Sportsman's Warehouse Holdings, Inc.
Q1 2015 Earnings Call Transcript

Published: 29 May 2015

[Operator:]

Greetings and welcome to the Sportsman's Warehouse First Quarter 2015 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'd now like to turn the conference over to your host Ms. Rachel Schacter of ICR. Thank you. Ms. Schacter, you may begin.

[Rachel Schacter:]

Thank you. Good afternoon, everyone. With me on the call is John Schaefer, President and Chief Executive Officer; and Kevan Talbot, Chief Financial Officer. Before we get started, I’d 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 includes 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 in the Company's most recent 10-K filed with the SEC on April 2, 2015. We will also disclose non-GAAP financial measures during today's call. Definitions of such non-GAAP measures as well as reconciliation 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 Web site at investors.sportsmanswarehouse.com. Now, I’d like to turn the call over to John Schaefer, President and Chief Executive Officer of Sportsman's Warehouse.

[John Schaefer:]

Thank you, Rachel. Good afternoon everyone and thank you for joining us today. I’ll begin by discussing the highlights of our first quarter, then comment on industry dynamics and discuss the progress we’re making against our strategic growth initiatives. Kevan will then go over our financial results in more detail and review our outlook, after which we'll open up the call to your questions. We are pleased with our first quarter results which came in at the high end of our guidance. The first quarter is typically our lowest volume quarter. However, we were still able to make good progress on our strategic initiatives. A few highlights of the quarter

[Kevan Talbot:]

Thanks, John. Good afternoon, everyone. I’ll begin my remarks with a review of our first quarter 2015 results and then discuss our outlook for the remainder of fiscal year 2015. My comments today will focus on the comparison of our first quarter 2015 results with the adjusted results for the first quarter of 2014, which exclude the bonuses paid for our IPO completed in the first quarter of 2014. We did not have any similar adjustments for our first quarter of 2015. We describe these results in the financial tables in our earnings press release issued today. A reconciliation of GAAP net loss and loss per share to these adjusted numbers is contained in these tables along with an explanation of each adjustment. As John said our top line results came in consistent with our guidance. Net sales increased in the first quarter by 9.1% to $144.5 million from $132.4 million in the first quarter of last year. Same-store sales during the quarter decreased by 0.7%. Excluding sales of fire arms and ammunition, our same-store sales increased 1%. Excluding fire arms, ammunition and all shooting related categories including optics, our same-store sales increased 3.3%. Turning to our same-store sales by each of our three store groupings, which are

[Operator:]

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Seth Sigman from Credit Suisse. Please proceed with your question.

[Seth Sigman:]

Thanks. Good afternoon, guys. Nice progress in the quarter. I want to talk a little bit about the composition of comps in the quarter. It was nice to see a conversion in average basket up. If we focus on the traffic side of the equation, which was down overall, with ammo now comping positive, I assume that's a big driver of recurring traffic to the stores. What categories are still seeing traffic or transactions lag with the rest of the group? And then the second piece of that would be as you look at the Q2 guidance which embeds potentially positive comps, what needs to happen from a category perspective to get you there? Thanks.

[John Schaefer:]

Well, I think with the warmer weather we had fewer people coming in for the cold weather gear in February and March. We have seen that that turn in the second quarter and we are seeing improvement in the firearms category, but it isn’t there yet and clearly ammunition is a consumable. So we get a lot of people coming in for that and we are very pleased with the traffic we had in the unit sales, as well as the dollar sales in the ammunition. The unit sales in firearms, people are coming in with an intent to buy where in the normal circumstances under our normal traffic, if you will, people would come in a couple of times before they purchase so. And it bring us to see the normalization of all that going into the second quarter and the rest of the year and the weather is now back to what is as close to normal as you can hope. So I think all that's starting to trend all in basically a prior year or historical perspective.

[Seth Sigman:]

Okay. That's helpful. And then, you mentioned in expectation that the promotional activity across the industry would start to normalize pass Q2. Can you elaborate on that and does that reflect a change in maybe the inventory situation, or is it just confidence in demand in the category, any color there would be helpful? Thanks.

[John Schaefer:]

Well, first of all, I think there is two types of reasons for promotional activity going on. One is traffic drivers and I think the traffic is returning to normal levels for most of the players that I can keep track of. So I think that part of the promotional environment is going to start to subside. And then to the inventory point it is pretty clear now that finally the mom-and-pops have turned that inventory into cash and as we talked about it in prior quarters, we’re expecting them to turn it into cash in the fourth quarter. They didn’t, they were trying to maintain price, and the first quarter was pretty obviously. They weren’t going to maintain price and they were trying to get their inventory out of the way. And based on what happened in the back half of the first quarter and what's going on in the second quarter, it appears that their inventories are now back the way, “normal basis” I guess.

