Sportsman's Warehouse Holdings, Inc. (SPWH) Q4 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the Sportsman's Warehouse Fourth Quarter and Year-End 2022 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, Vice President of Investor Relations, Riley Timmer. Thank you, Riley. You may begin.

Thank you, operator. Participating with me on the call today is Jon Barker, Joe Schneider and Jeff White. I will now remind everyone 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 includes statements regarding our expectations about 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 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 would also like to note that today’s materials include an earnings conference call PowerPoint presentation, which is available at sportsmans.com in the Investor Relations section of the website. You can utilize this deck as a reference with today’s prepared remarks. I will now turn the call over to Jon.

Thank you, Riley, and good afternoon, everyone. As I'm sure you saw we announced in our press release that I will be retiring from my position as CEO and Director effective this Friday. Joe Schneider, Chair of the Board, will lead the company on an interim basis as the Board undertakes a comprehensive search process. And I will be available to advise both the Board and Joe for the next 30 days to ensure a smooth transition. While there's no easy time for a transition like this, I feel that now is the right time for me to retire as I've never been more confident in the future of the company. Thank you for a wonderful six years. They have been the highlight of my career. With that, I will turn the call over to Joe and Jeff for some prepared remarks.

Thank you, Jon. I want to personally thank Jon for his six years of leadership and commitment to the company and for his willingness to be available for the next 30 days to help with this transition. On behalf of the Board and the company, we wish you the best in your retirement. With that, I'll turn it over to Jeff to review our results, strategic objectives, outlook for Q1. Jeff?

