Greetings, and welcome to the Sportsman's Warehouse Fourth Quarter and Full Year 2023 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Riley Timmer, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Participating with me on the call today is Paul Stone, our Chief Executive Officer; and Jeff White, our Chief Financial Officer. Now I'll remind everyone of the company's safe harbor language. The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding expectations about our future results of operations, demand for our products and growth of our industry. Actual 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 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, which is also available on the Investor Relations section of our website at sportsmans.com. I will now turn the call over to Paul.

Thank you, Riley, and good afternoon, everyone. Let me start by reminding everyone of the mission of Sportsman's Warehouse: to provide outstanding gear and exceptional service to inspire outdoor memories. This is the core of our company and what we will continuously lean into as we carefully navigate a microeconomic environment. As we reported earlier in the earnings release, the business remained under pressure during the fourth quarter, with net sales coming in at the low end of our guided range. However, earnings per share exceeded the top end of our guidance range with both our inventory and debt levels finishing the year better than we expected. We will continue to prioritize the pay down of debt with free cash flow generation as we move through 2024. We view 2024 as a year to reset the organization and return the business to profitability, creating a strong foundation for anticipated profitable growth in 2025. During my first four months, I spent my time visiting stores, getting to know our associates, talking with our customers, and understanding many of our vendors and their perspectives. My early assessments confirmed why I chose to join Sportsman's Warehouse and also provided visibility into the opportunities that exist to become the leader in specialty outdoor retail. Our strategy is on resetting and rebuilding the fundamentals of great retail, which for Sportsman's Warehouse are great gear and exceptional service. While some of our key initiatives are still taking shape, we took several early actions in the areas I mentioned just a moment ago. Given the importance of technology, culture, and operating great stores, we made some leadership changes in these areas bringing in best-in-class talent for our key roles. We now have an experienced retail team, including veteran outdoor retail professionals who each have a track record of successful execution with organizations like Walmart, Sam's, Target, Academy Sports, and Cabela's. Importantly, I have worked with many of these executives at other high-performing organizations. We speak the same language, know what's expected, and we're already moving very quickly. Other areas where our strategic efforts will be highly focused in 2024 include creating stronger channel capabilities, making improvements to our loyalty program, and precise execution of our digital and traditional marketing strategies. We also see opportunities to better support customers through the use of technology. By creating wheel styles and equipping our store associates with improved tools, we will be better prepared to service customers. Additionally, we are refining our marketing mix model to better understand what resonates with our customer. This allows us to be more productive with our current marketing dollars, capture more share of the online sales, and further increase our omnichannel customer base. This is another way for us to further streamline and gain greater efficiency within the current organization. Currently, we are viewing the foundational techniques for marketing as well as making sure we're building the right tools and capabilities to support our omnichannel efforts. Today, our focus will be on finding the most productive uses of our marketing resources as we continue to improve our capabilities, evolve our programs, invest strategically, and leverage our current on-channel platform. I also see opportunities to refine and evolve our loyalty program. While over 50% of our sales come through our loyalty members, I believe there's an opportunity to improve the value proposition of the program, drive more engagement with our members through personalization, attract and retain more members, and increase the lifetime value of our existing customers. As I mentioned earlier, part of the reset of 2024 will include investments in needed tools and technology to support our base of stores. We recently partnered with Blue Yonder, a best-in-class supply chain management solution to develop a comprehensive merchandising assortment and planning software system. With this tool, we will have improved capabilities with inventory management, store planogramming, seasonal regional auto replenishment, as well as improved in-stock and productivity reporting. This will also help facilitate the expansion of our omnichannel capabilities, which is in line with regional and seasonal customer expectations. The other area of technology investment involves workforce management software. This tool will allow us to specifically staff our stores and be closer aligned with the peak hours of customer business. This alignment, along with changes we have in our store compensation and leadership structure, are important investments as we navigate towards our continuous goal of exceptional service. As we reported during the fourth quarter, we further reduced our inventory levels and made significant efforts to get out of products and brands that simply do not resonate with our core customer. While we made good progress during the fourth quarter, we will continue to closely manage our inventory levels and merchandise mix. This will ensure we have the right products in the right location at the right time, creating inventory efficiency, which allows us to better service our customers and improve our overall merchandise productivity. Significantly reducing inventory allows us to invest in new and relevant seasonal products as we prepared and get into our key spring outdoor season. We are currently seeing positive trends in camp and fish as we invested in newness and depth going into these early spring season. Another piece of our inventory management strategy includes rationalizing our SKUs and refining our product assortment. This will allow us to drive improved inventory productivity and churns, better depth of key and never-out items, new local and regional product offerings, and improved overall in-stocks and customer shopping experience. Over the last few months, our merchant team has successfully worked through this initiative in a number of product areas. As we navigated through lower inventory in Q4, we were very purposeful in how we prepared for our key spring season, particularly fishing. This is a category where we have a right to win, especially at the local and regional level. For the first time ever, our fishing set was in place by mid-February with depth in critical items. I talked about 2024 being a reset year. Here's what the spring reset meant to the fishing category. First, we rationalized the assortment. We're moving 40% of the SKUs and 30% of the vendors. Next, we reassorted the category across all regions and stores with local relevance and accuracy. Then we invested in depth into key products and our local product offerings. And finally, we reset the sales floor to align our in-store presentation with the new assortment, including better productivity of our rain caps and expanded feature space. It's the execution of key initiatives such as this that gives me confidence we are moving the business in the right direction to once again merchandise and operate great stores. Along with tight inventory management, we expect to maintain both rigor and discipline on our variable SG&A costs. Last year, we eliminated about $25 million of indirect costs out of the business, and we'll continue to manage these efforts carefully. My objective is to further streamline the assets of the business, using 2024 as a reset year to get us back to operating profitably. We're gaining our edge of being the best local and convenient choice, which separates Sportsman's Warehouse from the competition. This means having a great year in providing exceptional service in each of our 146 stores every day. I firmly believe we are implementing the right strategies and making the necessary improvements to solidify the foundation of this company to return us to profitability and increase shareholder value. With that, I'll now turn the call over to Jeff.

