Greetings and welcome to Sportsman’s Warehouse Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. A 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, Rachel Schacter with ICR. Please go ahead.

Thank you. Good morning, 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 this company’s 10-K for the year ended February 2, 2019 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 investors.sportsmanswarehouse.com. As a reminder, fiscal year 2018 was a 52-week year and fiscal 2017 was a 53-week year. Same-store sales as a comparable number, so all figures are presented on a 13-week basis for the fourth quarter and on a 52-week basis for the full year. Our fiscal year 2018 same-store sales compares to the shifted corresponding period in fiscal 2017. Now, I would like to turn the call over to Jon Barker, Chief Executive Officer of Sportsman’s Warehouse.

Thank you, Rachel. Good morning, 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 detail and review our outlook. After which, we will open up the call to your questions. We are pleased with the solid end to the year as our fourth quarter results were in line with expectations on the top and bottom line. For the quarter, net sales declined 0.2% to $242.7 million or increased 4.4% excluding the $10.6 million in net sales in the 53rd week of fiscal 2017. Comparable sales increased 3.1%, which was above our outlook, driven by strong performance from our existing stores and our e-commerce platform. We believe this is a testament that the investments we have made are gaining traction. We held gross margins flat for the quarter, which was modestly better than expectations due to fewer promotions versus last year with product margins offsetting transportation headwind. This combined with disciplined cost control resulted in adjusted earnings per share of $0.25. Drilling down on the composition of our fourth quarter comparable sales results, firearm units across the company were again better than the adjusted mix data within our states as we continued to capitalize on market share opportunities through our positioning as the leader in the category combined with the investments we have made across the business to further strengthen our capabilities within the industry. For the fourth quarter, firearm units saw a slight increase of 0.3% versus a 5.1% decline in the adjusted mix data in the states we serve. Ammunition sales decreased 5.1% in the fourth quarter. The primary…

Thank you for your generous comments, Jon. It’s been a great 17 year run and a true privilege to serve the company and our shareholders. Now, turning to our results, I will begin my remarks with the review of our fourth quarter and full year results and then discuss our outlook for fiscal year 2019. 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 release which was issued earlier today. Net sales for the quarter declined 0.2% to $242.7 million. Excluding the $10.6 million in net sales during the 53rd week of fiscal year 2017, net sales increased 4.4%. Same-store sales increased 3.1% above our expectations as we saw strong results from the expansion of our omnichannel strategies. We ended the quarter with 92 stores in 23 states, our square footage growth of 3.9% from the end of fiscal year 2017. Gross profit decreased 0.2% to $79.5 million compared to $79.7 million in the fourth quarter of fiscal year 2017. Gross profits as a percentage of net sales was flat with the prior year at 32.8% which was better than our expectations as product margin expansion resulting from the less promotional selling environment offset freight headwinds. SG&A decreased 0.9% to $62.5 million for the fourth quarter of fiscal year 2018 from $63.1 million in the fourth quarter of fiscal year 2017. As a percentage of net sales, SG&A expenses in the quarters decreased approximately 10 basis points to 25.8% from 25.9% due to less pre-opening expenses incurred during the fourth quarter of fiscal year 2018. Income from operations from the quarter was $17 million as compared to $16.6 million in the fourth quarter of…

Thank you. We will now be conducting question-and-answer session. [Operator Instructions] Our first question is coming from Peter Benedict from Robert W. Baird. Your line is now live.

Hi guys. Thank you for taking the question, Kevan best of luck going forward. My first question is just around the firearms, Jon you have mentioned the units were up 0.3%, was that a total number or a comp number, just curious what the comp units were and maybe what the comp sales were in firearms, that’s my first question?

Peter, good morning. That was total, not comp, so we may have to circle back and we will have exact on the comp. It was one underlying thing to share since you asked. In 2017, we had a significant promotional event from a manufacturer Cyber 5 days that we did not comp this year. So the rest of our categories except that one particular class performed much better than 0.3%, but we were confident for a tough promo from a brand within one bankrupt a few months later. So that was one thing that was a little bit of a headwind for us in ‘18 as compared to ‘17, but we were still very pleased with the overall performance of the category as compared to the market.

Yes. Okay.

But we can get you that comp, we can absolutely follow-up with that one Peter.

