Sportsman's Warehouse Holdings, Inc 10-Q for FY2022 Q2
Sportsman's Warehouse Holdings, Inc. (SPWH)
About this 10-Q
Sportsman's Warehouse Holdings, Inc filed this 10-Q on September 8, 2021, covering the quarter ended July 31, 2021 (FY2022 Q2).
Headline figures
Quarter ended July 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $361.78M
- down 5.0% from $380.99M a year earlier
- Net income
- $17.72M
- down 45.4% from net income of $32.46M a year earlier
- Diluted EPS
- $0.40
- down 45.2% from $0.73 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
| ||
(State or other jurisdiction | | (I.R.S. Employer |
| | |
| ||
(Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code: (
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ |
| ☒ | |
| | | | | |
Non-accelerated filer | | ☐ | Smaller reporting company | | |
| | | | | |
Emerging growth company | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of September 8, 2021, the registrant had
SPORTSMAN’S WAREHOUSE HOLDINGS, INC.
TABLE OF CONTENTS
| Page | ||
|---|---|---|---|
| |||
| | ||
4 | |||
| | | |
| 4 | ||
| | | |
| 5 | ||
| | | |
| 6 | ||
| | | |
| 7 | ||
| | | |
| 8 | ||
| | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
| | | |
28 | |||
| | | |
29 | |||
| | | |
| |||
| | ||
30 | |||
| | | |
30 | |||
| | | |
30 | |||
| | | |
31 | |||
| | | |
32 | |||
We operate on a fiscal calendar that, in a given fiscal year, consists of the 52- or 53-week period ending on the Saturday closest to January 31st. Our fiscal second quarters ended July 31, 2021 and August 1, 2020 both consisted of 13 weeks and are referred to herein as the second quarter of fiscal year 2021 and the second quarter of fiscal year 2020, respectively. Fiscal year 2021 contains 52 weeks of operations and will end on January 29, 2022. Fiscal year 2020 contained 52 weeks of operations and ended on January 30, 2021.
References throughout this document to “Sportsman’s Warehouse,” “we,” “us,” and “our” refer to Sportsman’s Warehouse Holdings, Inc. and its subsidiaries, and references to “Holdings” refer to Sportsman’s Warehouse Holdings, Inc. excluding its subsidiaries.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “10-Q”) contains statements that constitute forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this 10-Q are forward-looking statements. These statements may include words such as “aim,” “anticipate,” “assume,” “believe,” “can have,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “should,” “target,” “will,” “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our plans and objectives for future operations, growth or initiatives and strategies are forward-looking statements. The forward-looking statements also include assumptions about our proposed merger with Great Outdoors Group, LLC (“Great Outdoors Group”), a subsidiary of Great American Outdoors Group.
These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that predicting the impact of known factors is very difficult, and we cannot anticipate all factors that could affect our actual results.
All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:
| ● | the potential impact of, and any potential developments related to, the pending merger with Great Outdoors Group, including the risk that the conditions to the consummation of the merger are not satisfied or waived, litigation challenging the merger, the impact on our stock price, business, financial condition and results of operations if the merger is not consummated, and the potential negative impact to our business and employee relationships due to the merger; |
| ● | current and future government regulations, in particular regulations relating to the sale of firearms and ammunition, which may impact the supply and demand for our products and our ability to conduct our business; |
| ● | the impact of COVID-19 pandemic and measures intended to reduce its spread on our operations; |
| ● | our retail-based business model which is impacted by general economic and market conditions and economic, market and financial uncertainties that may cause a decline in consumer spending; |
| ● | our concentration of stores in the Western United States which makes us susceptible to adverse conditions in this region, and could affect our sales and cause our operating results to suffer; |
| ● | the highly fragmented and competitive industry in which we operate and the potential for increased competition; |
| ● | changes in consumer demands, including regional preferences, which we may not be able to identify and respond to in a timely manner; and |
| ● | our entrance into new markets or operations in existing markets, which may not be successful. |
The above is not a complete list of factors or events that could cause actual results to differ from our expectations, and we cannot predict all of them. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements disclosed under “Part I. Item 1A. Risk Factors,” appearing in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this 10-Q, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the
2
Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, and public communications. You should evaluate all forward-looking statements made in this 10-Q and otherwise in the context of these risks and uncertainties.
Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements we make. These forward-looking statements speak only as of the date of this 10-Q and are not guarantees of future performance or developments and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly, whether as a result of new information, future developments or otherwise.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPORTSMAN’S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in Thousands, Except Per Share Data
(unaudited)
| | July 31, | | January 30, | | ||
|
| 2021 |
| 2021 |
| ||
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash | | $ | | | $ | | |
Accounts receivable, net | | | | | | | |
Merchandise inventories | | | | | | | |
Prepaid expenses and other | | | | | | | |
Total current assets | | | | | | | |
Operating lease right of use asset | | | | | | | |
Property and equipment, net | | | | | | | |
Goodwill | | | | | | | |
Definite lived intangibles, net | | | | | | | |
Total assets | | $ | | | $ | | |
| | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | | | $ | | |
Accrued expenses | | | | | | | |
Income taxes payable | | | | | | | |
Operating lease liability, current | | | | | | | |
Revolving line of credit | | | | | | — | |
Total current liabilities | | | | | | | |
Long-term liabilities: | | | | | | | |
Long-term debt, net of discount, debt issuance costs, and current portion | | | — | | | — | |
Deferred income taxes | | | | | | | |
Operating lease liability, noncurrent | | | | | | | |
Total long-term liabilities | | | | | | | |
Total liabilities | | | | | | | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
Stockholders' equity: | | | | | | | |
Preferred stock, $ | | | | | | ||
Common stock, $ | | | | | | | |
Additional paid-in capital | | | | | | | |
Accumulated earnings | | | | | | | |
Total stockholders' equity | | | | | | | |
Total liabilities and stockholders' equity | | $ | | | $ | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SPORTSMAN'S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in Thousands Except Per Share Data
(unaudited)
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | ||||||||
| | July 31, | | August 1, | | July 31, | | August 1, | | ||||
| | 2021 | | 2020 | | 2021 | | 2020 | | ||||
Net sales | | $ | | | $ | | | $ | | | $ | | |
Cost of goods sold | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Selling, general, and administrative expenses | | | | | | | | | | | | | |
Income from operations | | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | |
Income tax expense | | | | | | | | | | | | | |
Net income | | $ | | | $ | | | $ | | | $ | | |
Earnings per share: | | | | | | | | | | | | | |
Basic | | $ | | | $ | | | $ | | | $ | | |
Diluted | | $ | | | $ | | | $ | | | $ | | |
Weighted average shares outstanding: | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SPORTSMAN'S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Amounts in Thousands
(unaudited)
For the Thirteen Weeks Ended July 31, 2021 and August 1, 2020 | |||||||||||||||||||
| | Common Stock | | Restricted nonvoting | | Additional | | Accumulated | | Total | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Amount |
| Amount |
| Amount | |||||
| | | | | | | | | | | | | | | | | | | |
Balance at May 2, 2020 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
Issuance of common stock for cash per employee stock purchase plan | | | | | — | | — | | | — | | | | | | — | | | |
Stock based compensation | | — | | | — | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | — | | | — | | | — | | | | | | |
Balance at August 1, 2020 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | |
Balance at May 1, 2021 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
Stock based compensation | | — | | | — | | — | | | — | | | | | | — | | | |
Net income | | — | | | — | | — | | | — | | | — | | | | | | |
Balance at July 31, 2021 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
For the Twenty-Six Weeks Ended July 31, 2021 and August 1, 2020 | |||||||||||||||||||
| | Common Stock | | Restricted nonvoting | | Additional | | Accumulated | | Total | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Amount |
| Amount |
| Amount | |||||
| | | | | | | | | | | | | | | | | | | |
Balance at February 1, 2020 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
Vesting of restricted stock units | | | | | | | — | | | — | | | ( | | | — | | | — |
Payment of withholdings on restricted stock units | | — | | | — | | — | | | — | | | ( | | | — | | | ( |
Issuance of common stock for cash per employee stock purchase plan | | | | | — | | — | | | — | | | | | | — | | | |
Stock based compensation | | — | | | — | | — | | | — | | | | | | — | | | |
Net income | | — | | | — | | — | | | — | | | — | | | | | | |
Balance at August 1, 2020 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | |
Balance at January 30, 2021 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
Vesting of restricted stock units | | | | | | | — | | | — | | | ( | | | — | | | — |
Payment of withholdings on restricted stock units | | — | | | — | | — | | | — | | | ( | | | — | | | ( |
Stock based compensation | | — | | | — | | — | | | — | | | | | | — | | | |
Net income | | — | | | — | | — | | | — | | | — | | | | | | |
Balance at July 31, 2021 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | |
| |||||||||||||||||||
6
SPORTSMAN'S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in Thousands
(unaudited)
| | | Twenty-Six Weeks Ended | ||||
| | | July 31, | | August 1, | ||
|
| | 2021 | | 2020 | ||
Cash flows from operating activities: | | | | | | | |
Net income | | | $ | | | $ | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | |
Depreciation of property and equipment | | | | | | | |
Amortization of deferred financing fees | | | | | | | |
Amortization of definite lived intangible | | | | | | | |
Loss on asset dispositions | | | | — | | | |
Noncash lease expense | | | | | | | |
Deferred income taxes | | | | ( | | | |
Stock-based compensation | | | | | | | |
Change in operating assets and liabilities, net of amounts acquired: | | | | | | | |
Accounts receivable, net | | | | ( | | | |
Operating lease liabilities | | | | ( | | | ( |
Merchandise inventories | | | | ( | | | ( |
Prepaid expenses and other | | | | | | | ( |
Accounts payable | | | | | | | |
Accrued expenses | | | | ( | | | |
Income taxes payable and receivable | | | | ( | | | |
Net cash (used in) provided by operating activities | | | | ( | | | |
Cash flows from investing activities: | | | | | | | |
Purchase of property and equipment, net of amounts acquired | | | | ( | | | ( |
Acquisition of Field and Stream stores, net of cash acquired | | | | — | | | ( |
Net cash used in investing activities | | | | ( | | | ( |
Cash flows from financing activities: | | | | | | | |
Net borrowings/ (payments) on line of credit | | | | | | | ( |
Increase in book overdraft, net | | | | | | | |
Proceeds from issuance of common stock per employee stock purchase plan | | | | — | | | |
Payment of withholdings on restricted stock units | | | | ( | | | ( |
Principal payments on long-term debt | | | | — | | | ( |
Net cash provided by (used in) financing activities | | | | | | | ( |
Net change in cash | | | | ( | | | |
Cash at beginning of period | | | | | | | |
Cash at end of period | | | $ | | | $ | |
| | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | |
Cash paid during the period for: | | | | | | | |
Interest, net of amounts capitalized | | | $ | | | $ | |
Income taxes, net of refunds | | | | | | | |
| | | | | | | |
Supplemental schedule of noncash activities: | | | | | | | |
Noncash change in operating lease right of use asset and operating lease liabilities from | | | $ | | | $ | |
remeasurement of existing leases and addition of new leases | | | | | | | |
Purchases of property and equipment included in accounts payable and accrued expenses | | | $ | | | $ | |
Payable to seller relating to acquisition of Field and Stream stores | | | $ | — | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SPORTSMAN’S WAREHOUSE HOLDINGS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Amounts reported in thousands, except per share data and store count data
(1) Description of Business and Basis of Presentation
Description of Business
Sportsman’s Warehouse Holdings, Inc. (“Holdings”) and its subsidiaries (collectively, the “Company”) operate retail sporting goods stores. As of July 31, 2021, the Company operated
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and have been prepared by management of the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company’s condensed consolidated balance sheet as of January 30, 2021 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments that are, in the opinion of management, necessary to summarize fairly our condensed consolidated financial statements for the periods presented. All of these adjustments are of a normal recurring nature. The results of the fiscal quarter ended July 31, 2021 are not necessarily indicative of the results to be obtained for the year ending January 29, 2022. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 filed with the SEC on April 2, 2021 (the “Fiscal 2020 Form 10-K”).
Impact of COVID-19 Pandemic
During March 2020, the World Health Organization declared the rapidly growing coronavirus outbreak to be a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. Beginning in March 2020, the Company reduced store hours to allow sufficient time to restock its shelves and perform additional cleaning, and the Company also limited the number of customers in its stores at any one time. During the second quarter of fiscal 2020, the Company returned to normal operating hours in each of its stores and continues to operate normally as of the end of the second quarter of fiscal 2021. The Company may again restrict the operations of its stores and its distribution facility if it deems this appropriate or if recommended or mandated by authorities.
(2) Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2 to the Company’s Fiscal 2020 Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as the London
8
Inter-Bank Offered Rate (“LIBOR”), certain tenors of which are being phased out in 2021, to alternate reference rates, such as the Secured Overnight Financing Rate. The standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. The provisions have impact as contract modifications and other changes occur while LIBOR is phased out. The Company is in the process of evaluating the optional relief guidance provided within this ASU. Management will continue its assessment and monitor regulatory developments during the LIBOR transition period.
(3) Revenue Recognition
Revenue recognition accounting policy
The Company operates solely as an outdoor retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the United States and online. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since the Company only extends credit for immaterial purchases to certain municipalities.
Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:
| ● | Retail store sales |
| ● | E-commerce sales |
| ● | Gift cards and loyalty reward program |
For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the products are tendered for delivery to the common carrier.
The transaction price for each contract is the stated price on the product, reduced by any stated discounts at that point in time. The Company does not engage in sales of products that attach a future material right and could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit point-of-sale contract with the customer, as reflected in the transaction receipt, states the final terms of the sale, including the description, quantity, and price of each product purchased. Payment for the Company’s contracts is due in full upon delivery. The customer agrees to a stated price implicit in the contract that does not vary over the contract.
The transaction price relative to sales subject to a right of return reflects the amount of estimated consideration to which the Company expects to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. The allowance for sales returns is estimated based upon historical experience and a provision for estimated returns is recorded as a reduction in sales in the relevant period. The estimated merchandise inventory cost related to the sales returns is recorded in prepaid expenses and other. The estimated refund liabilities are recorded in accrued expenses. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net sales and earnings in the period such variances become known.