Thank you, Paul, and good afternoon, everyone. I'll begin my remarks today with a review of our fourth quarter and full year fiscal 2023 financial results, then cover our liquidity and capital allocation plans and finally, review our outlook for 2024. As Paul mentioned, net sales for the fourth quarter were $370.4 million and came in at the low end of our guided range. This is compared to $379.3 million in the fourth quarter of the prior year. Our net sales remain pressured from a challenging macroeconomic environment and persistently high inflation weighing on our consumer discretionary spending through the holiday season. As a reminder, 2023 was a 53-week year, which resulted in one extra week in the fourth quarter when compared with the prior year. The 53rd week for 2023 contributed $15.4 million in net sales and resulted in an additional $0.06 loss to EPS compared to the prior year's 52-week period. Same-store sales decreased 12.8% in the fourth quarter on a 14-week basis compared with the same time period of fiscal year 2022. Excluding the additional week, same-store sales in the fourth quarter were down 12.8%. Looking at comparable sales by department, hunting was the best performing category during the fourth quarter, down 3.9% on a 14-week basis compared to the prior year. This outperformance versus the run rate of the company was driven by items that correlated with holiday gift giving such as scopes and optics. All other departments were down double digits in the quarter, reflecting the tough macroeconomic environment and underscoring the importance of having the right inventory for the right location and season so we can provide a better overall shopping experience for our customers. During the holiday season, the customer came in specifically for the promotions, with very little attachment to other items in the store, highlighting the continuing inflationary pressure on our core customer base. On our last call, we outlined our strategy to further promote and mark down distressed portions of our apparel and footwear inventory in an effort to end the year in a much healthier position. During the fourth quarter, we successfully executed on this plan, exceeding our goal and ending the year with $354.7 million in inventory, $10 million below our guidance. By reducing inventory nearly $90 million in the quarter, we generated excess cash flow, allowing us to pay down our debt by over $59 million. Gross margin for the fourth quarter was 26.8% versus 32.4% in the prior year period. This decrease was primarily driven by the promotional efforts to move through distressed apparel and footwear inventory, as well as lower gross margins on ammunition. However, while down significantly compared to the prior year, gross margin in the quarter came in better than we expected as we did not have to be as aggressive as planned with our markdowns to move through the distressed inventory. We estimate that the EPS impact from the gross margin relating to the markdowns was between $0.30 and $0.40 in the fourth quarter of 2023. As a percentage of net sales, SG&A expense increased to 29% compared to 28.1% in the fourth quarter of the prior year. This increase was primarily due to higher rent and depreciation expense from the addition of 15 new stores opened during 2023 and the stores refreshed over the last two years. While SG&A was up as a percentage of sales on a year-over-year basis, SG&A dollars were down 9.8% on a per store basis versus Q4 of 2022. The most significant year-over-year decrease was in payroll, which was down approximately $3.9 million from last year or a decrease of 17.4% on a per store basis. During the back half of 2023, we undertook a comprehensive expense reduction initiative to align our costs with the declining trends of the business. These efforts resulted in approximately $25 million of annualized savings. We expect to continue to realize the benefit of these cost reductions throughout 2024 and will continue to reduce expenses where we believe we can simplify the business. Net loss for the fourth quarter was $8.7 million or negative $0.23 per diluted share compared with net income of $11 million or $0.29 per diluted share in the fourth quarter of the prior year. Adjusted net loss in the fourth quarter was $7.5 million or negative $0.20 per diluted share compared with adjusted net income of $12.7 million or $0.33 per diluted share in the fourth quarter of the prior year. Adjusted EBITDA for the fourth quarter was $5.3 million compared with adjusted EBITDA of $28.2 million in the fourth quarter of 2022. Shifting now to the full fiscal year. For the full year of 2023, we finished with sales of approximately $1.29 billion and adjusted EPS of negative $0.64 per diluted share. For the full year of 2023, we estimate that the earnings per share impact from the clearing of distressed inventory was between $0.60 and $0.80. I will now take a minute and review our balance sheet and liquidity as of the end of 2023. Full year 2023 ending inventory was $354.7 million, compared to $399.1 million at the end of 2022, a decrease of $44.4 million or approximately 20% on a per store basis. Compared to the end of the third quarter, inventory is down nearly $92 million. Successfully moving to our seasonal and distressed inventory during the fourth quarter facilitated the better-than-planned inventory balance and debt pay down at year-end. This was important and provided us the open-to-buy dollars needed to lean into new merchandise to support our spring and early summer seasons to which we are already seeing success. Inventory management will remain a primary focus as we now expect to move more efficiently in and out of season and improve the productivity of our inventory as we continue to rationalize SKUs and vendors. For the full year 2023, we incurred approximately $60 million of net capital expenditures, primarily related to the construction of our 15 new stores and ongoing fleet maintenance. In regards to liquidity, we ended the debt balance at $122.9 million and total liquidity of $91.4 million. We used our cash flow generated during the fourth quarter to pay down debt and we'll continue to emphasize debt paydown as our primary use of free cash flow until we reduce our leverage ratio. Turning now to our guidance. As we mentioned in the earnings release, we are adjusting our cadence and will now provide annual net sales and adjusted EBITDA guidance, which we will provide an update to you quarterly. Our focus will be on longer-term measures, being a great retailer and returning Sportsman's Warehouse to profitability in 2024. Starting with our net sales outlook, we estimate fiscal 2024 net sales to be in the range of $1.15 billion to $1.23 billion. We expect adjusted EBITDA for fiscal 2024 to be in the range of $45 million to $65 million. We expect CapEx for 2024 to be between $20 million and $25 million relating to technology investments to improve store service and merchandising productivity, as well as our normal store maintenance. To reiterate, our priority for 2024 is to use excess free cash flow to pay down our debt, decrease our leverage ratio, and invest in needed technology. As we carefully manage inventory and variable expenses, we believe we can return the business to profitability. That concludes our prepared remarks today. I will now turn the call back over to the operator to facilitate questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Mark Smith with Lake Street Capital.