Sure. Yes. No problem. Next is on the competitive landscape, I mean you spoke to a little bit and obviously there is a lot of folks that are pulling back from the category at least among the public companies, you guys seem to be one that’s well positioned to kind of step in and maybe fill the gap, just curious kind of the competitive impact on comp, it’s something you guys have spoken to in the past, how is that kind of set up right now, how did that look this year and then maybe as you look to next year, anything that’s kind of noteworthy there. And then on the smaller store test any more inflow, I mean how large is this store going to be, is this going to go in the same markets in which currently operate or is it opening up kind of new even smaller markets to the current versus the current format?

Great questions, let me see if I can take the competitive landscape on firearms first Peter. The – we are not aware of any competitive openings during 2019 in the markets in which we serve. There were a couple on the horizon that have I believe been canceled by one of the individuals. We think that SCHEELS might have a store in a couple of years in Colorado that can be competitive are in our markets, but otherwise we are not aware of any major retailer opening up in 2019. So from a headwind standpoint, that puts them in a good spot. As you might be referencing other major retailers that have decided to pull hunting and shooting out of their stores, we saw a little bit of that in 2018. We understand they have announced some – number of stores they will be removing those categories. We are unaware of where those stores are located and I don’t believe that data has been available. So, I think it will be a little while before we understand whether that change will have a material influence on – or material impact on where our stores exist today, but we are certainly staying close to that. Where we see opportunities not only in the brands at our retailers I just referenced is a combination of smaller markets, Peter, where historically we might not have wanted to go in with even a 15,000 square foot store, but there is a high demand, high user base for our products around firearms, shooting sports and hunting. And this store concept, call it something smaller than the existing 15,000 square foot store, allows us not only to go into small markets and serve those customers, but also it can allow us to go into large markets and fill in voids with a smaller format and a less capital structure. So we see it as opening up two large areas, two large quantities of locations that there is demand underserved and that other retailers will not pursue because of their lack of flexibility in real estate.

Okay, that’s helpful. My last question is just on loyalty, I don’t know if I heard a number of kind of what the count is at the end of the year. And as you think about the growth for loyalty going forward, I know you have got a number of engagement initiatives on tap, but how do you think about the growth in just the number of loyalty members? Do you feel like that’s tapped out in the existing markets and it will grow just by your new store growth or you think there is still an opportunity to bring more people in your existing markets into the loyalty program?

I do think that over time it starts to – the growth curve starts to slow. We are a little bit over 1.8 million, Peter, in the program right now. What we are focused on more from a numbers of customers is making sure that the loyalty accounts that we create in those relationships are complete and allow us to reengage. So, making sure the numbers of engaged and active loyalty customers where we have the contact information and all the information for the engagements really where we are focused. We see opportunity to grow dollars significantly over time greater than the 50% of our sales as we improve on the technologies and the engagement personalization tools that are coming. I do suspect though that the 1.8 million slows down in its growth over time as we saturate the core customer, but the dollars per customer will grow materially.

Okay, sure. That makes sense. Thanks for the color. Good luck. Thank you.

Thanks Peter.

Thank you. Our next question is coming from Peter Keith from Piper Jaffray. Your line is now live.

Hey, thanks. Good morning, guys. I wanted to get a sense on the recent firearm demand trends. So, we are coming off of two tough years overall just based on the NICS data. Curious to kind of what you are seeing maybe with 2019 year-to-date and then what’s your outlook for firearms that’s embedded in that comp guidance?

I think the overall market, if I have got the data correct we are still running about 13 million units as far as the adjusted NICS going at TPM. So, it’s still a very large market over the last 12 months. We will see in Q1, which were reflected in our guidance, a material drop compared to ‘18. The events that happened in February of ‘18 along with changes in certain retailers’ own approach to regulations did drive demand across the market. We were successful in capturing a good portion of that extra demand last year and creating new relationships. We expect Q1 the adjusted NICS will continue to be a headwind for us before it normalizes back. And Kevan, help me kind of June-ish probably before it gets back to normal.

And you will also see as we continue to go forward and this was demonstrated in our Q4 numbers, we are gaining market share. Because of the policy changes and everything else that’s going on there and our increased assortment, we continue to pick up market share in the firearms space. So, one of the things that we’re really focused on this year is our ability to gain and pick up that market share.

Thanks for that. So, maybe just to follow up, so, when – Jon, you’re saying get back to normal, I guess, I’m curious what that means because we don’t know what normal is at this point. Are you talking about negative 5% NICS data in your markets for Q4? Are you talking about getting back to that level or do you think that, that kind of in your outlook, NICS is going to flatten out after Q1?

No, we expect it to be closer to flat after Q1, call it down slightly to up slightly, but Q1 is going to be the most significant, right, variance we’ve seen in a while in the last at least 4 quarters in the industry because we’re comping the events in 2018.