Contract liabilities are recognized primarily for gift card sales and our loyalty reward program. Cash received from the sale of gift cards is recorded as a contract liability in accrued expenses, and the Company recognizes revenue upon the customer’s redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying a historical breakage rate of
Accounting Standards Codification (“ASC”) 606 requires the Company to allocate the transaction price between the goods and the loyalty reward points based on the relative stand alone selling price. The Company recognized revenue for
9
the breakage of loyalty reward points as revenue in proportion to the pattern of customer redemption of the points by applying a historical breakage rate of
We offer promotional financing and credit cards issued by a third-party bank that manages and directly extends credit to our customers. We provide a license to our brand and marketing services, and we facilitate credit applications in our stores and online. The banks are the sole owners of the accounts receivable generated under the program and, accordingly, we do not hold any customer receivables related to these programs and act as an agent in the financing transactions with customers. We are eligible to receive a profit share from certain of our banking partners based on the annual performance of their corresponding portfolio, and we receive monthly payments based on forecasts of full-year performance. This is a form of variable consideration. We record such profit share as revenue over time using the most likely amount method, which reflects the amount earned each month when it is determined that the likelihood of a significant revenue reversal is not probable, which is typically monthly. Profit-share payments occur monthly, shortly after the end of each program month.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Sales returns
The Company allows customers to return items purchased within 30 days provided the merchandise is in resaleable condition with original packaging and the original sales/gift receipt is presented. The Company estimates a reserve for sales returns and records the respective reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience of actual returns and customer return rights are the key factors used in determining the estimated sales returns.
Contract balances
The following table provides information about right of return assets, contract liabilities, and sales return liabilities with customers as of July 31, 2021 and January 30, 2021:
|
| July 31, 2021 |
| January 30, 2021 | ||
Right of return assets, which are included in prepaid expenses and other | | $ | | | $ | |
Estimated gift card contract liability, net of breakage | | | ( | | | ( |
Estimated loyalty contract liability, net of breakage | | | ( | | | ( |
Sales return liabilities, which are included in accrued expenses | | | ( | | | ( |
For the 13 and 26 weeks ended July 31, 2021, the Company recognized approximately $
The current balance of the right of return assets is the expected amount of inventory to be returned that is expected to be resold. The current balance of the contract liabilities primarily relates to the gift card and loyalty reward program liabilities. The Company expects the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions over the next
10
Disaggregation of revenue from contracts with customers
In the following table, revenue from contracts with customers is disaggregated by department. The percentage of net sales related to the Company’s departments for the 13 and 26 weeks ended July 31, 2021 and August 1, 2020, was approximately:
| | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | ||||
| | | | July 31, | | August 1, |
| July 31, |
| August 1, | |
Department |
| Product Offerings |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
Camping | | Backpacks, camp essentials, canoes and kayaks, coolers, outdoor cooking equipment, sleeping bags, tents and tools | | | | | | ||||
Apparel | | Camouflage, jackets, hats, outerwear, sportswear, technical gear and work wear | | | | | | ||||
Fishing | | Bait, electronics, fishing rods, flotation items, fly fishing, lines, lures, reels, tackle and small boats | | | | | | ||||
Footwear | | Hiking boots, socks, sport sandals, technical footwear, trail shoes, casual shoes, waders and work boots | | | | | | ||||
Hunting and Shooting | | Ammunition, archery items, ATV accessories, blinds and tree stands, decoys, firearms, reloading equipment and shooting gear | | | | | | ||||
Optics, Electronics, Accessories, and Other | | Gift items, GPS devices, knives, lighting, optics, two-way radios, and other license revenue, net of revenue discounts | | | | | | ||||
Total | | | | | | | | ||||
(4) Property and Equipment
Property and equipment as of July 31, 2021 and January 30, 2021 were as follows:
| | July 31, | | January 30, | | ||
|
| 2021 |
| 2021 |
| ||
Furniture, fixtures, and equipment | | $ | | | $ | | |
Leasehold improvements | | | | | | | |
Construction in progress | | | | | | | |
Total property and equipment, gross | | | | | | | |
Less accumulated depreciation and amortization | | | ( | | | ( | |
Total property and equipment, net | | $ | | | $ | | |
(5) Accrued Expenses
Accrued expenses consisted of the following as of July 31, 2021 and January 30, 2021:
| | July 31, | | January 30, | ||
|
| 2021 |
| 2021 | ||
Book overdraft | | $ | | | $ | |
Unearned revenue | | | | | | |
Accrued payroll and related expenses | | | | | | |
Sales and use tax payable | | | | | | |
Accrued construction costs | | | | | | |
Other | | | | | | |
Total accrued expenses | | $ | | | $ | |
11
(6) Leases
At the inception of the lease, the Company’s operating leases have certain lease terms of up to
The Company determines whether a contract is or contains a lease at contract inception. As the rate implicit in the lease is not readily determinable in most of the Company’s leases, it uses its incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The operating lease asset also includes any fixed lease payments made and includes lease incentives and incurred initial direct costs. Operating lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. The Company’s lease terms may include options to extend or terminate the lease. Additionally, the Company’s leases do not contain any material residual guarantees or material restrictive covenants.
In the 13 and 26 weeks ended July 31, 2021, the Company recorded a non-cash increase of $
In accordance with ASC 842, total lease expense, including common area maintenance (“CAM”), recorded during the 13 and 26 weeks ended July 31, 2021 was $
In accordance with ASC 842, other information related to leases was as follows:
| | Twenty-Six Weeks Ended | ||||
| | July 31, | | August 1, | ||
|
| 2021 |
| 2020 | ||
Operating cash flows from operating leases | | $ | ( | | $ | ( |
Cash paid for amounts included in the measurement of lease liabilities - operating leases | | | ( | | | ( |
| | | | | | |
| | As of July 31, | | As of August 1, | ||
|
| 2021 |
| 2020 | ||
| | | | | | |
Right-of-use assets obtained in exchange for new or remeasured operating lease liabilities | | $ | | | $ | |
Terminated right-of-use assets and liabilities | | | — | | | ( |
Weighted-average remaining lease term - operating leases | | | | | ||
Weighted-average discount rate - operating leases | | | | | ||
12
In accordance with ASC 842, maturities of operating lease liabilities as of July 31, 2021 were as follows:
| | Operating | |
Year Endings: | Leases | ||
2021 (remainder) | | $ | |
2022 | | | |
2023 | | | |
2024 | | | |
2025 | | | |
Thereafter | | | |
Undiscounted cash flows | | $ | |
Reconciliation of lease liabilities: | | | |
Present values | | $ | |
Lease liabilities - current | | | |
Lease liabilities - noncurrent | | | |
Lease liabilities - total | | $ | |
Difference between undiscounted and discounted cash flows | | $ | |
(7) Revolving Line of Credit
On May 23, 2018, Sportsman’s Warehouse, Inc. (“SWI”), a wholly owned subsidiary of the Company, as lead borrower, and Wells Fargo Bank, National Association (“Wells Fargo”), with a consortium of banks led by Wells Fargo, entered into an Amended and Restated Credit Agreement (as amended, restated, supplemented or otherwise modified, the “Amended Credit Agreement”). The Amended Credit Agreement governs the Company’s senior secured revolving credit facility (“Revolving Line of Credit”) and a $
In conjunction with the Amended Credit Agreement, the Company incurred $
Amounts outstanding under the Revolving Line of Credit are offset on the condensed consolidated balance sheets by amounts in depository accounts under lock-box or similar arrangements, which were $
The Amended Credit Agreement contains customary affirmative and negative covenants, including covenants that limit the Company’s ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations.