First question for me is really around margins. I think it's kind of what's built into your outlook here in '24. Any additional thoughts you can give us around maybe even SG&A and the $25 million in savings? Any insight you can give us on maybe where that falls for the full year or any additional insights into gross profit margin, maybe improvements of where it came in here in the latter half of the year?

Yes, Mark, great question. It's Jeff. Good to hear from you. From a gross margin perspective as we look ahead to 2024, I want to emphasize that we won't experience as steep a decline as we did in 2023 when we had to address the distressed inventory. Our main objective now that we've moved past that is to recover the gross margin losses incurred during 2023 due to inventory clearance and return the margin to historical levels. As Paul and I mentioned on our call, we are confident that we dealt with the majority of those issues in the fourth quarter, and we anticipate some margin improvements as we progress into 2024. Regarding SG&A cuts, we initiated that process around mid-third quarter. Consequently, in the fourth quarter, we achieved effective expense reductions. These cuts will continue to benefit us into the first, second, and partly into the third quarter of 2024, so we will keep seeing the positive impact from these cost reductions throughout a significant portion of 2024.

And I would just say, I mean, we continue to be focused on being a low-cost operator. Ultimately, we are a warehouse, and we should operate as a warehouse as we just continuously look at ways to take costs out of the business without impacting our stores and our service. We're going to continue to invest back into exceptional service, but we'll also look to keep costs in check and to be able to flow.

Okay. Next question for me is kind of a tough environment here. Any additional insight you can give us on the consumer environment? And in particular, I'm curious your thoughts around recent mix data here in March and if that mix some of that weakness kind of applies to you guys as well.