[Seth Sigman:]

Got it. All right. Thanks. Well nice job gaining share despite that promotional activity.

[John Schaefer:]

Thanks.

[Operator:]

Our next question comes from the line of Matthew Fassler from Goldman Sachs. Please proceed with your question.

[Stephen Tanal:]

Thanks. Good afternoon, guys. Steve Tanal on for Matt. I wanted to focus just a little bit on the gross margin in the quarter. The sort of, how we think about kind of the promotional backdrop you guys may have participated into some degree versus fewer vendor incentives and whether that was an offset last year and your promotional or perhaps you sort of lost that this year. I mean, how did that either flow through the quarter?

[John Schaefer:]

Well, as we’ve looked at that, last year the vendors were trying to continue to keep their products flowing. The mom-and-pop channels were flooded and so we experienced lot of opportunistic buys and a lot of other incentives. But now that the, as John just alluded to the fact that the mom-and-pops channel is starting to unclog those incentives are not as readily available for us. We’ve been able to maintain product gross margins but the dollars, the incentives that they were giving to us in various capacities just were not there. And quite frankly we saw that coming. We met our expectations with respect for our gross margin. We didn’t think that those incentives were going to repeat themselves. But that is the biggest component of the change in our gross margin year-over-year.

[Stephen Tanal:]

Okay. So it wasn’t as though you guys, I guess to some degree you must have participated in the promotions and I’m wondering how you’re thinking about kind of going forward. I’d assume the vendor incentives are no longer there and maybe the promotional comments are also kind of about your stance as it relates to the overall category? Is that fair?

[John Schaefer:]

Not really. We’re not doing anything out of the ordinary in promotions this year that we didn’t do last year. The incentives we achieved last year were one time rebates based on inventory purchases to help certain vendors move product through their channel while the mom-and-pop channel was clogged. We knew those were onetime rebates. We took them as one time rebates. We knew they wouldn’t occur this year. As it relates to the normal ongoing flow of our business, we have done absolutely nothing different in terms of margin or promotional cadence of promotional strategies this year than we did last year.

[Stephen Tanal:]

Got it. That’s helpful. The vendor incentives that they continue into 2Q, or is it really just the 1Q kind of …?

[John Schaefer:]

It was 1Q in 2014, and they haven’t occurred since.

[Stephen Tanal:]

Got it. And then just lastly, on the trade down that’s happening at firearms, that’s affecting the selling prices there. Is that a bigger headwind than the mix between handguns and long guns, how are you thinking about that?

[John Schaefer:]

No, it’s the normal -- its getting back to a normal mix of shotguns versus handguns versus MSRs versus bolt-action rifles. And what I would say to you is that the trends are back to the historical mix that you would have seen in the 2009 through mid 2012 period. Beginning in that last half of 2012, into 2013 and the hangover from that we saw a mix shift up toward more expensive price, product and more MSR type product. And now we’re seeing that over the last couple of quarters make its way back down to what I would consider normal movement.

[Stephen Tanal:]

Got it. Thanks.

[Operator:]

Our next question comes from the line of Peter Benedict from Robert W. Baird. Please proceed with your question.

[Peter Benedict:]

Hi, guys. Just turning back the SG&A has done a nice job kind of managing that so far. Is there a level of comp or total sales growth that we should think about that you need to leverage SG&A going forward? And related to that, have you seen any evidence of kind of wage inflation start to come through, as you’re hiring folks to the new stores?

[Kevan Talbot:]

The analysis that we’ve done in our models, its somewhere in that 1% to 2% comp range where we can start to leverage our SG&A and that’s been pretty consistent there. I have not seen any wage inflation as we’ve looked at that, that’s kind of indicated the biggest contributor to the increase in SG&A was our legal expenses, so we’ve really not seen much wage inflation there.

[Peter Benedict:]

Okay. That’s helpful. Thanks. Kevan, and then just follow-up on the prior question on the gross margin. So it sounds like some of the incentives kind of fall off. As we look out over the balance of the year, should we be expecting gross margin to be more on par with where it was last year? Could it be up? What's the view on gross margin as we look over the balance of the year?

[Kevan Talbot:]

As we have looked at our gross margin, we don’t provide specific guidance on a quarter-by-quarter basis, but we have spoken to the fact that we expect gross margin for the year to be flat with last year. We’re consistently maintaining that guidance. We’ve not changed that guidance at all. So by implied nature it’s got to be up a little bit to make up for the short fall in the first quarter. So, flat to slightly up over the remainder of the year would be our expectations for gross margins.

[Peter Benedict:]

All right, perfect. That’s helpful. Thank you.

[Operator:]

Our next question comes from the line of Matt Nemer from Wells Fargo. Please proceed with your question.

