Sportsman’s Warehouse(SPWH) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements, management's analysis, and market risk disclosures Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets Details the company's assets, liabilities, and stockholders' equity at the end of the reporting period Condensed Consolidated Balance Sheets (Amounts in Thousands): | Metric | October 30, 2021 | January 30, 2021 | | :--- | :--- | :--- | | Cash | $2,532 | $65,525 | | Merchandise inventories | $428,497 | $243,434 | | Total current assets | $447,419 | $324,653 | | Total assets | $814,714 | $660,818 | | Revolving line of credit | $57,551 | $0 | | Total current liabilities | $328,640 | $227,428 | | Total liabilities | $560,138 | $456,158 | | Total stockholders' equity | $254,576 | $204,660 | - A significant increase in merchandise inventories from $243,434 thousand to $428,497 thousand indicates a strategic buildup[14] - Introduction of a $57,551 thousand revolving line of credit as of October 30, 2021, compared to zero at January 30, 2021[14] Condensed Consolidated Statements of Operations Outlines revenues, costs, and profits over the thirteen and thirty-nine week periods Condensed Consolidated Statements of Operations (Amounts in Thousands, Except Per Share Data): Thirteen Weeks Ended: | Metric | October 30, 2021 | October 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $401,014 | $385,748 | +4.0% | | Gross profit | $129,622 | $130,582 | -0.7% | | Income from operations | $29,648 | $38,330 | -22.6% | | Net income | $21,863 | $30,482 | -28.3% | | Diluted EPS | $0.49 | $0.68 | -27.9% | Thirty-Nine Weeks Ended: | Metric | October 30, 2021 | October 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $1,089,784 | $1,013,572 | +7.5% | | Gross profit | $353,723 | $334,450 | +5.8% | | Income from operations | $67,460 | $83,373 | -19.1% | | Net income | $50,036 | $61,813 | -19.0% | | Diluted EPS | $1.13 | $1.40 | -19.3% | - For the thirteen weeks, net sales increased by 4.0%, but net income and diluted EPS decreased by 28.3% and 27.9% respectively, indicating margin pressure[17] - For the thirty-nine weeks, net sales increased by 7.5%, but net income and diluted EPS decreased by 19.0% and 19.3% respectively[17] Condensed Consolidated Statements of Stockholders' Equity Summarizes the changes in stockholders' equity over the reporting period Condensed Consolidated Statements of Stockholders' Equity (Amounts in Thousands): | Metric | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Total stockholders' equity | $254,576 | $174,101 | | Accumulated earnings | $164,445 | $84,842 | | Additional paid-in capital | $89,693 | $88,823 | - Total stockholders' equity increased by $80,475 thousand from October 31, 2020, to October 30, 2021, primarily driven by accumulated earnings[20][22] - Net income contributed $21,863 thousand for the 13 weeks and $50,036 thousand for the 39 weeks ended October 30, 2021, to accumulated earnings[20][22] Condensed Consolidated Statements of Cash Flows Reports the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Amounts in Thousands, Thirty-Nine Weeks Ended): | Metric | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(78,343) | $171,736 | | Net cash used in investing activities | $(38,463) | $(20,172) | | Net cash provided by (used in) financing activities | $53,813 | $(133,935) | | Cash at end of period | $2,532 | $19,314 | - A significant shift in operating cash flow from $171,736 thousand provided in 2020 to $(78,343) thousand used in 2021, primarily due to a substantial increase in merchandise inventories[25][152] - Financing activities provided $53,813 thousand in 2021, a reversal from $(133,935) thousand used in 2020, driven by net borrowings on the revolving line of credit[25][154] Notes to Condensed Consolidated Financial Statements Provides supplementary details on accounting policies and specific financial statement items - The Company operates 119 stores in 29 states and an e-commerce platform, aggregated into one operating segment[27] - The merger agreement with Great Outdoors Group, LLC was terminated on December 2, 2021, resulting in a $55.0 million termination fee paid to Sportsman's Warehouse[83][95] Disaggregation of Revenue by Department (Percentage of Net Sales): Thirteen Weeks Ended: | Department | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Camping | 12.6% | 12.9% | | Apparel | 9.1% | 8.6% | | Fishing | 7.7% | 7.8% | | Footwear | 6.4% | 5.6% | | Hunting and Shooting | 55.4% | 57.4% | | Optics, Electronics, Accessories, and Other | 8.8% | 7.7% | Thirty-Nine Weeks Ended: | Department | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Camping | 13.9% | 13.8% | | Apparel | 7.4% | 6.5% | | Fishing | 11.3% | 11.5% | | Footwear | 6.3% | 5.3% | | Hunting and Shooting | 53.7% | 56.3% | | Optics, Electronics, Accessories, and Other | 7.4% | 6.6% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial results, liquidity, and critical accounting policies Overview Summarizes the company's business, the terminated merger, and the impact of the COVID-19 pandemic - The Company operates 119 stores in 29 states and an e-commerce platform, focusing on outdoor sporting goods[102] - The proposed merger with Great Outdoors Group was terminated on December 2, 2021, resulting in a $55.0 million termination fee received by the Company[105] - Experienced significant sales increases since March 2020 due to the COVID-19 pandemic, but demand has begun to stabilize[107] How We Assess the Performance of Our Business Details the key metrics and strategies used to evaluate business performance and drive growth - Key performance measures include net sales, same store sales, gross margin, SG&A expenses, income from operations, and Adjusted EBITDA[111] - Growth strategy targets annual square footage growth of greater than 8%-10% through new store openings or acquisitions[113] - Key drivers for increasing total net sales include expanding gross square footage, increasing same store sales, and enhancing omni-channel capabilities[115][116] Results of Operations Analyzes the company's operational results, comparing current and prior-year periods Key Components as a Percentage of Net Sales: Thirteen Weeks Ended: | Metric | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | | Cost of goods sold | 67.7% | 66.1% | | Gross profit | 32.3% | 33.9% | | Selling, general, and administrative expenses | 24.9% | 23.9% | | Income from operations | 7.4% | 10.0% | | Net income | 5.5% | 8.0% | | Adjusted EBITDA | 9.8% | 12.9% | Thirty-Nine Weeks Ended: | Metric | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | | Cost of goods sold | 67.5% | 67.0% | | Gross profit | 32.5% | 33.0% | | Selling, general, and administrative expenses | 26.3% | 24.8% | | Income from operations | 6.2% | 8.2% | | Net income | 4.6% | 6.1% | | Adjusted EBITDA | 9.0% | 11.0% | - Net sales increased by 4.0% for the 13 weeks and 7.5% for the 39 weeks ended October 30, 2021, primarily driven by seven new store openings[127][135] - Same store sales decreased by 1.5% for the 13 weeks but increased by 1.5% for the 39 weeks, with strong growth in footwear and apparel[127][130][136][138] - Gross profit margin decreased for both periods (1.6 percentage points for 13 weeks, 0.5 percentage points for 39 weeks) due to higher freight costs[131][139] Seasonality Discusses the seasonal patterns affecting the company's sales and profitability - Net sales are typically higher in the third and fourth fiscal quarters due to hunting season and holiday buying patterns[145] - The company does not expect higher sales volume in Q4 FY2021 compared to Q4 FY2020 due to the significant sales spike in the prior year[145] - New retail store openings incur non-recurring expenses and typically result in lower initial operating profit[146] Liquidity and Capital Resources Details the company's sources of liquidity, capital requirements, and cash flow activities - Primary capital requirements are for seasonal working capital and capital expenditures for new store openings and acquisitions[148] - Received a $55.0 million cash payment from Great Outdoors Group on December 2, 2021, following the termination of the merger agreement[149] - Net cash used in operating activities was $(78.3) million for the 39 weeks ended October 30, 2021, a significant decrease from $171.7 million provided in the prior year, primarily due to inventory buildup[151][152] - Net cash provided by financing activities was $53.8 million for the 39 weeks ended October 30, 2021, compared to net cash used of $(133.9) million in the prior year[151][154] - As of October 30, 2021, $73.8 million was outstanding under the $250.0 million revolving credit facility, with $149.3 million available for borrowing[155] Critical Accounting Policies and Estimates Outlines the key accounting policies that require significant management judgment and estimates - Financial statements are prepared in accordance with GAAP, requiring assumptions, estimates, and judgments[163] - No significant changes to critical accounting policies from the Fiscal 2020 Form 10-K[164] Off Balance Sheet Arrangements Confirms the absence of any off-balance sheet arrangements - The company is not party to any off-balance sheet arrangements[166] Contractual Obligations Presents a summary of the company's contractual payment obligations as of the reporting date Contractual Obligations as of October 