivery to home it certainly has a different unit economic.

Thank you.

Our next question is with Andrew Burns with D.A. Davidson. Please proceed with your question.

Good afternoon. And Jon, congratulations on the new position. Couple of questions. Just as your store fleet has continued to grow, I remember around the time of the IPO there was a lot of similarity, you look at large MSAs versus small in different store size, it has very similar productivity. Have you had any trends emerge in recent years whether it's productivity by size, by geography, by size of MSA that is this worth calling out? Thank you.

Andrew, I don't know that our views with respect to those return metrics have changed significantly enough to the call out. We are still very pleased with the returns of our smaller format stores, obviously those smaller formats stores are going to do less from a revenue per store perspective, but we are pleased with the overall returns and with the ability that it gives us to get to those smaller markets that are little bit more insulated from a competition perspective. And so we’re looking across all MSAs as we continue to evaluate our store growth opportunities because they all -- both of our standard format store as well as our smaller format store have continued to perform in the ways that we would expect them to.

Thanks. And then looking at five stores this year and a greater focus on e-commerce, what would be the thought process for determining new store growth in 2019 and beyond whether to keep it as a similar pace or accelerate it? Thank you.

Andrew, this is Jon. We plan to continue to grow our store base in the coming year, so there's no strategic change away from growing. Of course our format allows us to be successful as Kevan was mentioning earlier and some of the stores that are opening this year, kind of clarify that we’re going to very large MSAs with a few and we’re going to some more – some less scale areas with others. The question of how many for next year and the year beyond is an each year planning process. We’re going to be evaluating a retail landscape, interest rates and our financial objectives of free cash flow and debt reduction as part of the 2019 year -- 2019 store growth plan and probably in the incoming discussions we’ll talk more specific about how many 2019 will include.

Great. Thanks. And then one last one just in terms of your full year guidance; the low end of the range contemplating a negative 1% comp. You have a strong start to the year unfolding from a comp perspective. What are some of the items you’re thinking about when you look at the low end of that range? It’s still potential for stronger category headwinds or is that contemplating competitive dynamics? Any color there would be helpful? Thank you.

Andrew, as we look at the full-year guidance as far as the comp goes, as you mentioned we are off to a strong start this year. What we don't know yet is how much of this is a pull forward. Is this just going to be a spike or is this going to be an increase in market share and going to continue longer. So, we’ve been cautious with respect to the back half of the year. As I look at the back half of the year we’re anticipating as I mentioned in my prepared remarks a more normalized environment which is a basically flat to up slightly in the firearms and as we indicated that primarily drives the business. So, the first quarter of the year is the lowest volume quarter of the year. So, even though it up significantly in the guidance, it does have the least amount of impact on the full-year. So we’re being cautious with respect to the remainder of the year until we see how long this increased activity last.

Thanks and good luck.

Thank you.

Our next question is with Peter Keith with Piper Jaffray. Please proceed with your question.

Hey, thanks for taking my question and congratulations Jon with your promotion. Jon, question specific for you with your background which does have some e-commerce to it, I get some curious you’ve been there year, you’ve laid out some interesting initiatives on what the consumer will begin to see a year from now. What you think are that the biggest opportunities or maybe what will the consumer see that – most of the attention to or the biggest -- where would you see the biggest benefit?

I think from a customer facing user experience you probably been in one of our stores and you probably shopped our site, clearly we haven't invested in the same level of expertise and shopping experience on the front end for the consumer that we have in the store. This specialized service that we provide in the expertise and the product we sell inside the store isn’t necessarily shown on the site. So that’s the first thing that the customer will see, as far as how we can leverage systems to better engage customers there is a lot of opportunity and our loyalty program which I touched on in the script. Some of the tests we’ve had on specific segmentation and engagement to those loyalty customers around the products and categories they’ve shopped in has shown really encouraging results. So thinking about that or as well as building our general outreach in email and to new areas where we don't have a presence, we started to test that through digital marketing and other avenues and we’re starting to see a really strong response. So I'm encouraged by what the user experience will see when we launch the new platform and create a new -- an expertise. And I’m also encouraged by some of the underlying capabilities we will have to reach our customers in a new way. Finally, the underlying which probably may or may not come out the script is with this Omni channel experience when it's fully rolled out, the ability for us to leverage or 100% for inventory across all 92 stores are more by than for a customer to be able to buy from that store pickup within a few minutes, ship from that store, improved time in transit, reduced costs, all those things that can come from it by levering the existing working capital is a pretty exciting part of it. That will take a little while to get rolling, but by mid next year we expect to see some of that coming to fruition.