Okay, good enough. I wanted to pivot the next question over to working capital and inventory management because you did show some really nice improvement in Q4, particularly on a per store basis. Could you give us a sense on maybe how you’re viewing working capital by the end of 2019? Do you have a target for maybe inventory turn by the end of the year or even looking out further, inventory turns have come down over the last couple of years, is there a level that, that you think is reasonable to get back to?

Peter, we’re evaluating that and that is one of our key focuses for 2019. As we discussed back in the third quarter earnings call, we hired a Director of Inventory Planning that his job is to focus on the inventory on a daily basis, and he’s implemented some great tools and some discipline that’s helped us turn the tide. We have looked at the inventory turnovers and we see the same trends that you do and we’re planning for a significant increase this year because of the focus and the tools that we now have in place. We saw a little bit of those with the inventory reduction by the end of the year. We expect that – that trend to continue and to see roughly a 20 basis point increase in our inventory turnover for 2019 with these focuses that we’ve now put in place.

And I think, Peter, we’re pleased with the progress, but we are far from satisfied as a business. And the entire buying, planning, finance team, supply chain team are working diligently to make sure that we’ve got our in-stock rates correctly because this is not a one – the metric doesn’t work by itself, it’s got to work both ways. We’ve got to have the right product in-stock seasonally, but we’ve got to turn our inventory better. So, we’ve got the processes happening, we’ve got the structure in place, we’ve got the tools coming online. The e-comm platform is the other component. I just can’t say how much leverage we are already seeing from that platform especially on the high consideration product, Peter, where you’re online, you’re looking for a particular – I’ll use the firearm as an example, you’re looking for a particular caliber, we might only have one of those guns in the 92 stores, but I can literally source that firearm to your store wherever you’re at and have it there in 2 days from our existing working capital. It’s creating some nice leverage and turnover from that perspective.

Okay. That’s – that sounds interesting. But lastly, I just want to ask a question on the gunsmithing, a couple of things on that topic. Are there any startup costs that we should be thinking about? And secondarily, do you think there’ll be any revenue impact that’s noticeable in 2019 or is this something that will build over time? And then lastly, is it – is that revenue margin accretive or margin dilutive?

On the – first of all, let me talk about the investment. We have a very large scale operation compared to the industry. We located that within existing distribution square footage, we carved out a corner of that. The capital investment was minimal to get started. It’s a few hundred thousand dollars in machinery and equipment to get started.

Most of which was acquired in 2018, so it’s already reflected, so no additional capital is required.

So, it’s going to be growing over time. I don’t expect it will be a material financial improvement in 2019. It is margin accretive over time.

Okay. Thanks a lot. Sounds good. Good luck and good working with you, Kevan.

Thank you.

Thanks, Peter.

Thank you. Our next question today is coming from Michael Kawamoto from D.A. Davidson and Company. Your line is now live.

Hey guys, thanks for taking my questions. Just for the full-year 2019 on your comp guidance, the low-end calls for down 1%, when you started the year, it was a little tougher on the firearm side just given you’re anniversarying a strong period last year, but here’s what is contemplated in the low-end of the guidance range there?

Well, as we look at 2019, obviously, the first quarter is going to be a tough quarter for us, that’s reflected there. Clearly, the firearms and ammunition are driving that – that comp. One of the things as well in the first quarter while the late – the heavy winter helped us in the fourth quarter from soft goods sales, in the first quarter, it’s going to hurt us in our camping and our fishing. So, there’s some impact there that will also be residual. So, as we look forward, Jon mentioned the firearms to be right around that flat for the remainder of the year. So, those are the big drivers that keep us there. And we’ve got some initiatives that we’re implementing that we’re optimistic will be able to help drive us – drive our same-store sales to the high-end of that guidance. But those are some of the concerns that we’re facing as we look to the low-end of the guidance.

Got it. And do you think you’ll get a mix benefit on gross margin in 1Q just given you’d expect firearms to be down a little bit from last year?

Yes, we do expect a mix benefit to come in the gross margin line.

Cool. And then you talked about testing some local inventory ads with Google on the last call and trying some new things on the marketing and customer acquisition front. How are you thinking about customer acquisition in markets where maybe you historically haven’t had a store but are now a little more in play with the updated site and now these smaller format hunting and shooting stores?