30, 2021 (Amounts in Thousands): | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $389,334 | $15,408 | $119,289 | $90,410 | $164,227 | | Standby letters of credit | $1,955 | $1,955 | - | - | - | | Revolving line of credit | $73,763 | $73,763 | - | - | - | - Operating lease obligations do not include additional payments for common area maintenance, real estate, taxes, and insurance[169] - Purchase/construction obligations with vendors are not included as they do not contain termination payments or other penalties if cancelled[172] Non-GAAP Measures Defines and reconciles non-GAAP financial measures, such as Adjusted EBITDA, to their GAAP counterparts - Adjusted EBITDA is defined as net income plus interest expense, income tax expense, depreciation and amortization, and other specified adjustments[171] Reconciliation of Net Income to Adjusted EBITDA (Amounts in Thousands): Thirteen Weeks Ended: | Metric | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Net income (loss) | $21,863 | $30,482 | | Interest expense | $413 | $465 | | Income tax expense (benefit) | $7,372 | $9,530 | | Depreciation and amortization | $6,665 | $5,404 | | Stock-based compensation expense | $194 | $882 | | Pre-opening expenses | $1,712 | $958 | | Hazard pay | — | $2,000 | | Acquisition costs | $1,113 | $297 | | Bargain purchase | — | $(2,218) | | Legal accrual | — | $2,125 | | Store closure | — | — | | Adjusted EBITDA | $39,332 | $49,925 | | Net sales | $401,014 | $380,989 | | Adjusted EBITDA margin | 9.8% | 12.9% | Thirty-Nine Weeks Ended: | Metric | October 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Net income (loss) | $50,036 | $61,813 | | Interest expense | $905 | $3,016 | | Income tax expense (benefit) | $16,519 | $20,691 | | Depreciation and amortization | $18,801 | $16,085 | | Stock-based compensation expense | $2,237 | $2,436 | | Pre-opening expenses | $3,090 | $1,778 | | Hazard pay | — | $4,600 | | Acquisition costs | $6,419 | $332 | | Bargain purchase | — | $(2,218) | | Legal accrual | — | $2,125 | | Store closure | — | $1,039 | | Adjusted EBITDA | $98,007 | $111,697 | | Net sales | $1,089,784 | $1,013,572 | | Adjusted EBITDA margin | 9.0% | 11.0% | - Adjusted EBITDA margin decreased from 12.9% to 9.8% for the 13 weeks and from 11.0% to 9.0% for the 39 weeks ended October 30, 2021, compared to the prior year[177] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discloses the company's exposure to market risks, primarily interest rate fluctuations - Principal market risk exposure relates to changes in interest rates on its revolving credit facility and term loan, which carry floating interest rates[182] - A 100 basis point increase in interest rates would not have significantly increased interest expense based on a sensitivity analysis as of October 30, 2021[182] - The company does not use derivative financial instruments for speculative or trading purposes[182] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as of the reporting date - Disclosure controls and procedures were evaluated as effective as of October 30, 2021[184] - Management acknowledges that control systems provide only reasonable, not absolute, assurance against error and fraud due to inherent limitations[185] - No material changes in internal control over financial reporting occurred during the 13 weeks ended October 30, 2021[186] PART II. OTHER INFORMATION This part contains information on legal proceedings, risk factors, exhibits, and report signatures Item 1. Legal Proceedings Refers to financial statement notes for details on legal proceedings incidental to the company's business - Refers to Note 11, "Commitments and Contingencies" for additional information on legal proceedings[189] Item 1A. Risk Factors States there are no material changes to previously disclosed business and operational risk factors - The business faces significant risks and uncertainties[190] - No material changes in the assessment of risk factors from the Fiscal 2020 Form 10-K[190] Item 5. Exhibits Lists all exhibits filed with the report, including key agreements and certifications - Includes a Severance Agreement with Jeff White, dated September 26, 2021[192] - Includes the Termination Agreement, dated December 2, 2021, among Sportsman's Warehouse Holdings, Inc., Great Outdoors Group, LLC, and Phoenix Merger Sub I, Inc[192] - Includes Certifications of the CEO and Interim CFO pursuant to the Sarbanes-Oxley Act of 2002[192] Signatures Provides the official sign-off by the company's executive officers on the specified date - Signed by Jon Barker, President and Chief Executive Officer[196] - Signed by Jeff White, Interim Chief Financial Officer[196] - Date of signing: December 8, 2021[196]