Thank you, Joe, and good afternoon, everyone. To quickly recap 2022, I'm proud of our accomplishments during the year and the progress we made while navigating against the tough macroeconomic backdrop. It was around this time one year ago that many of the restrictions imposed because of the pandemic started to subside and consumers moved back to post-pandemic working, recreating and shopping behaviors. At the same time, Russia’s war on Ukraine began, causing a significant increase in fuel prices and added to the growing consumer uncertainty. This coupled with high inflation, but immense constraints on the consumer spending behaviors, creating a challenging operating environment for much of 2022. Despite these challenges, we opened nine new stores, strengthened our management team, further expanded our omnichannel capabilities and returned nearly $65 million in capital to our shareholders through our stock buyback program. Turning now to our Q4 performance. Our fourth quarter results beat the midpoint of our guidance range for both sales and earnings per share. We achieved net sales of $379 million compared to $416 million in Q4 of 2021. The decrease was primarily driven by lower sales demand from consumer inflationary pressures and recession concerns, partially offset by the opening of nine new stores over the prior year. Same-store sales decreased 12.5% in the quarter compared to the same quarter of fiscal year 2021. However, compared to the fourth quarter of pre-pandemic fiscal year 2019, total net sales increased 46.9% and same-store sales increased 24.9%. We achieved significant increases in most categories compared to pre-COVID Q4 2019, with footwear, up 42.8%; apparel, up 42.1%; hunting, up 26.8%; camping, up 6.6%; and optics, electronics and accessories, up 9.9%. Although the consumer continues to be pressured by inflation, the business has maintained sales that are elevated over pre-pandemic levels, reflecting the continued strong participation in outdoor activities that we support. Gross margin was 32.4% for the quarter, a decrease of 40 basis points versus the prior year fourth quarter period. During the fourth quarter of 2022, particularly during the holiday season, customers average basket composition focus more on promotion-driven merchandise that we've experienced during the last few years. While overall transportation costs were down year-over-year, the average basket margin was lower than we experienced in the prior year. As a percentage of sales, SG&A expense increased to 28.1% compared to 27.2% in the fourth quarter of the prior year. This increase was primarily due to higher rent and depreciation expenses from the addition of nine new stores opened during 2022 and the stores refreshed over the last two years. For full year 2022, we finished with sales of approximately $1.4 billion and adjusted EPS of $1.06. We ended 2022 with a total of 131 stores in 30 states and improved our omnichannel capabilities with e-com-driven sales now in excess of 15% of total sales. Comparing to the pre-COVID year of 2019, we have increased sales nearly 60%, added over 30 new stores to our growing footprint, strengthened our balance sheet with minimal debt and successfully executed on our omnichannel strategy by more than doubling the amount of revenue that comes from our website. As we navigate through 2022, the business experienced a return to pre-pandemic seasonal trends, inventory availability across key categories improved and marketing and promotional activities returned to a normal cadence. While sales levels are still significantly elevated over pre-pandemic 2019, the persistent inflationary pressures felt by our consumers weighed on ourselves. As we mentioned on our last few calls, many consumers put discretionary purchases on-hold, especially on high-ticket durable goods flowing down their normal trade-up cycle. As we move through 2023, we will continue executing our strategies to increase our share of an estimated $70 billion a year total addressable market, while keeping focused on the overall health of the consumer. Our strategic growth drivers for 2023 to maintain our position as the fastest growing outdoor specialty retailer and leverage our omnichannel platform are the following: one, grow our store footprint using our flexible store approach; two, grow our omnichannel platform in sales generated from sportsmans.com; three, engage the customer by leveraging our databases and improving our digital marketing efforts; and four, improve our local assortment and grow our private brands to fill in our good-better-best merchandising strategy. Looking at the accelerated expansion of our retail store footprint, our strategy for opening new stores will continue to leverage our ability to flex the size of any given store to match the needs of that market. This approach allows us to reach consumers and go to underserved markets where our largest competitors simply can't go. We are pleased to announce that we have to get successfully negotiated lease terms and plan to open 15 new stores in 2023. We have outlined the locations, timing and box sizes of these new stores in the press release issued earlier today. Based on the announced new store openings, we will end fiscal 2023 with a total of 146 stores in 32 states. We also plan to refresh two stores during 2023. Over the last two years, we have refreshed 29 of our stores and invested about $12 million of capital in these refreshes. Keeping our fleet of stores relevant and esthetically pleasing was the key driver of our decision to remodel these older stores. Regarding our e-commerce platform growth. During 2023, we see Sportsmans.com as a way to drive additional sales through reaching new customers outside our geographic area, continuing to leverage our fleet-wide inventory and increase assortment through the introduction of new relevant products to our website. We are pleased with the growth of our e-commerce-driven sales and continue to see that part of the business outperforming the trends of other parts of the business and increasing year-over-year. Turning now to customer engagement and leveraging our growing databases. Over the last few years, we experienced significant increases to our customer data files. We now have more emails, loyalty members and credit card customers than ever before. Sales from loyalty customers continues to penetrate at approximately 50% of our business with the number of loyalty members now in excess of 3.8 million. Our strategic efforts in 2023 will be centered on continuously improving our capabilities with digital and print marketing to become even more efficient and effective with customer engagement. As we look to the future, we have immense opportunities to grow and leverage our databases, increased retention and maximize the lifetime value of our customers. Now to improving our local assortment and private brand strategy. We pride ourselves in our ability to assort with the right balance of national brands that our customers expect to find and augment that selection with our private brand offerings to fill-in gaps in our good-better-best merchandising strategy. During 2023, we will continue to invest in the development and expansion of our private brands. We will also continue to invest in our visual merchandising to enhance the look and feel of our stores to provide our customers with an enjoyable shopping experience. We continue to work together with more of our key vendor partners to further build-out our store -- in-store strategy. These in-store shops provide a visually appealing way to highlight certain geographically relevant brands and provide the customer with an improved in-store experience. I now will -- I now want to take a minute and review our balance sheet and liquidity. Full-year 2022 ending inventory was $399.1 million compared to $386.6 million at the end of 2021, an increase of $12.5 million. Compared to the end of third quarter, inventory is down approximately $86 million. We are very confident in the overall health of our year-end inventory and believe our stores are well-positioned to handle our current sales trend. With the plan of 15 new stores opening in 2023, four of which fall in Q1, we expect our normal inventory increases and decreases to be impacted by these openings throughout the year. As a reminder, the initial load-in of inventory is about $2.5 million per store. For the full-year 2022, we incurred approximately $60 million of net capital expenditures, primarily related to the construction of nine new stores and the refurbishment of nine existing stores during the year. Our liquidity continues to be a strength as we ended 2022 with $87.5 million on our line-of-credit and with a debt-to-adjusted EBITDA leverage ratio of less than 1 times. Our total liquidity including cash-on-hand at the end of 2022 was $161.5 million. During the fourth quarter, we repurchased approximately 260,000 shares in the open market for an investment of $2.3 million. For the full fiscal year 2022, we repurchased a total of 6.8 million shares for a total return of capital of $64.7 million. As of the fiscal end-of-the year, we had approximately $10.3 million of remaining capacity under the share repurchase program. We will continue our open-market repurchase strategy and execute opportunistically as market conditions dictate. Turning now to our guidance. Starting with our net sales outlook. We estimate first quarter net sales to be in the range of $265 million to $270 million. Same-store sales in the first quarter of 2023 are anticipated to be in the range of down 19% to down 17%. EPS for the first quarter of 2023 is expected to be in the range of negative $0.40 to negative $0.35. To add more color to our Q1 guidance, we believe that weather has been a significant headwind for us, especially in the western half of the United States. A combination of unusually high amounts of rain and snow is influencing the timing of the spring fishing and camping seasons, likely pushing these to later than normal. However, the much needed water we received in the west should open up more streams, rivers, reservoirs and camp grounds for better fishing and fewer wildfires, allowing people to enjoy the outdoors more than we've seen in the prior years. In quantifying the impact, we believe the impact due to weather on-top line sales is somewhere between $17 million and $20 million and $0.15 to $0.20 of EPS in the first quarter. We have been adjusting inventory accordingly and merchandising our impacted stores to provide customers what they need once the weather breaks and the outdoor spring season begins. While participation in the outdoors remains strong, the macro environment and inflationary pressure continues to weigh on the consumer and how they are spending. These trends, coupled with the headwinds from weather and tough year-over-year comps are factored into our first-quarter guidance. It is critical that we maintain rigor and discipline as we navigate this environment. However, we remain optimistic about the overall strategic position of the business and health of the outdoor industry. That concludes our prepared remarks today. I will now turn the call back to the operator to facilitate questions for me, and our interim CEO, Joe Schneider.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our next question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed with your question.