[Matt Nemer:]

Good afternoon everyone. First, I wanted to ask about the gun ASP mix shift. When do you think we anniversary that or we kind of get back to a normal level. Is that something that persist for a couple of more quarters? Do we see that kind of bleed into 2016? Love to get your thoughts on that.

[John Schaefer:]

I think our position has always been that, the second half of our fiscal year and what do you want to call that late June or early July has really been where we see based on the patterns the inflection point. And I’d think as we sit here today, I think we still see that as probably the late June, July second half of our fiscal in the second half of the calendar year kind of a dynamic getting that mix down to where its been at its historical points and seeing some average selling prices that are either consistent with the prior year or hopefully slightly above, we’ll see.

[Kevan Talbot:]

Matt, it really started to show itself the average selling price in the third quarter of last year. So, as we start to anniversary that impact in last third quarter we don’t expect it to decrease much significant beyond that. So, last half of the year as John indicated really is when we expect that to kind of normalize and average out.

[Matt Nemer:]

Okay. That’s very helpful. And then, turning at the loyalty program impact on gross margin. When does that also start to level out or is that, am I not thinking about that the right way. Is that sort of getting stronger as more people adopt and use the program?

[Kevan Talbot:]

I would expect it to kind of level out towards the end of the year first part of next year. The impact this quarter versus the first quarter of last year, we went from 18 basis points last year to 25 basis points this year, so it’s the seven basis point impact. That’s smaller than it was in the fourth quarter. I would expect that incremental impact to continue to decrease. But as we continue to grow our program and we get adoption of the program by our consumers we’re excited that it’s growing this well and that we’re having this kind of an impact. But I would expect it to normalize towards the end of the year really about the two year anniversary point at the time that we launched the program.

[John Schaefer:]

Just to add a little color on that. I think we’re seeing what most people who implement an effective loyalty program see and that you’re seeing customer frequency, you’re seeing average selling price, you’re seeing items per order. All those things are significantly better. So, I think as we go through the next two quarters, we’ll probably do even more to encourage people to join the loyalty program and while that may have a small impact on margin for a couple of quarters, the long-term benefits are absolutely clear. I think and I think that’s reiterated by anybody who has a successful loyalty program. So, again as Kevan says, I think probably we’re going to see more moderation and some comparability on a state basis probably Q4 and into Q1 of next year.

[Matt Nemer:]

Okay. That’s helpful. And then just lastly, anything change in terms of the competitive store count outlook now that a lot of your competitors have announced those stores for 2016?

[Kevan Talbot:]

No, there has been no recent announcements that have impacted the anticipated competitive impact for the rest of 2015 or even 2016 that we’re aware of.

[Matt Nemer:]

Okay, great. Thanks so much.

[Operator:]

Our next question comes from the line of Mark Miller from William Blair. Please proceed with your question.

[Mark Miller:]

Hi. Good afternoon everyone. Could you frame the shift from the second quarter to the second half, basically looking for flat EPS at the midpoint in 2Q and then higher teens second half versus second half last year. What are the, obviously stronger comps but beyond that what are the key things that lead to the acceleration, whether its comparison issues or things sequentially that are getting better.

[Kevan Talbot:]

I think one of the big impacts -- obviously the biggest impact is with that you’ve alluded to already with respect to stronger comps in the second half of the year. As we entered the third and fourth quarter of last year, because of the warmer weather that we experienced, our margins on the clothing and soft good side of the business were not as strong as we anticipated. Our expectation is that we’re going to have a normal weather pattern there and return to better margins in those. So that is a significant impact there with respect to the clothing. Obviously that’s going to impact the mix as well, which will have an overall shift in the gross margin and that’s really where you get the biggest drop through to the bottom line is through the gross margin and the mix area.

[Mark Miller:]

Okay. Kevan, I wanted to make sure I understood when you talked about the legal expenses. Does that pertain to the suite that came out, out of two months ago, two and half months ago or is that something different and is that material?

[Kevan Talbot:]

That is the suite that we’re referring to. We recorded the accrual in the fourth quarter. The trial occurred during our first quarter and so we had the legal expenses associated with that. The number was approximately $0.5 million in legal expenses associate with that. There will be some ongoing legal expenses associated with that. Although we don’t believe it will be quite to that magnitude. We are in the process of appealing and filing motions with the court. It will not be as costly as the actual trial itself. But there will be some ongoing expenses associated with that litigation.

[Mark Miller:]

All right. And then, I know its early still, but for 2016 as you’re reviewing potential sites. Do you have a sense whether the store development may shift a little bit more towards smaller MSAs a balanced more neighborhood stores. I mean how are you thinking in aggregate. I guess the returns can't be exactly the same. I would assume one group is trending a little bit better than the other.