Hey, Michael, it’s Jon, good morning. The – as I’ve mentioned before, we – our investment and I’ll call it utilization of digital marketing is limited and it’s something as part of the $1 million I mentioned, there is a little bit of that $1 million going into new digital marketing. We have the local inventory feeds live with Google, but they’re just in testing. The website itself, most of the sessions or visitors are in our regions, but we start – we’re going to start branching out to look at other regions because we have product that certainly can fulfill needs nationwide. And the gunsmithing component is another piece of that, Michael. Again, there are people across the entire country looking for services that can’t find them. You’re going to start to see us marketing traditional ways with the hunting magazines and shooting magazines, but also on forums and other digital ways to announce and engage consumers nationwide on the gunsmithing service.

Got it. And then maybe much further down the line, but could you see a point where that data you’re getting from your website could help make decisions on where you want to open a new store just given where that traffic is coming from in the future?

Absolutely. We already – we already have that data as part of our modeling.

Awesome. Thanks for your time and good luck for the rest of the year.

Thanks, Michael.

Thank you. Our next question is coming from Daniel Hofkin from William Blair. Your line is now live.

Good morning. Just wanted to follow up a little bit on the comp guidance and specifically as it relates to firearms and ammo. I guess what – what are you seeing that kind of gives you some confidence that things would sort of stabilize closer to flat for the category post 1Q? That’s my first question and then I’ll follow up after that.

So, as we looked at the trends that we’re seeing particularly the market share gains that we’ve been experiencing, that’s what gives us confidence by getting back to that level post Q1. So, basically, it’s the market share gains and we believe that the market share gains are going to continue past the first quarter. We’ve been implementing expanding our assortment, but we’ve been implementing the online firearms options, partnering with our drop-ship vendors, that’s going to help us in the market share.

Okay. And then in the – what you’re contemplating for the first quarter you’re seeing evidence that you’re gaining market share quarter to-date from what you can tell on those – based on those initiatives?

That is correct. Keep in mind that there’s only 1 month so far that’s complete within the – the first quarter for us so far.

Yes, yes. Okay. And then in terms of some of the investments, can you just discuss a little bit to what degree you view those as sort of near to intermediate term things that will roll off after 2019 and – versus continuing beyond that at similar levels? Just trying to get an idea of this is a bit of a stepped-up investment year, do we expect to kind of return to some degree of earnings growth in 2020 and beyond?

Yes, I think there’s two, Daniel, good morning, it’s Jon. There’s two parts to that. On the e-comm investment side, we are starting to – we are starting to model out where the leverage starts to return on the business. So, in 2020, we are feeling comfortable that the investment will continue – will start to slow and we’ll start to see leverage. On the minimum wage, we have – I’m looking at Kevan to clarify, we have several years left on the minimum wage increases and those are the other major component of what’s happening on the investment side. So, we do not expect that to slow down.

In addition, the public company cost, Sarbanes-Oxley compliance, that is going to be an investment that’s going to continue as that’s going to be a requirement of us going forward.

Okay. In terms of – how about in terms of separate from the minimum wage, some of the headcount investments that you’re making. Is this a year of sort of a one-time year of step-up and then you expect that it’s more normalized looking forward beyond 2019?

Should be more normalized looking beyond. We should get to the point where we can – as Jon mentioned particularly with respect to the e-comm investment, as we’ll start to leverage the investments and the people that we’ve been hiring to help us operate this new platform.

And I guess lastly, can you just sort of qualitatively evaluate the performance, you obviously talked about some good comp results in the other half of the business, but how you feel you’re executing there relative to opportunity and where there might be more opportunities to even improve further? Thanks.

One of the things that we’re very pleased with in the fourth quarter was that our comp was across all of our categories with the exception of our hunting and shooting categories and that was primarily driven by our ammunition comp, which as Jon mentioned in his remarks was driven by the fact that we did not feel we needed to be as promotional this year versus last year. So, we were very pleased that it was across all categories and the one that it wasn’t was a decision that we purposely made. So, we were very excited to see the results from Q4 and are optimistic that those results will carry over into 2019 once we get past the first quarter.

Okay. Thanks very much, Kevan. Best of luck.

Thank you.

Thank you. Our next question is coming from Seth Sigman from Credit Suisse. Your line is now live.

Hey guys, good morning. Kevan, best of luck, and to the rest of the team, congrats on the progress, definitely some encouraging signs here. My first question is around the comment about running fewer promotions in the fourth quarter, the negative impact on comps. Was that specific to the ammo category and just the fourth quarter or is that something that you expect to continue in 2019?