As of July 31, 2021, the Revolving Line of Credit had $
For the 13 and 26 weeks ended July 31, 2021, gross borrowings under the Revolving Line of Credit were $
13
the Revolving Line of Credit were $
Restricted Net Assets
The provisions of the Revolving Line of Credit restrict all of the net assets of the Company’s consolidated subsidiaries, which constitute all of the net assets on the Company’s condensed consolidated balance sheet as of July 31, 2021, from being used to pay any dividends without prior written consent from the financial institutions party to the Company’s Revolving Line of Credit.
(8) Income Taxes
The Company recognized an income tax expense of $
(9) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding, reduced by the number of shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards.
The following table sets forth the computation of basic and diluted income per common share:
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | ||||||||
| | | July 31, | | | August 1, | | | July 31, | | | August 1, | |
|
| | 2021 |
| | 2020 |
| | 2021 |
| | 2020 | |
Net income | | $ | | | $ | | | $ | | | $ | | |
Weighted-average shares of common stock outstanding: | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | |
Dilutive effect of common stock equivalents | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | |
Basic earnings per share | | $ | | | $ | | | $ | | | $ | | |
Diluted earnings per share | | $ | | | $ | | | $ | | | $ | | |
Restricted stock units considered anti-dilutive and excluded in the calculation | | | | | | | | | | | | | |
(10) Stock-Based Compensation
Stock-Based Compensation
During the 13 and 26 weeks ended July 31, 2021 the Company recognized total stock-based compensation expense of $
Employee Stock Plans
As of July 31, 2021, the number of shares available for awards under the 2019 Performance Incentive Plan (the “2019 Plan”) was
14
Employee Stock Purchase Plan
The Company also had an Employee Stock Purchase Plan (“ESPP”) that was approved by shareholders in fiscal year 2015, under which
Nonvested Performance-Based Stock Awards
During the 13 and 26 weeks ended July 31, 2021, the Company did
During the 13 weeks ended August 1, 2020, the Company did
The following table sets forth the rollforward of outstanding nonvested performance-based stock awards (per share amounts are not in thousands):
| | | | Weighted | | |
| | | | average | | |
| | | | grant-date | | |
|
| Shares |
| fair value |
| |
Balance at January 30, 2021 | | | | $ | | |
Grants | | — | | | — | |
Forfeitures | | ( | | | | |
Vested | | ( | | | | |
Balance at July 31, 2021 | | | | $ | | |
| | | | | | |
| | | | Weighted | | |
| | | | average | | |
| | | | grant-date | | |
| | Shares |
| fair value | | |
Balance at February 1, 2020 | | | | $ | | |
Grants | | | | | | |
Forfeitures | | ( | | | | |
Vested | | — | | | — | |
Balance at August 1, 2020 | | | | $ | | |
Nonvested Stock Unit Awards
During the 13 weeks ended July 31, 2021, the Company issued
During the 26 weeks ended July 31, 2021, the Company issued
15
During the 13 and 26 weeks ended August 1, 2020, the Company issued
The following table sets forth the rollforward of outstanding nonvested stock units (per share amounts are not in thousands):
| | | | Weighted | | |
| | | | average | | |
| | | | grant-date | | |
|
| Shares |
| fair value |
| |
Balance at January 30, 2021 | | | | $ | | |
Grants | | | | | | |
Forfeitures | | ( | | | | |
Vested | | ( | | | | |
Balance at July 31, 2021 | | | | $ | | |
| | | | | | |
| | | | Weighted | | |
| | | | average | | |
| | | | grant-date | | |
|
| Shares |
| fair value |
| |
Balance at February 1, 2020 | | | | $ | | |
Grants | | | | | | |
Forfeitures | | ( | | | | |
Vested | | ( | | | | |
Balance at August 1, 2020 | | | | $ | | |
(11) Commitments and Contingencies
Legal Matters
The Company is involved in various legal matters generally incidental to its business. After discussion with legal counsel, management is not aware of any matters for which the likelihood of a loss is probable and reasonably estimable and which could have a material impact on its consolidated financial condition, liquidity, or results of operations.
Parsons v. Colt’s Manufacturing Company, 2:19-cv-01189-APG-EJY – On July 2, 2019 the estate and family of a victim of the Route 91 Harvest Festival shooting filed litigation against
TMS McCarthy, LP, Etc., Pltf. v. Sportsman’s Warehouse Southwest, Inc. Etc. Et Al., Dfts.- On June 23, 2020 TMS McCarthy, LP filed a complaint against Sportsman’s Warehouse Southwest, Inc., a wholly owned subsidiary of Sportsman’s Warehouse Holdings Inc., claiming the Company wrongfully terminated the lease relating to one of its stores. The Company believes the plaintiffs’ complaint is without merit based on the plain language of the lease at issue and on August 14, 2020 filed a counterclaim for declaratory relief.
(12) Merger with Great Outdoors Group
On December 21, 2020, Sportsman’s Warehouse entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Great Outdoors Group, LLC, (“Great Outdoors Group”) and Phoenix Merger Sub I. Inc., (“Merger Subsidiary”). Pursuant to the terms and conditions set forth in the Merger Agreement, Merger Subsidiary will be merged with and into Sportsman’s Warehouse (the “Merger”), with Sportsman’s Warehouse continuing as the surviving
16
corporation in the Merger and a wholly-owned subsidiary of Great Outdoors Group. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Sportsman’s Warehouse common stock, par value $
The Merger Agreement has been unanimously adopted by the board of directors of Sportsman’s Warehouse, and the stockholders of Sportsman’s Warehouse approved the Merger at the special stockholders meeting held on March 23, 2021. Completion of the Merger is subject to the satisfaction of several conditions, including: (i) the expiration or termination of any applicable waiting period (and any extensions thereof) relating to the Merger under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (ii) the absence of any order, injunction, or other judgment by any governmental authority of competent jurisdiction that enjoins or otherwise prohibits the consummation of the Merger; (iii) the accuracy of each party’s representations and warranties (subject to certain qualifications); (iv) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (v) the absence of a material adverse effect on Sportsman’s Warehouse.
Assuming receipt of required clearance pursuant to the HSR Act and timely satisfaction of other conditions to closing, we currently expect the closing of the Merger to occur in the second half of calendar year 2021.
er
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in “Part I. Item 1A. Risk Factors” in our Fiscal 2020 Form 10-K. Also see “Statement Regarding Forward-Looking Statements” preceding Part I in this 10-Q.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this 10-Q.
Overview
We are an outdoor sporting goods retailer focused on meeting the everyday needs of the seasoned outdoor veteran, the first-time participant and everyone in between. Our mission is to provide outstanding gear and exceptional service to inspire outdoor memories.
Our business was founded in 1986 as a single retail store in Midvale, Utah. Today, we operate 114 stores in 28 states, totaling approximately 4.5 million gross square feet. We list the locations of our stores on our website, www.sportsmans.com. We also operate an e-commerce platform at www.sportsmans.com.
Our stores and our e-commerce platform are aggregated into one operating and reportable segment.
Proposed Merger with Great Outdoors Group, Inc.