Jon, sad to see you go, but enjoy retirement. I want to start with guidance for Q1. I get the weather impact and the macro issues, et cetera, but are there any categories that are performing well so in Q1 or is this kind of an across the board impact to the business?

Yes, Ryan. This is Jeff. It's a great question. In Q1, even given the headwinds that we're seeing, we're still seeing really good traction on the firearms segment of the business. I can say that we're definitely gaining market share, we're seeing really good in-stocks, we're increasing our assortment online. So that's an area of the business that we are very pleased with in Q1. As -- where does it bounce? We’re also very pleased with the traction that we've seen on some of our cold weather remaining gear that's in the stores, given the longer winters and cold weather that’s out here in the West. We actually had really good traction on selling through the residual inventory that we have in those locations.

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

Yes. I think if you look at the historical pre-opening we've had per store, it runs in the range, roughly between $300,000 to $350,000 per store. So there was -- that in Q1, that's going to impact earnings as well as some of the pre-opening that we're starting to incur for the openings during Q2. So, I think with that math, you can put it to paper and figure out what the impact was in our guidance.

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

Yes, listen. I think we have some short-term headwinds with the weather impact that we have for Q1 with how much snow I see in the western part of United States. I do think that that probably bleeds into early Q2. As we start to get to the back-half of the year and we start to anniversary the significant inflationary pressures that we experienced last year, I'm very optimistic about what the business has. And as we continue to open new stores and expand into new geographies, I am very optimistic about the back-half of the year.

Thanks, Jeff. Good luck, guys.

The next question comes from Eric Wold with B. Riley Securities. Please proceed with your question.

Thanks. Good afternoon, and I also echo, Jon, great working with you. And [indiscernible] So maybe Jeff, I’ll now turn the question on him. But I guess, two things. I guess, one, on the inventory situation, I know you talked about your comfortable level of inventory in the stores and where you're positioned. Maybe just talk about the composite of that inventory. I know that you're looking to fill in some of the good-better-best and the private-label. Is that -- how are you kind of thinking about that with the new stores you open? I know you’re kind of -- as you -- I guess, ask different way. With existing stores, you're going to rotating inventory possibly towards some of the more price private-label to kind of take maybe advantage of where the consumer is now, is that impacting to any big degree how you initially start the new stores this year versus what your strategy maybe in the past?