Okay. That sounds exciting. Thank you. And looking maybe at this year you’d mentioned that you would see a 2% to 3% price increase in ammunition. How do you think that plays out to your customer? Is there any unit elasticity there that would cause a slowing of sales or is that going to be a pretty clean flow-through over all. And furthermore is it – I guess, gross margin neutral really, the price increase along to your customers.

But let me start with the last one. Yes, we believe it will be gross margin neutral as we and we expect our competitors to pass it along as well. So it’s going to happen in over time this price increase. As we have mentioned we expected to happen in the back half of the year. So, it will be interesting to see what the customer does if they buy up ahead of it or if it does impact the demand there. As we indicated in our script we do expect a little bit of headwinds there that it will impact the demand. So we’ll see how it plays out, but that's our expectation for the year.

Okay. It sounds good. Thanks a lot guys.

Thank you.

Our next question is with Patrick McKeever with MKM Partners. Please proceed with your question.

Okay. Thank you. Kevan, you mentioned -- I’m talking about the sequential improvement in firearms and ammunition, some decisions made by competitors. So I mean, my question is are seeing it more the impact on your business, more on the product side just based on some of the what some competitors have done in terms of removing some of the MSRs? Or is it is on the age side with some of the age restrictions that have been put in place by some competitors? So that’s my first question. And then, on wages you mentioned I think $1 million in wage pressure from minimum wage hikes in 2018? I mean is that the extent of it or is there some pressure beyond minimum wages in some states?

Now, let me start with the first question. With respect to that we’re seen it on the product level and its bringing more people into the stores and it's across a lot of different categories, it's not just firearms, firearms is leading the way, but it's listing the other categories as well as more people are coming into the store. So we’re seeing very good traffic thus far in the first quarter. With respect to the minimum wage increase that is the primary driving factor of the pressure there, but there is also some competitive factors in local areas where from a distribution perspective there are some competitive wage pressures that we’re having to match or increase wages in order to retain employees. So it’s a market-by-market basis, but we are facing other wages not significant enough to call out the individually by itself but there are other factors that we take into account when we prepare the guidance.

And then just back to the first topic or question, I mean, I know there -- have you had any, I'm sure you have, but to what extent internal discussions about putting any company restrictions on firearm purchases beyond the laws that are currently out there? And then, I mean, have you gotten any pressure from any of your vendors. I know there was at one big retailer that had some pretty significant vendor pressure in that area?

Patrick, this is Jon. As far as a Sportsman's Warehouse changing their policies around regulated materials, we are continuing to monitor the situation having ongoing conversations to make sure we understand what's happening in the political arena and regulation. But we continue to support the lawful sale of firearms under the second amendment rights of our customer. And at this point we have no intent or plan to change the way that we approach that. We have the very best compliance record of any retailer in the entire industry for the ATF and we have a great relationship with federal, state and local law enforcement and we will continue to monitor and focus on being compliant with laws there in place in the federal state and local jurisdictions in which we operate.

As an example in the state of Florida as they recently increased their minimum age to purchase a rifle to 21, we increase -- we changed our state law chart and if a customer from Florida goes to one of our stores say, in South Carolina nearby we will abide by the 21 age limit for residents of the state of Florida compliance with the laws and regulations whether that be state or federal or local jurisdictions is very important and critical to our company and so we watch as Jon indicated what the law changes are and we make sure that we comply with the with the laws.

Yes. Understood. And then anything on the vendor side, I mean, have you had any pressure there from vendors to do anything or change anything?

Patrick, when you say vendors I'm not sure. Can you give us more specific?

The brands -- that some of the brands, the manufacturers of non-firearm products.

We’ve had no indications from any vendor that I'm aware of off the top.

Okay, great. Thank you very much.

Thank you.

Our next question is with Ron Bookbinder with IFS. Please proceed with your question.

Thank you for taking my questions. You have talked in the past about making opportunistic purchases that could benefit gross margin. Could you do one of that in the fourth quarter? And if so, which category? How did it work out? And would you pursue that going forward?

Yes. We did have some opportunistic purchases there. Many categories as vendors were looking to move merchandise there, we continue to evaluate the opportunities as they are presented to us and if it makes sense from a financial perspective we will take advantage of that. I'm aware of one that we did just a few weeks ago because it made financial sense. Other deals that are been presented to us, we have turned down; again we evaluate each deal on an individual basis to see where it makes sense from a financial perspective.