On December 21, 2020, Sportsman’s Warehouse entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Great Outdoors Group and Phoenix Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of Great Outdoors Group (“Merger Subsidiary”). Pursuant to the terms and conditions set forth in the Merger Agreement, Merger Subsidiary will be merged with and into Sportsman’s Warehouse, with Sportsman’s Warehouse continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Great Outdoors Group. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Sportsman’s Warehouse common stock, par value $0.01 per share (the “Shares”) outstanding immediately prior to the Effective Time (other than such Shares held by (i) Great Outdoors Group, Merger Subsidiary, or any other subsidiary of Great Outdoors Group, (ii) Sportsman’s Warehouse or its subsidiaries, as treasury stock or (iii) stockholders of Sportsman’s Warehouse who properly exercised their appraisal rights for such Shares under the Delaware General Corporation Law) will automatically be cancelled and converted into the right to receive $18.00 per Share in cash, without interest and less any applicable withholding taxes.
The Merger Agreement has been unanimously adopted by the board of directors of Sportsman’s Warehouse, and the stockholders of Sportsman’s Warehouse approved the Merger at the special stockholders meeting held on March 23, 2021. Completion of the Merger is subject to the satisfaction of several conditions, including: (i) the expiration or termination of any applicable waiting period (and any extensions thereof) relating to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (ii) the absence of any order, injunction, or other judgment by any governmental authority of competent jurisdiction that enjoins or otherwise prohibits the consummation of the Merger; (iii) the accuracy of each party’s representations and warranties (subject to certain qualifications); (iv) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (v) the absence of a material adverse effect on Sportsman’s Warehouse.
Assuming receipt of required clearance pursuant to the HSR Act and timely satisfaction of other conditions to closing, we currently expect the closing of the Merger to occur in the second half of calendar year 2021. For more information on the Merger, see “Part I. Item 1. Business—Proposed Merger with Great Outdoor Groups, Inc.” and “Part I. Item 1A. Risk Factors—Risks Related to the Proposed Merger” in the Fiscal 2020 Form 10-K
18
Update on Impact of COVID-19 Pandemic
Since mid-March of 2020 through the end of the second quarter 2021, the Company has experienced a significant increase in sales as compared to historical sales levels. A larger than normal portion of those sales has come from certain product categories, particularly firearms and ammunition.
The increased demand we have experienced since mid-March 2020 resulted in our net sales increasing by 9.7% to $688.8 million during the first half of 2021 compared to the first half of 2020. Further, our same store sales increased 3.4% during the first half of 2021 compared to the corresponding period of fiscal 2020. While we have experienced strong sales growth throughout the pandemic, our net sales for the second quarter of fiscal 2021 decreased compared to the second quarter of fiscal year 2020 because we began recognizing strong demand during the second quarter of fiscal 2020 due to social unrest at that time, which significantly drove up demand for firearms and ammunition. We expect that our net sales will continue to stabilize or decrease for the remainder of fiscal 2021 compared to the same period last year. As of the filing of this 10-Q, all of our 114 stores are open with no significant restrictions or limitations on their operations.
In addition, with respect to our supply chain, we continue to see some interruption with various vendors as a result of restrictions or limitations on their operations due to the pandemic. While our increase in sales shows a significant demand for firearms and ammunition during the pandemic that we believe is outpacing supply, we do not believe supply chain disruptions resulting from restrictions and limitations on supplier operations caused by the pandemic are resulting in significantly less supply and we are working closely with our vendors to limit such disruption.
While we have experienced increased sales, especially in our hunting and shooting category, since the beginning of the COVID-19 pandemic, we cannot predict the future impact on us of the COVID-19 outbreak.
For more detailed information on the potential impact of COVID-19 to our business, we refer you to Item 1A, Risk Factors, “The novel coronavirus (COVID-19) pandemic, efforts to mitigate or disrupt the pandemic and the related weak, or weakening of, economic or other negative conditions, have impacted our business, and could result in a material adverse effect on our operations, liquidity, financial condition and financial results.” in our Fiscal 2020 Form 10-K.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, same store sales, gross margin, selling, general, and administrative expenses, income from operations and Adjusted EBITDA.
Net Sales and Same Store Sales
Our net sales are primarily received from revenue generated in our stores and also include sales generated through our e-commerce platform. When measuring revenue generated from our stores, we review our same store sales as well as the performance of our stores that have not operated for a sufficient amount of time to be included in same store sales. We include net sales from a store in same store sales on the first day of the 13th full fiscal month following the store’s opening or acquisition by us. We exclude sales from stores that were closed during the period from our same store sales calculation. We include net sales from e-commerce in our calculation of same store sales. Some of our competitors and other retailers may calculate same store sales differently than we do. As a result, data regarding our same store sales may not be comparable to similar data made available by other retailers.
Measuring the change in year-over-year same store sales allows us to evaluate how our retail store base is performing. Various factors affect same store sales, including:
| ● | the impact of the COVID-19 pandemic; |
| ● | changes or anticipated changes to regulations related to some of the products we sell; |
| ● | consumer preferences, buying trends and overall economic trends; |
| ● | our ability to identify and respond effectively to local and regional trends and customer preferences; |
19
| ● | our ability to provide quality customer service that will increase our conversion of shoppers into paying customers; |
| ● | the success of our omni-channel strategy and our e-commerce platform; |
| ● | competition in the regional market of a store; |
| ● | atypical weather; |
| ● | changes in our product mix; and |
| ● | changes in pricing and average ticket sales. |
Opening new stores and acquiring store locations is also an important part of our growth strategy. While our target is to grow square footage at a rate of greater than 8%-10% annually, we may deviate from this target if attractive opportunities are presented to open stores or acquire new store locations outside of our target growth rate.
We also have been scaling our e-commerce platform and increasing sales through our website, www.sportsmans.com.
We believe the key drivers to increasing our total net sales include:
| ● | increasing our total gross square footage by opening new stores or acquiring new store locations; |
| ● | continuing to increase same store sales in our existing markets; |
| ● | increasing customer visits to our stores and improving our conversion rate through focused marketing efforts and continually high standards of customer service; |
| ● | increasing the average ticket sale per customer; and |
| ● | expanding our omni-channel capabilities. |
Gross Margin
Gross profit is our net sales less cost of goods sold. Gross margin measures our gross profit as a percentage of net sales. Our cost of goods sold primarily consists of merchandise acquisition costs, including freight-in costs, shipping costs, payment term discounts received from the vendor and vendor allowances and rebates associated directly with merchandise and shipping costs related to e-commerce sales.
We believe the key drivers to improving our gross margin are increasing the product mix to higher margin products, particularly apparel and footwear, increasing foot traffic within our stores and traffic to our website, improving buying opportunities with our vendor partners and coordinating pricing strategies among our stores and our merchandise group. Our ability to properly manage our inventory can also impact our gross margin. Successful inventory management ensures we have sufficient high margin products in stock at all times to meet customer demand, while overstocking of items could lead to markdowns in order to help a product sell. We believe that the overall growth of our business will allow us to generally maintain or increase our gross margins, because increased merchandise volumes will enable us to maintain our strong relationships with our vendors.
Selling, General, and Administrative Expenses
We closely manage our selling, general, and administrative expenses. Our selling, general, and administrative expenses are comprised of payroll, rent and occupancy, depreciation and amortization, acquisition expenses, pre-opening expenses and other operating expenses, including stock-based compensation expense. Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.