Eric, it's Jeff. Thanks for the question. And as we look at new-store inventory load-in and existing store inventory composition, it's important to remember that we pride ourselves in being a retailer of brands. So the mix of having the appropriate vendor brands and then augmenting our good-better-best selection and filling in the gaps with our private-label is key to the business. As we think about some of the new stores that we're opening that we've laid out in our press release, really focusing on the regional relevance of the inventory and the seasonality of the inventory to ensure that we have the right product during the right season during those openings is what the merchandising team is intently focused on.

Got it. And then just last question on the pipeline. Congratulations on lining up the 15 stores for this year and getting those leases signed. How do you think about going beyond 2023? How are discussions with developers and landlords and whatnot as you look beyond 2023? Are discussions as easy as you had with 2023? Is it getting more difficult you’re finding locations that meet the terms you want or getting the terms of lease the way you want, maybe think about beyond 2023?

Eric, good question. As we've stated on any given day, we have 100 stores that we're looking at 100 locations within our funnel. I will tell you that good real estate is good real estate. So if we're looking at an A location in a power center, we most likely have three or four other retailers right behind us looking at the same box. So that's the landscape that we're dealing with, but that has not changed significantly since last year. So as we work through our openings and our lease signings for 2024 and beyond, we're still intently focused on the long-range plan that we laid out of having 190 to 210 stores by the end of fiscal year 2025. And right now there is nothing that I see in my pipeline that would not cause me to be confident in those -- in that number.

That's great. Thanks, Jeff. Appreciate it.

Thank you. Our next question is from Justin Kleber with Baird. Please proceed with your question.

Yes. Hey everyone. It's Justin Kleber at Baird. Jon, let me add my congrats on your retirement as well. It's been great working with you. Couple of questions from me. Just to start-off, Jeff, you mentioned the strength in firearms business, is that broad-based across the footprint? I'm just wondering if you could comment on what you're seeing in states like Oregon and Washington, where we've seen some legislative actions. Just as we think about the lap of what I assume has been a surge in-demand in those states, just any color on whether that was material in 4Q or either here in 1Q?

Yes. Justin, when there's regulatory changes in states, there's always bumps that follow those, there's fear buying of people not being able to get what they think is going to be taken away. So we see bumps. I will tell you that the Oregon bump in Q4 was not material [indiscernible] such in the business. Going-forward, we see changes in states like Washington. There has been some relaxing of regulations in states like North Carolina that are contributing to the increase in firearm sales. But overall, our ability to offer the broad assortment - the best assortment in the industry in firearms on our website and in-store is what I feel is really driving the win that we have on the firearm category.

Okay, got it. Maybe a question here on SG&A. You talked about, Jeff, lower payroll expenses in the press release. How much more room do you have to reduce store payroll as the revenue backdrop remains difficult? I'm trying to understand where you sit from a store payroll respect -- relative to just minimum staffing levels.

Yes, Justin, that's a great question. We executed very well in Q4 controlling our variable expenses. As we think about the Q1 guidance and the pressures on-top line sales, the flow-through to EPS, I would tell you is, what you're seeing in terms of what our fixed costs are to keep the stores open, keep the lights on. The Q1 guidance does figure in a little bit more in things like utilities, where it's costing us more to heat the stores because it's still called out here in some of the stores in the West, but I think from a payroll perspective the pressures that you're seeing on Q1 with the top-line sales and the flow-through to EPS is indicative of kind of that fixed-cost base.

Okay, that's helpful. And then a follow-up question. Not focused on pre-opening, Jeff. But just as we think about opening up 15 stores this year. You're going to have rent associated with those stores depreciation. I mean, is there any sense you can give us just for the magnitude of deleverage or SG&A dollar inquiry related. So these 15 store openings just as we try to better understand the flow-through on different revenue scenarios.