Mark, I would just say we're not seeing the same decline in mix that's being reported, and we believe we're leaning into it and taking share as a company. So I know as we saw that come out yesterday and as we look and gather our data, we feel that we're continuing to grow. As we think about the business and we see others walking away from the business, we believe we have a huge opportunity to continue to gain share in that part of the business.

In terms of consumer trends that we saw, during the holiday, we said it in our remarks, but the customer was really focused on promotional activities. We're continuing to see them focused on that and trending downwards towards an entry-level or mid-level price point. So we're seeing some pressure that's coming through on our customer and our spending habits in terms of them looking at promotions but also really gravitating towards that entry and mid-level price point.

Okay. Perfect. Last question, I think, for me. Just as we look at the inventory, really solid improvements there, and maybe this will sound like a weird question given where we came from. But is there a point where your per-store inventory where you cut too much or give me a feel for kind of your comfort levels around current inventory?

Mark, we feel good with the inventory position. I think really good with what the merchant team was able to do in Q4. We got out of the distressed merchandise. But two, still had an eye on spring and knowing that we missed spring in a big way around fish and camp. So I mean they did a really, really nice job of managing the liquidation process, but keeping their eye on what we needed to do for Q1 and Q2 as we enter fish and camp. So I think as we think about it in terms of getting out of some of these XYZ items and then being able to double down and really invest in what the customer wants in the ABC item, we're going to have depth in the product that customers want. And quite frankly, we're going to have feature space like we've never had before as an organization to be able to highlight that great new merchandise that we bring in and be able to open up our stores where you're going to be able to see features and a more direct line of sight for people to navigate our stores. So I would say the inventory we've pulled out, we feel really good about how we're able to double down and invest on those key items, which I think we've lacked the past in being able to really buy with depth the key items and freshen the stores with newness. We're seeing the newness work and as we come into spring, the work the team and merchant team was able to do in Q4 to keep their eye on Q1, we're liking what we see.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group.

Just curious if you can give any commentary on year-to-date trends, whether it be sales and/or on the margin side?

Yes. We entered February still experiencing some softness in traffic and various macroeconomic factors. However, as we moved into the latter half of March and began April, we noticed an improvement in weather conditions. This change has positively impacted our key categories, particularly camping and fishing, and we feel optimistic about this progress. February seemed similar to January, but as temperatures increased, we began to see the traction we were hoping for. We are pleased with our performance, especially in those crucial spring categories. Looking back at January, we noticed a continuation of the trends from the end of the previous year. As we’ve built momentum throughout the quarter, we are satisfied with the execution from both our merchants and operations teams, as they have successfully brought energy to our stores.

Yes. The only thing I would add to that, Ryan, is on the margin front, to your question, as you see better performance out of the camp and fish category. Obviously, those categories for us are more margin accretive than selling more firearms and ammunition. So seeing life in those parts of the business gives us optimism on where we're heading in terms of the right trend for the business.

Great. Then maybe just wanted to put a finer point on inventory. I guess, is the right way to think about it, that absolute inventory dollars are pretty stable here throughout the year, but it's just a rationalization and optimization of the mix throughout that?

Yes, Ryan. From a working capital perspective, I think there's always a little bit more we can squeeze out of inventory. I'm going to encourage the merchant team to always increase turns and be more productive on inventory. So I don't think we see huge cash generation like we did last year in terms of the reduction of inventory, but there is always better efficiency that we can drive and clean up to be had in order to drive more productive inventory across the board. So I know that wasn't a direct answer to your question, but where we ended, we feel comfortable, and that's not to say that there are not things we need to clean up so we can take those dollars and feed them into inventory that we want to have in the store. So it's going to be a continuous process throughout the year, and we're going to continue to work on really driving productivity of inventory.

I would say we'll just continue to keep a cadence of being able to get out when we need to get out. And as we start the year in a better position in key categories, that's going to give us legs to be able to turn that merchandise quicker than what we have in the past. I think we've been a little late in being proactive to help with our sell-through and our turn.

Last one for me, just some of the ammo OEMs taking price increases reasonably impacting you guys. Are you able to pass that along to the end consumer? And any commentary on ammo margins relative to what we see recently here?

Yes, Ryan. On the ammo front, I called out that we continue to see pressure on the gross margin line in ammunition, particularly in your range-type calibers, your 9-millimeter, your .556 or .223. We're seeing pricing pressure out in the retail market, and we're seeing retailers take the price point down on those to stay competitive. For us, it really is the milk in the back of the store. So we have to use that as a traffic driver. We need to stay competitive in the market. So we're seeing degradation in the margin in those categories because of increased availability and the competitive landscape. I would frame that we're not seeing it go back to pre-COVID levels, but it is something that we're keeping our eye on and making sure that we stay competitive in order to use it as a traffic driver.