Our selling, general, and administrative expenses are primarily influenced by the volume of net sales of our locations, except for our corporate payroll, rent and occupancy and depreciation and amortization, which are generally fixed in nature. We control our selling, general, and administrative expenses through a budgeting and reporting process that allows our personnel to adjust our expenses as trends in net sales activity are identified.
20
We expect that our selling, general, and administrative expenses will increase in future periods due to our continuing growth. Furthermore, 12 of our current stores are being impacted by minimum wage increases in fiscal year 2021 that have and will continue to drive up our selling, general, and administrative costs during fiscal year 2021.
Income from Operations
Income from operations is gross profit less selling, general, and administrative expenses. We use income from operations as an indicator of the productivity of our business and our ability to manage selling, general, and administrative expenses.
Adjusted EBITDA
We define Adjusted EBITDA as net income plus interest expense, income tax expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, and other gains, losses and expenses that we do not believe are indicative of our ongoing expenses. In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as an additional measurement tool for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. See “—Non-GAAP Measures.”
21
Results of Operations
The following table summarizes key components of our results of operations as a percentage of net sales for the periods indicated:
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | ||||
| | July 31, |
| August 1, |
| July 31, |
| August 1, |
|
| 2021 |
| 2020 | | 2021 |
| 2020 |
Percentage of net sales: | | | | | | | | |
Net sales | | 100.0% | | 100.0% | | 100.0% | | 100.0% |
Cost of goods sold | | 66.8 | | 66.1 | | 67.5 | | 67.5 |
Gross profit | | 33.2 | | 33.9 | | 32.5 | | 32.5 |
Selling, general, and administrative expenses | | 26.5 | | 21.9 | | 27.0 | | 25.3 |
Income from operations | | 6.7 | | 12.0 | | 5.5 | | 7.2 |
Interest expense | | 0.1 | | 0.3 | | 0.1 | | 0.4 |
Income before income taxes | | 6.6 | | 11.7 | | 5.4 | | 6.8 |
Income tax expense | | 1.7 | | 3.2 | | 1.3 | | 1.8 |
Net income | | 4.9% | | 8.5% | | 4.1% | | 5.0% |
Adjusted EBITDA | | 9.7% | | 14.1% | | 8.5% | | 9.8% |
The following table shows our sales during the periods presented by department:
| | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | ||||
| | | | July 31, | | August 1, |
| July 31, |
| August 1, | |
Department |
| Product Offerings |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
Camping | | Backpacks, camp essentials, canoes and kayaks, coolers, outdoor cooking equipment, sleeping bags, tents and tools | | 17.8% | | 17.1% | | 14.7% | | 14.4% | |
Apparel | | Camouflage, jackets, hats, outerwear, sportswear, technical gear and work wear | | 6.6% | | 5.6% | | 6.5% | | 5.1% | |
Fishing | | Bait, electronics, fishing rods, flotation items, fly fishing, lines, lures, reels, tackle and small boats | | 15.1% | | 15.9% | | 13.4% | | 13.7% | |
Footwear | | Hiking boots, socks, sport sandals, technical footwear, trail shoes, casual shoes, waders and work boots | | 6.6% | | 5.7% | | 6.4% | | 5.2% | |
Hunting and Shooting | | Ammunition, archery items, ATV accessories, blinds and tree stands, decoys, firearms, reloading equipment and shooting gear | | 48.1% | | 49.1% | | 53.1% | | 55.6% | |
Optics, Electronics, Accessories, and Other | | Gift items, GPS devices, knives, lighting, optics, two-way radios, and other license revenue, net of revenue discounts | | 5.8% | | 6.6% | | 5.9% | | 6.0% | |
Total | | | | 100.0% | | 100.0% | | 100.0% | | 100.0% | |
Thirteen Weeks Ended July 31, 2021 Compared to Thirteen Weeks Ended August 1, 2020
Net Sales. Net sales decreased by $19.2 million, or 5.0%, to $361.8 million during the 13 weeks ended July 31, 2021 compared to $381.0 million in the corresponding period of fiscal year 2020. Our net sales primarily decreased due to lower demand compared to the same period of the prior year as we anniversaried the social unrest that occurred in 2020 which significantly drove up demand for firearms and ammunition during the prior year period. Stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed $22.2 million to net sales. Same store sales decreased by 9.9% for the 13 weeks ended July 31, 2021 compared to the comparable 13 week period of fiscal year 2020, primarily driven by decreases in our hunting and shooting and fishing departments.
Our apparel, footwear and optics, electronics, and accessories departments saw increases of $2.4 million, $2.3 million, and $1.0 million, respectively, in the second quarter of fiscal year 2021 compared to the comparable 13-week period of
22
fiscal year 2020 due to increased demand in these categories as a result of increased demand in these products as consumer spending increased. Our hunting and shooting, fishing, and camping departments saw decreases of $11.5 million, $6.1 million and $1.1 million, respectively, in the second quarter of fiscal year 2021 compared to the comparable 13-week period of fiscal year 2020. Within hunting and shooting department, our firearm and ammunition categories saw decreases of $11.2 million or 13.3% and $1.4 million or 2.6%, respectively, in the second quarter of fiscal year 2021 compared to the comparable 13-week period of fiscal year 2020. The decrease seen in these categories is due to lower demand as we anniversaried the social unrest and pending presidential election of the prior year period.
With respect to same store sales, during the 13 weeks ended July 31, 2021, our footwear, clothing, and optics, electronics, and accessories, departments had increases of 7.1%, 6.7%, and 0.6%, respectively, for the second quarter of fiscal year 2021 compared to the comparable 13-week period of fiscal year 2020. Our fishing, hunting, and camping departments saw decreases of 14.1%, 11.7%, and 5.5%, respectively, as we anniversaried the demand driven in the prior year by the COVID-19 pandemic, social unrest, and the pending political process. As of July 31, 2021, we had 107 stores included in our same store sales calculation.
Gross Profit. Gross profit decreased to $120.1 million during the 13 weeks ended July 31, 2021 compared to $129.1 million for the corresponding period of fiscal year 2020 primarily as a result of decreased sales. As a percentage of net sales, gross profit decreased to 33.2% for the 13 weeks ended July 31, 2021, compared to 33.9% for the corresponding period of fiscal year 2020 due to higher freight costs. The higher freight costs were partially offset by an increase in product margins across all categories and increased vendor incentives. We expect higher transportation costs to continue to impact the business during the remainder of fiscal 2021.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased by $12.3 million, or 14.7%, to $95.9 million during the 13 weeks ended July 31, 2021 from $83.6 million for the comparable 13-week period of fiscal year 2020. This increase was primarily due to an increase in our payroll expense of $4.4 million, which was the result of opening 8 new stores since the end of the second quarter of fiscal year 2020, and minimum wage increases impacting 12 of our stores in fiscal year 2021. We also had an increase in acquisition costs of $2.5 million due to costs relating to the pending merger with Great Outdoors Group, as well as increases in other selling, general and administrative costs, rent, depreciation, and pre-opening of $2.0 million, $1.7 million, $1.0 million, and $0.8 million, respectively, during the 13 weeks ended July 31, 2021 primarily related to the opening of 8 new stores since August 1, 2020. As a percentage of net sales, selling, general, and administrative expenses increased to 26.5% of net sales in the second quarter of fiscal year 2021, compared to 21.9% of net sales in the second quarter of fiscal year 2020, as a result of the decrease in net sales we experienced in the second quarter of fiscal year 2021 compared to the second quarter of fiscal year 2020 and the increase in expenses noted in second quarter of fiscal year 2021 compared to the second quarter of fiscal year 2020.