There were numerous promotional events, the biggest impact was on the ammunition. We ran an ammunition sale in 2017 that we did not anniversary. There were a couple of other smaller promotions that we chose not to because the environment was not as promotional. So, it hurt the top-line, but it certainly helped us from a product margin perspective and that flowed through we feel to the bottom line and that helped us hit our goals for the quarter.

Hi, Seth, it’s Jon. As we look at the competitive environment, the promotional activity that we’re seeing in our categories has more – is more normalized than it was previously. We’ve seen some – some I’ll call it more static responses from competitors that have combined and some of the manufacturers have been more static on their promotions. As we think about the future in 2019, we’re going to stay true to our everyday low pricing. We’re going to stay true to our promotional cadence, which is seasonally based. We do not see anything on the horizon that would cause us to have to get heavier in the promotional cadence like we have in previous years. So, we want to be more rigorous in how we think about each promotion going forward.

Right. And can you just remind us of that promotional cadence in 2018, what we’re going to be lapping here, obviously, to your point in the fourth quarter, you were lapping something from the prior year, how do we think about this year?

This year ‘18, most of ‘18 we were pretty back to normal. I mean, we hit our spring seasons, our summer seasons and our fall hunting seasons, and of course, the holiday season in our normal cadence in ‘18 pulling back from some of the unique promotions that we ran in ‘17. So, we expect ‘19 to be similar to ‘18 in our cadence and we haven’t seen anything from the competitive set that would indicate they’re approaching ‘19 differently than they did ‘18.

Okay, great. And then just following up on the first quarter guidance, it seems like the guidance is mostly a function of the comparison from last year specifically firearms. Is there any other consideration here around weather or maybe other factors, other demand drivers that could be weighing on the comps?

Yes, there’s two, the heavy winter is hurting our camping and our fishing department as we’re starting out the first quarter. So, while the weather helped us during the fourth quarter and we saw that in our clothing and footwear sales, it’s having a bit of a damper on the camping and the fishing as it limits people’s ability to get in the outdoors and participate in the – in those activities. So yes, there is some weather impacts that are impacting that Q1 guidance as well.

Okay. And then just finally on – as it relates to the online business, I may have missed it, but can you guys size up how big is online for Sportsman’s Warehouse today, how much is BOPIS, and I guess, now that you’re a couple of months into the new platform, it sounds like you’re pleased with the response, just any more color on – or learnings on what you’re seeing, where maybe traffic is coming from, is it different than where your store basis, how incremental is it et cetera? Thank you.

We – Seth, we don’t provide the exact numbers. I think the last time we provided it was less than 2%. We’ve got internally goal is to get to 10% of our business over the next 3 years coming from the e-commerce platform, that’ll put us very close to the industry standard depending on which category look at being high single-digits to low-teen. As far as where we are seeing traffic, a majority of our traffic is coming from the regions in which we operate from our existing consumer base that knows the brand and is used to shopping the brand. As we look at ‘19, we will start to utilize digital marketing tools to reach additional areas of the country and we feel that, that’s an opportunity that’s been underpenetrated for us. And we will ease into that make sure that our learnings and our marketing expenses are utilized in an effective manner, but we do believe that’s an opportunity.

Got it, okay. And then Jon, just on the BOPIS penetration today, and I guess, just how important do you think that is to the overall omni-channel offering?

It’s critical. We have – again depending on the time of year, you get $250 million, $300 million of the inventory in the stores. Our customers are researching products, some of these products are high consideration, some of these products are extremely large, you can imagine moving at 900 pound gun safe. So, our ability to bring that forth in a effective way using the website and content is critical. For them that customer to be able to go online, order that item, whether again it’s small or large and pick it up at the same day is powerful. So, I can be sitting at lunch on my phone need something for fishing, hunting and camping trip that’s coming up tonight or next week or whatever and within 2 hours, I can swing by the store and pick it up and not have to worry about whether or not we have it, how long it’s going to take on my lunch hour to get it and I’m back out the door. So, we’re seeing nice growth in that area and great response from the customer. But we literally just launched it in December and by the end of Q1, we will have all categories rolled out, so they’re shoppable from the consumer for the buy online and pick up in store, so lots of opportunity there.

Okay, great. Thanks, and good luck.

Thanks.

Thank you.

Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Okay. As I wrap up today, I want to thank all of our team members over 5,000 employees in our 92 stores, distribution center and corporate office and care center, their passion is what keep our loyal customers coming back to Sportsman’s Warehouse. We look forward to building on our progress and further strengthening our market position. Thank you again for joining our earnings call today.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.