Yes, Justin. Good question. Just to clarify, on our pre-opening expense, that does include the rent that we incurred prior to the store opening. So that's part of that range that I gave. As we think about the long-term growth of the company. We knew that there was going to be an investment needed in order to hit our long-range targets that we gave. Part of that investment is in the capital outlay and the expense outweigh as we open more stores than we ever had in the history of the company. As we think about the long-term though, as those stores reach maturity and contribute to the bottom-line profitability. Eventually, the increase in store number is offset by the total base that we have, as that number growth.

Yeah, okay. And maybe last one for me, maybe for, Joe, if I could ask you a question. Just what are the most important skill-sets you and the Board are looking for as you search for a new CEO. Obviously you have some big shoes to fill here with Jon leaving. So we'd just love any color on that. Thanks so much.

Sure. Obviously, the individual needs to have a retail background, combination of brick-and-mortar, omnichannel preferably. A great understanding of the business, the outdoor business. A individual that has unbelievable emotional intelligence like Jon does, that can relate from our consumer to our associates and our distribution center to dealing with the various suppliers we have. And so, there's a whole litany of things, the Board is -- it has all the criteria, and we're working on that and certainly getting Jon's input and management's and I'm sure we'll have some great candidates to select from, and look-forward to the next chapter of Sportsman's Warehouse, got a great opportunity.

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

Thank you. Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Hi guys, just I want to echo, Jon, best of luck in retirement, Joe, welcome to the call here. First question I have is really, as we look at the footprint of these new stores it looks like a pretty diverse sizing. Any thoughts on as you look at -- we've got a couple here that are a little bit bigger. And then any thoughts that you have on spike camp stores? It doesn't look like maybe there is any in here. Is there a chance that some get drawn in or what have been the results of some of those stores here recently?

Yeah, Mark, great commentary, and great question. As we look at the size of the box for 2023, I feel like it really fits into the strategy as we target a 30,000 square-foot box when we go into any given market. And then we adjust as the market needs fee fit and as the available real-estate. Some of the larger stores that you see presented an incredible opportunity to enter into new markets, under-penetrated areas with a big consumer base and then a very lucrative box where the rent was very appealing for that size. So in those types of stores, you're going to see us do things a little differently with more visual displays of merchandise. In terms of spike camp, from the beginning, we've always said that we're going to strategically use those in-markets that makes sense, where we know the product catalog very well, being that size we have to know what skews go in there and we're going to continue to look at places to use those strategically, but for 2023 it just fell that the real-estate deals that were found, the markets that were available kind of fit right into our core real-estate strategy of a 30,000 square-foot average box.

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

Yeah, the new DC as we presented our investor deck, we're still on-track for having that DC opening. I would say mid-2024, we're going to probably start incurring some sort of capital outlay towards the end of this year. The search process for that is well underway. It is going to be eastern focused in order to create economies of scale on the number of stores we have growing [indiscernible] as well as being able to service our -- a lot of our vendor community that is centered out east as we move trucks across the country. So we'll continue to update that on a quarterly basis as we move forward.

Okay. And I think the last one for me, just firearms skew as a percent of kind of overall mix, it seems like higher here in Q1. Looking at firearms, any thoughts you can give us on kind of used firearms versus new? How that mix has gone? And maybe how you feel about your market-share maybe as it applies to mix, is that's kind of the best indicator that we have? And lastly, as it skew, I assume higher here in Q1, is that putting a decent amount of pressure here in Q1 margins?

Yeah, so lots of good questions. Let me address just the Q1 part of your question first. So absolutely, in Q1, as we're not seeing sales-through our sales mix be in a normal cadence more centered or more penetrated towards camping, fishing, outdoor activities. We are seeing higher penetration into the firearms, which is obviously impacting the Q1 guidance that we gave. As we think about overall penetration into the firearm category, based on some of the recent publications from our vendor peers that are out in the public market, we feel very comfortable with our market-share and the gains that we've had. If you look at our sales, I would say that we're outperforming what you're seeing from some of the vendors. So very happy with our place in the market, our penetration and then our opportunity to continue to grow and reach new customers across the country.

Excellent. Thank you.

Thank you. There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.