Interest Expense. Interest expense decreased by $0.7 million, or 73.8%, to $0.3 million during the 13 weeks ended July 31, 2021 from $1.0 million for the comparable 13-week period of fiscal year 2020. Interest expense decreased primarily as a result of decreased borrowings on our revolving line of credit during the second quarter of fiscal year 2021 compared to the second quarter of fiscal year 2020.
Income Taxes. We recognized income tax expense of $6.2 million compared to an income tax expense of $12.0 million during the 13 weeks ended July 31, 2021 and August 1, 2020, respectively. Our effective tax rate for the 13 weeks ended July 31, 2021 and August 1, 2020 was 25.9% and 27.0%, respectively. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 21.0%, due to state taxes, permanent items, and discrete items relating to stock award deductions.
Twenty-Six Weeks Ended July 31, 2021 Compared to Twenty-Six Weeks Ended August 1, 2020
Net Sales. Net sales increased by $60.9 million, or 9.7%, to $688.8 million during the 26 weeks ended July 31, 2021 compared to $627.8 million in the corresponding period of fiscal year 2020. Our net sales increased due to a variety of reasons including: increased participation in outdoor activities, increased demand through our e-commerce platform, and demand driven by the change in consumer behavior associated with the COVID-19 pandemic, partially offset by lower demand during the second quarter of fiscal 2021 compare to the same period last year in certain categories as we anniversaried the demand driven in the prior year by the COVID-19 pandemic, social unrest, and the pending presidential election. Stores that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed $46.3 million to net sales. Same store sales increased by 3.4% for the 26 weeks ended July 31,
23
2021 compared to the comparable 26 week period of fiscal year 2020, primarily driven by increases in all of our departments.
All of our departments had increases in net sales for the 26 weeks ended July 31, 2021 compared to the corresponding period in fiscal year 2020, led by our hunting and shooting department with an increase in net sales of $18.0 million, or 5.2%. Our apparel, footwear, camping, optics, electronics, and accessories and fishing departments saw increases of $12.7 million, $11.3 million, $10.5 million, $7.7 million and $6.3 million, respectively, in the first half of fiscal year 2021 compared to the comparable 26-week period of fiscal year 2020 due to increased traffic within our stores and online. Within hunting, our firearm category saw an increase of $8.4 million or 5.5% and our ammunition category saw a decrease of $5.2 million or 4.6%, in the first half of fiscal year 2021 compared to the comparable 26-week period of fiscal year 2020. The decrease seen in the ammunition category is due to the lack of supply in the market as a result of supply chain disruptions caused by the COVID-19 pandemic and demand that is outpacing manufacturing capacity.
In regards to same store sales, each of our departments except our hunting and shooting department, had increases for the 26 weeks ended July 31, 2021. Our clothing, footwear, optics, electronics, and accessories, camping, and fishing departments had increases of 33.1%, 29.1%, 16.2%, 6.9%, and 1.8%, respectively, for the first half of fiscal year 2021 compared to the comparable 26-week period of fiscal year 2020. We saw a substantial increase in same store sales for our clothing and footwear departments as we saw consumer spending return to a more normalized pattern during the first half of 2021 compared to the first half of 2020. Our hunting and shooting department had a decrease of 1.8%, with our firearm and ammunition categories having decreases of 2.4% and 11.0%, respectively, for the first half of fiscal year 2021 compared to the comparable 26-week period of fiscal year 2020. Our hunting and shooting department and firearm and ammunition categories saw a year-over-year decline because we began recognizing strong demand for these products during the second quarter of fiscal 2020 due to social unrest at that time. As of July 31, 2021, we had 107 stores included in our same store sales calculation.
Gross Profit. Gross profit increased to $224.1 million during the 26 weeks ended July 31, 2021 compared to $203.9 million for the corresponding period of fiscal year 2020 primarily as a result of increased sales. As a percentage of net sales, gross profit was flat at 32.5% for the 26 weeks ended July 31, 2021 and the 26 weeks ended August 1, 2020. Within gross margin we experienced increased freight costs that were offset by increased volume incentives, and other adjustments. We expect higher transportation costs to continue to impact the business during the remainder of fiscal 2021.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased by $27.5 million, or 17.3%, to $186.3 million during the 26 weeks ended July 31, 2021 from $158.8 million for the comparable 26-week period of fiscal year 2020. This increase was primarily due to an increase in our payroll expense of $14.5 million, which was the result of opening 8 new stores since the end of the second quarter of fiscal year 2020, and minimum wage increases impacting 12 of our stores in fiscal year 2021. We also had increases in acquisition costs of $5.3 million due to costs relating to the pending merger with Great Outdoors Group, as well as increases in rent, other selling, general and administrative costs, depreciation, and pre-opening expenses of $3.5 million, $2.9 million, $0.7 million and $0.6 million. respectively, during the 26 weeks ended July 31, 2021 primarily related to the opening of 8 new stores since August 1, 2020. As a percentage of net sales, selling, general, and administrative expenses increased to 27.0% of net sales in the first half of fiscal year 2021, compared to 25.3% of net sales in the first half of fiscal year 2020, primarily as a result of opening 8 new stores since August 1, 2020 and costs associated with the pending merger with Great Outdoors Group.
Interest Expense. Interest expense decreased by $2.1 million, or 80.7%, to $0.5 million during the 26 weeks ended July 31, 2021 from $2.6 million for the comparable 26-week period of fiscal year 2020. Interest expense decreased primarily as a result of decreased borrowings on our revolving line of credit during the first half of fiscal year 2021 compared to the first half of fiscal year 2020.
Income Taxes. We recognized income tax expense of $9.1 million compared to an income tax expense of $11.2 million during the 26 weeks ended July 31, 2021 and August 1, 2020, respectively. Our effective tax rate for the 26 weeks ended July 31, 2021 and August 1, 2020 was 24.5% and 26.3%, respectively. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 21.0%, due to state taxes, permanent items, and discrete items relating to stock award deductions.
24
Seasonality
Due to the openings of hunting season across the country and consumers’ holiday buying patterns, net sales are typically higher in the third and fourth fiscal quarters than in the first and second fiscal quarters. We also incur additional expenses in the third and fourth fiscal quarters due to higher sales volume and increased staffing in our stores. While we typically would expect our net sales to continue to reflect this seasonal pattern, we may not recognize higher sales volume in the third and fourth fiscal quarters of fiscal year 2021 because of the significant spike in sales as a result of the increased demand during the COVID-19 pandemic and other factors noted above.
The timing of our new retail store openings also may have an impact on our quarterly results. First, we incur certain non-recurring expenses related to opening each new retail store, which are expensed as they are incurred. Second, most store expenses generally vary proportionately with net sales, but there is also a fixed cost component, which includes occupancy costs. These fixed costs typically result in lower store profitability during the initial period after a new retail store opens. Due to both of these factors, new retail store openings may result in a temporary decline in operating profit, in dollars and/or as a percentage of net sales.