[John Schaefer:]

Yes, I think as you look at the number of MSAs available particularly in the West and in the South and South East where we’re located. It makes sense to start looking at opportunities in the smaller markets. So while we don’t have our 2016 class defined in total yet, there are a number of markets we’re looking at. So I don’t know exactly how it will finally hash itself out. I would say the mix will be relatively similar to 2015 with a slight moment toward to the opportunities in the smaller markets.

[Mark Miller:]

All right. That’s helpful. Keep up the good work. Thanks.

[Operator:]

Our next question comes from the line of Andrew Burns from D.A. Davidson. Please proceed with your question.

[Andrew Burns:]

Thanks. Good afternoon. I was hoping to dive a little bit into your components of the same store sales particularly the competitive entrant in the newly acquired stores, both of which were very strong numbers. So, on the newly acquired stores, wondering if there is any sort of store upgrade that is still going on that cause that 5.8% comp or is that just relative to the comparisons looked easy. And on the competitive entrant, you -- when the IPO was underway that the first year impact was, it’s going to be 20% to 30%, it continues to get better. Just any color there on what's driving that? Thanks.

[Kevan Talbot:]

Yes, let me first start on the new store, what we refer to as the new store tailwind. That includes not only the acquired stores but also any new stores as they ramp up to maturity. It usually takes our stores three to four years to hit maturity in the normal environment granted we’re still getting back to what we referred to as a normal environment but in the normal environment, a first year comp for a new store is typically 8% to 10%. A second year comp is typically 4% to 6%; it’s that impact as the store reaches maturity that you’re seeing there. So not only does it include the 10 stores that we acquired in 2013 but there’s also new stores that we’ve opened since that point in time that are including that. And that’s just basically consistent with what we’ve shown that as our stores reach maturity and ramp to maturity they outperform our base stores and again this quarter is no exception. It’s about a 5% difference between our base stores and those new stores that are within that first two years in the comp base. With respect to the impact that’s there, that number that we’ve given and provided historically is usually that first impact when a store, when a new competitor opens on top of our stores, obviously the more time goes on, the honeymoon if you will wears off and we start to decrease the impact that’s there. So part of the 13.5% out of our new stores, that decline is due to the fact that some of these stores are approaching 18 months since the new competitor has opened. So a lot of that has to do with the timing and the newness. Not all of those opened just a month ago, some of them are approaching the end of that tale. So that's -- it's a blended rate, the 13.5%. As John indicated, that is better than what our expectations are as we look at this on a store-by-store basis based upon where each of those stores are in that competitive curve.

[Andrew Burns:]

That's helpful. Thanks. And then, I think in the prepared remarks, John you mentioned the competitive promotional activity will likely subside as you move into the back half of the year. And I understand that the dynamics that you outlined on the mom-and-pop discounting, previous to your views in confidence in the idea of national retailers, the promotional activities subsiding there? Thanks.

[John Schaefer:]

Well, I can’t really speak to what their promotional strategies ROI, but from my view point, traffic is a very important driver to the sustained growth of the business. And as traffic patterns begin to normalize, as people come into shop more as you get better comps versus the prior year, I think the traffic numbers will begin to normalize and as a result the need to promote to generate traffic subsides. We’ve never done that, but I think the inventories of both us and what I can tell of our national competitors have always been really good. So it’s been mainly a traffic incentive, and I think as we get into the second half of the year in the normalization of firearms, traffic will take care of itself for everybody.

[Andrew Burns:]

Great. Thank you.

[Operator:]

Our next question comes from the line of Lee Giordano from Sterne, Agee. Please proceed with your question.

[Unidentified Analyst:]

Hi. This is Michael Gunter [ph] on for Lee. Thank you for taking our question. Could you provide us an update on the private-label business? Do you see similar year-over-year increases in penetration for the next several quarters? And do you have any initiatives in place to sort of increase the pace of that going forward?

[John Schaefer:]

I don’t know that we’re increasing the pace. We are going at a pretty steady pace, but the pace at which we’re going would almost by definition result in continued improvement. We’ve always said the private-label process is a journey and we're going about it in a very defined manner. It’s starting in the clothing area. It’s mainly starting in the clothing area as it relates to fall, hunting and fall outerwear. So I think as we go through the year, the first quarter there is not a lot of private-label stuff although it’s improved rather dramatically. Second quarter probably would be the same than in the third and fourth quarter, I think we will see continued sequential improvement.

[Unidentified Analyst:]

Thank you.

[Operator:]

There are no further questions in queue. I’d like to hand the call back over to management for closing comments.

[John Schaefer:]

Great. Well, I appreciate everybody being on the call today. We look forward to speaking with you when we report second quarter results. Thanks everyone for joining us today.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.