Our next question comes from the line of Justin Kleber with Baird.

Just the first one, I had was a follow-up to Mark's gross margin question. Of that 300 basis point decline in '23, Jeff, could you size, I guess, the drive specifically related to markdowns and clearance just as we think about the recapture opportunity here in '24?

Yes, Justin, great question. As we look at the degradation that we called out in the press release, that is all driven by the clearancing of inventory in apparel and footwear that we needed to get out of. So we quantified that. We said that was relating directly to those clearancing activities. As you think about what opportunities that creates in anticipation of the back half of the year, it would be not to anniversary a clearance event like that and be able to bring highly productive full-margin products to the stores, bring them to life, and sell through them in a much better fashion than what we had to do in Q3 and Q4 of 2023, where really it was about getting inventory as quickly as possible.

I think the other thing I would just add to it is that the technology investment that Jeff mentioned is really, as we think about the partnership with Blue Yonder and being able to get ourselves in a much greater position around product assortment and inventory allocation. These tools are going to be key for us as we think about it to be able to get us to speed on what a retailer should look like, having the tools for the merchants to be much more in tune with what's happening. I think it really puts us in a position as we think about getting a great return on this product that we're investing in from a technology standpoint.

Okay. I guess maybe I'll ask it more directly. I mean, you talked about returning to gross margin at historical levels. So if I look at kind of 2020 through 2022, you were in the upper 32% range. Is there any reason why that's not where you get back to here in '24?

I think the biggest unknown there, Justin, is obviously the health of the customer, and that's something we navigate every single day. But as we think about from a merchandise perspective and where we sit today, there are great opportunities for us to move through, have productive inventory, have the right stuff in the right place at the right time, serve it right with the store labor and really see some good improvements from the margin point. The other thing I would call out is just mix. If we go through the year and we see heavy penetration in firearms and ammunition, that obviously is going to weigh on the gross margin line because the mix is always going to add in that factor. We can't control it if I'm selling a lot of firearms and ammunition, which are lower-margin categories.

Yes, that all makes sense, Jeff. Question, Paul, you mentioned this new workforce management system that just thinking about payroll dollars more holistically or in aggregate, at least at the store level, do you see a need to reinvest back into the business from a store labor perspective? Or does this system just allow you to be smarter with your existing dollars and kind of how you deploy them at the peak hours during the day?

Yes, I believe that's the most important aspect. Currently, our approach is very manual, but we aim to forecast our needs four to six weeks in advance based on trends. This will help us ensure we have the right personnel available at the right times, particularly from Thursday to Sunday, which are crucial days. We have a unique customer pattern from 11 to 2 that differs from a typical drive-time consumer. This enables us to reduce administrative tasks and redirect those hours into customer service. As we engage with our stores, we are focusing on motivating our employees and store managers to sell more effectively while providing them opportunities to increase their earnings and boost our overall revenue. Our strategy involves investing more in our stores by employing staff who can assist customers and encourage profitable sales growth. Overall, I'm very enthusiastic about enhancing our workforce management system, which will diminish administrative work and create more chances for staff to engage with customers and offer outstanding service.

Great. Last question for me would be just your view, Paul, on the store fleet. Obviously, a lot of growth and new openings when demand was surging during the pandemic initially. Is there any need from your standpoint or perspective to clean up the portfolio at all? Or is that not really in the cards?

Great retailers are always monitoring your entire fleet. And I think any time that we look at it, we will evaluate stores that we're considering. But our main goal would be to be able to nurse them back to health and get them in a good position. I see this as an opportunity for us as we get the gear right and the service right for the consumer, putting ourselves back in a position to be able to grow. There's always grooming as a great retailer; you're always looking at other things that don't make sense. But I mean, us looking at it and saying, 'Hey, we're looking to pull stores out of our fleet'—that's not the case. We want to be productive in all of our stores. There are stores that are not performing at the level we need, and we want to be sure we can get them back in shape. Ultimately, I would just flip that and say we want to get the balance sheet in great position this year as we pay down debt and generate free cash flow. Then position ourselves in 2025 and particularly in 2026 to start growing.

There are no further questions at this time. I would like to turn the floor back over to Paul Stone for any closing comments.

Thank you for joining the call today, and thank you to all the passionate employees around the country for your commitment to Sportsman's Warehouse. Together, we look forward to providing our customers with great gear and exceptional service. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.