Are they concentrated in any one category or is it you know everything from heaters to kayaks?

It’s across all categories, I don’t know the specific classes or that I’d have to get with my merchant to get down and more into detail, but it’s across all categories. One of the things I think is worth mentioning the loyalty test and e-commentary I made earlier about segmentation has allowed our buyers across all categories to do purchases of much smaller quantities than we would historically for all of our stores. So the example being if we can buy 20 or 30 of our high consideration item at a great price, we now have an avenue to engage our loyalty customers on that special and that’s some of the tests we’ve been seeing with very great success. So it’s a slightly different way of thinking about special buys versus the large discounted special buy for the quarter, we are now opening up new channels to buy products that historically would have been too small of buys for the business.

The firearm inventory in the industry channel, do you think it’s at the profitable level that yes, we're going to see promotions basically coming to a normalization at the end of this quarter? Or is there still some excess merchandise? And would it be more on the long guns or on handguns?

I think we have seen through the acquisitions that happened last year and the promotions in Q4, it returned to a more normalized. I don’t know that it’s back to where it should be, but we saw a lot of that flow through in 2017. So I would expect it will be a more normal position towards the back half of this year.

Okay. And you guys are basically replacing for every unit sold in firearms, you're replacing it with another unit, correct? You're not trying to use your firearm in this inventory?

No. No, we are not.

Perfect. And kayak. Have you guys extended your selection of kayaks? It seems like there was a large ammunition in the store the other day. And it seemed like a larger selection. Does that drive other categories like the fishing category, which might bring a higher-margin than the kayak?

Yes, no I’m glad you are in the store so we appreciate that. Certainly going into spring our entire paddle sports categories, Paddleboards, kayaks, canoes, small fishing boats are all coming online and you are just going to see more of those in the store. We also do a really nice business online because the assortment is so broad there and we’re shipping those into the store. When the customer is getting into the store, it’s an easy upsell, right. Obviously and you’ve got a kayak or you’ve got a canoe, you need oars, you need life jackets, you might – or many of the kayaks we sell are fishing related kayaks, so it’s a great opportunity to increase the upsell and to engage the customer in a broader assortment than just that single unit.

Okay. Great, thank you very much and good luck in the New Year.

Thank you.

Our next question is with Daniel Hofkin with William Blair & Company. Please proceed with your question.

Hi, can you guys hear me okay?

Perfect.

Okay, thanks. So I just quickly a follow-up on earlier question about price increases expected in ammo [ph] later this year. Can you just quickly discuss any past experience in whether your comments about an expected reduction in unit demand as a result, whether that corresponds to what you've seen in the past when there've been maybe similar price increases. That's my first question and I have one follow-up.

Yes, we’ve seen both sides as the price increases have gone on. A lot of it depends on other line and demand, what’s going on with respect to firearms and that attachment there, so what we have based our guidance on is the historical that we have seen, as we indicated in our remarks we do expect some headwinds because of that price increase, so that’s how we factored it in and what we expect this year, could it be different? Yes, but that’s how we built it into our guidance.

Okay. And again, back to the sort of overall comp guidance and then, I guess, thinking about firearm demand year-over-year later this year. I think you commented that in the response that you would expect at some point later this year a sort of a return to the normalized flat to up slightly growth environment. Can you help square that with sort of obviously the last dozen years or so maybe with the exception of last year, obviously there were sort of a mid-single-digit or better average annual increase. Are we talking about kind of on the same basis you are now thinking that in this new environment going forward, that you're looking flat to up just slightly? Or is that are we talking about two different things?

No, I think it’s the latter. I think we are looking at it flat or up slightly as we look at 2017 from a firearms perspective, well it was off significantly versus 2016. There were no significant spikes or events that caused increases in demand that we then have to anniversary this year. So, as we look to the remainder of 2018 anniversarying no significant events we believe that that ship will show us what is the longer term growth rate which we believe is that flat to up slightly as we’ve indicated in our guidance.

So that flat to up slightly is a moderation from what it was, let's say, over the last -- the majority of the last dozen years or so where it was like 5% to 8%, is that right?

Yes, it’s correct. As I indicated we’ve being cautious with our guidance for the back half of the year, but we do see a more normalized firearm environment happening this year.

Okay, thanks very much.

Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back over to management for closing remarks.

This is Jon. And I want to thank everyone for taking the time to join us today on our earnings call and for the questions received afterwards. I would look forward to speaking to you more on in greater detail in the future. Thank you and have a great afternoon.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.