Outdoor specialty retailer Sportsman's Warehouse (NASDAQ:SPWH) missed analysts' expectations in Q2 FY2023, with revenue down 11.8% year on year to $309.5 million. Turning to EPS, Sportsman's Warehouse made a non-GAAP loss of $0.04 per share, down from its profit of $0.36 per share in the same quarter last year.
Sportsman's Warehouse (SPWH) Q2 FY2023 Highlights:
- Revenue: $309.5 million vs analyst estimates of $326 million (5.06% miss)
- EPS (non-GAAP): -$0.04 vs analyst estimates of $0.08
- Revenue Guidance for Q3 2023 is $320 million at the midpoint, below analyst estimates of $378.7 million
- EPS (non-GAAP) Guidance for Q3 2023 is -$0.13 at the midpoint, below analyst estimates of $0.33
- Free Cash Flow was -$50.6 million, down from $14.2 million in the same quarter last year
- Gross Margin (GAAP): 32.6%, down from 33.5% in the same quarter last year
- Same-Store Sales were down 16.1% year on year
A go-to destination for individuals passionate about hunting, fishing, camping, hiking, shooting sports, and more, Sportsman's Warehouse (NASDAQ:SPWH) is an American specialty retailer offering a diverse range of active gear, equipment, and apparel.
The company was founded in 1986 and its extensive selection encompasses everything from fishing rods and camping tents to firearms and apparel designed to withstand rugged environments.
Sportsman’s Warehouse views itself as not only a retailer but also a central pillar of the outdoor community. The company often hosts workshops, seminars, and events that provide insights into outdoor activities, gear maintenance, and safety practices.
Consistent with this theme, each store is designed to promote community building and acts as a hub for like-minded individuals to gather, exchange stories, and share their love for the outdoors. The stores feature spacious layouts that showcase a wide array of products, making it easy for customers to explore and discover the right gear for their specific interests.
Sportsman's Warehouse also staffs its stores with knowledgeable associates, often experienced outdoor enthusiasts themselves, to offer personalized recommendations, answer questions, and share insights to help customers make informed decisions.
Whether customers are seasoned outdoor veterans or newcomers looking to explore the natural world, Sportsman's Warehouse Holdings offers a comprehensive selection of products and resources to elevate their outdoor experiences.
Some of us spend our leisure time vegging out, but many others take to the courts, fields, beaches, and campsites; sports equipment retailers cater to the avid sportsman as well as the weekend warrior. Shoppers can find everything from tents to lawn games to baseball bats to satisfy their athletic and leisure needs along with competitive prices and helpful store associates that can talk through brands, sizing, and product quality. This is a category that has moved rapidly online over the last few decades, so these sports and outdoor equipment retailers have needed to be nimble and aggressive with their e-commerce and omnichannel presences.
Retailers offering sporting and outdoor goods include Academy Sports and Outdoor (NASDAQ:ASO), Camping World (NYSE:CWH), Dick’s Sporting Goods (NYSE:DKS), and Hibbett (NASDAQ:HIBB).Sales Growth
Sportsman's Warehouse is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.
As you can see below, the company's annualized revenue growth rate of 11.5% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was impressive as it opened new stores and expanded its reach.
This quarter, Sportsman's Warehouse reported a rather uninspiring 11.8% year-on-year revenue decline, missing analysts' expectations. The company is guiding for a 11% year-on-year revenue decline next quarter to $320 million, a further deceleration from the 10.3% year-on-year decrease it recorded in the same quarter last year. Looking ahead, the analysts covering the company expect sales to grow 11% over the next 12 months.
Same-Store Sales
Sportsman's Warehouse's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 6.59% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.
In the latest quarter, Sportsman's Warehouse's same-store sales fell 16.1% year on year. This decline was a reversal from the 9.4% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.
Gross Margin & Pricing Power
We prefer higher gross margins because they not only make it easier to generate more operating profits but also generally indicate product differentiation, negotiating leverage, and pricing power.
As you can see below, Sportsman's Warehouse has averaged a weak 32.4% gross margin over the last eight quarters. This means the company makes $0.32 for every $1 in revenue before accounting for its operating expenses. 
Sportsman's Warehouse's gross profit margin came in at 32.6% this quarter, relatively flat with the same quarter last year. This steady margin could stem from its efforts to keep prices consistently low or signal that it has stable input costs (such as freight expenses to transport goods).
Operating Margin
Operating margin is an important measure of profitability for retailers as it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.
In Q2, Sportsman's Warehouse generated an operating profit margin of negative 0.49%, down 6.5 percentage points year on year. We can infer that Sportsman's Warehouse was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.
From an operational perspective, Sportsman's Warehouse was profitable but held back because of its large expense base over the last two years. Its average operating margin of 2.88% has been paltry for a consumer retail business.EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q2, Sportsman's Warehouse reported EPS at negative $0.04. This print unfortunately missed Wall Street's estimates, but we care more about long-range EPS growth rather than short-term movements.
Between FY2020 and FY2023, Sportsman's Warehouse's adjusted diluted EPS dropped 93.7%, translating into 31.2% average annual declines. In a secularly declining sector such as consumer retail, we tend to steer our readers away from companies with multiple years of falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.
Sportsman's Warehouse burned through $50.6 million of cash in Q2, representing a negative 16.3% free cash flow margin. The company shifted to cash flow negative from cash flow positive in the same quarter last year, which could've happened for several reasons including (but not limited to) the stockpiling of inventory in anticipation of higher demand or unforeseen, one-time events.
Over the last two years, Sportsman's Warehouse's capital-intensive business model, lack of cost discipline, and large investments in new store buildouts have drained many company resources. Its free cash flow margin has been among the worst in the consumer retail sector, averaging negative 5.29%. Furthermore, its margin has averaged year-on-year declines of 9.1 percentage points. We'll keep an eye on this as almost any movement in the wrong direction is undesirable given its already low free cash flow margin. The company will need to improve its free cash flow conversion if it wants to survive (and ultimately thrive).
Return on Invested Capital (ROIC)
Sportsman's Warehouse's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average return on invested capital (ROIC) is 10.9%, somewhat low compared to the best retail companies that consistently pump out 25%+ returns.
We argue ROIC is one of the most important indicators of quality because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Sportsman's Warehouse's Q2 Results
With a market capitalization of $167.7 million, Sportsman's Warehouse is among smaller companies, but its more than $2.89 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
We struggled to find many positives in these results. This quarter's revenue and EPS came in below Wall Street's estimates. Its full-year revenue guidance also came in significantly below analysts' expectations. Given the decrease in demand, Sportsman's Warehouse said it would be more aggressive in its promotional activity to drive foot traffic to its stores, putting pressure on its profit margins in future quarters. Furthermore, the company has yet to find a permanent CEO. Overall, this was a bad quarter and the stock is down 19.9% on the results. It currently trades at $3.62 per share.
Is Now The Time?
When considering an investment in Sportsman's Warehouse, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. We cheer for everyone who's improving the lives of others but in the case of Sportsman's Warehouse, we'll be cheering from the sidelines. Its revenue growth has been solid, and analysts believe that sort of growth is sustainable for now. But while its expansion of physical locations shows that it's playing offense to grow its brand, the downside is that its decline in same-store sales suggests that it'll need to change its strategy to succeed and its cash burn raises the question of whether it can sustainably maintain growth.
While we've no doubt one can find things to like about Sportsman's Warehouse, we think there might be better opportunities in the market, and at the moment, don't see many reasons to get involved.
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