Weather conditions affect outdoor activities and the demand for related apparel and equipment. Customers’ demand for our products, and, therefore, our net sales, can be significantly impacted by weather patterns on a local, regional and national basis.
Liquidity and Capital Resources
Our primary capital requirements are for seasonal working capital needs and capital expenditures related to opening and acquiring new store locations. Our sources of liquidity to meet these needs have primarily been borrowings under our revolving credit facility, operating cash flows and short and long-term debt financings from banks and financial institutions. We believe that our cash on hand, cash generated by operating activities and funds available under our revolving credit facility will be sufficient to finance our operating activities for at least the next twelve months.
For the 26 weeks ended July 31, 2021, we incurred approximately $17.9 million in capital expenditures primarily related to the construction of new stores and the refurbishment of existing stores during the period. We expect total net capital expenditures between $42.0 million and $52.0 million for fiscal year 2021 primarily to refurbish many of our existing stores and to open eight to twelve new stores in fiscal year 2021. We intend to fund our capital expenditures with operating cash flows and funds available under our revolving credit facility. Other investment opportunities, such as potential strategic acquisitions or store expansion rates in excess of those presently planned, may require additional funding.
Cash flows from operating, investing and financing activities are shown in the following table:
| | Twenty-Six Weeks Ended | | ||||
| | July 31, | | August 1, | | ||
|
| 2021 |
| 2020 |
| ||
| | (in thousands) | | ||||
Cash flows (used in) provided by operating activities | | $ | (67,782) | | $ | 145,748 | |
Cash flows used in investing activities | | | (17,936) | | | (12,023) | |
Cash provided by (used in) financing activities | | | 22,813 | | | (123,122) | |
Cash at end of period | | | 2,620 | | | 12,288 | |
Net cash used in operating activities was $67.8 million for the 26 weeks ended July 31, 2021, compared to cash provided by operating activities of $145.8 million for the corresponding period of fiscal year 2020, a change of approximately $213.6 million. The decrease in our cash flows from operating activities was primarily the result of our buildup of inventory during the first half of fiscal 2021.We focused on rebuilding our inventory during the first half of fiscal 2021 after experiencing strong demand throughout the pandemic while also encountering supply chain disruptions at the same time.
Net cash used in investing activities was $17.9 million for the 26 weeks ended July 31, 2021 compared to $12.0 million for the corresponding period of fiscal year 2020. For the 26 weeks ended July 31, 2021, we incurred capital expenditures related to the construction of new stores and the refurbishment of existing stores.
25
Net cash provided by financing activities was $22.8 million for the 26 weeks ended July 31, 2021, compared to net cash used in financing activities of $123.1 million for the corresponding period of fiscal year 2020. During the 26 weeks ended July 31, 2021, we had an increase in borrowings under our revolving line of credit. During the 26 weeks ended August 1, 2020, we repaid $14.0 million principal outstanding on our term loan and $113.2 million on our revolving line of credit.
As of July 31, 2021, $37.1 million was outstanding under the revolving credit facility. We maintain a $250.0 million revolving credit facility. Borrowings under our revolving credit facility are subject to a borrowing base calculation. Our revolving credit facility is governed by an amended and restated credit agreement with a consortium of banks led by Wells Fargo Bank, National Association. The revolving credit facility matures on May 23, 2023. As of July 31, 2021, we had $186.0 million available for borrowing, subject to certain borrowing base restrictions, and $1.9 million in stand-by commercial letters of credit.
Borrowings under our revolving credit facility bear interest based on either, at our option, the base rate or LIBOR, in each case plus an applicable margin. The base rate is the higher of (1) Wells Fargo’s prime rate, (2) the federal funds rate (as defined in the credit agreement) plus 0.50% and (3) the one-month LIBOR (as defined in the credit agreement) plus 1.00%. The applicable margin for loans under the revolving credit facility, which varies based on the average daily availability, ranges from 0.25% to 0.75% per year for base rate loans and from 1.25% to 1.75% per year for LIBOR loans.
Interest on base rate loans is payable monthly in arrears and interest on LIBOR loans is payable based on the LIBOR interest period selected by us, which can be 7, 30, 60 or 90 days. All amounts that are not paid when due under our revolving credit facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full.
Each of the subsidiaries of Sportsman’s Warehouse Holdings, Inc. (“Holdings”) is a borrower under the revolving credit facility, and Holdings guarantees all obligations under the revolving credit facility. All obligations under the revolving credit facility are secured by a lien on substantially all of Holdings’ tangible and intangible assets and the tangible and intangible assets of all of Holdings’ subsidiaries, including a pledge of all capital stock of each of the Holdings’ subsidiaries. The lien securing the obligations under the revolving credit facility is a first priority lien as to certain liquid assets, including cash, accounts receivable, deposit accounts and inventory. In addition, our credit agreement contains provisions that enable Wells Fargo to require us to maintain a lock-box, or similar arrangement, for the collection of all receipts.
We may be required to make mandatory prepayments under the revolving credit facility in the event of a disposition of certain property or assets, in the event of receipt of certain insurance or condemnation proceeds, upon the issuance of certain debt or equity securities, upon the incurrence of certain indebtedness for borrowed money or upon the receipt of certain payments not received in the ordinary course of business.
Our revolving credit facility requires us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base. In addition, the credit agreement governing our revolving credit facility contains customary affirmative and negative covenants, including covenants that limit our ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. Our credit agreement also contains customary events of default. As of July 31, 2021, we were in compliance with all covenants under the credit agreement governing our revolving credit facility.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
26
There have been no significant changes to our critical accounting policies as described in our Fiscal 2020 Form 10-K.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations as of July 31, 2021 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | |||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |
Long-term debt obligations (1) | $ - | $ - | $ - | $ - | $ - | |
Operating lease obligations (2) | 398,555 | 30,381 | 117,190 | 88,603 | 162,381 | |
Standby letters of credit | 1,955 | 1,955 | - | - | - | |
Purchase/construction obligations (3) | - | - | - | - | - | |
| (1) | Long-term debt obligations do not reflect outstanding amounts under our revolving credit facility, because those amounts are considered current liabilities. As of July 31, 2021, $37.1 million was outstanding on our revolving credit facility. |
| (2) | Operating lease obligations in the table above do not include additional payments associated with common area maintenance, real estate, taxes and insurance. Such payments were $13.2 million, $11.2 million, and $10.1 million in fiscal years 2020, 2019, and 2018, respectively. |
| (3) | In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because these purchase orders do not contain any termination payments or other penalties if cancelled, they are not included in this table of contractual obligations. In accordance with GAAP, these obligations are not recorded in our financial statements. |
Non-GAAP Measures
In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our operating performance. We define Adjusted EBITDA as net income plus interest expense, income tax expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, and other gains, losses and expenses that we do not believe are indicative of our ongoing expenses. In addition, Adjusted EBITDA excludes pre-opening expenses because we do not believe these expenses are indicative of the underlying operating performance of our stores. The amount and timing of pre-opening expenses are dependent on, among other things, the size of new stores opened and the number of new stores opened during any given period. Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. We consider Adjusted EBITDA and Adjusted EBITDA margin important supplemental measures of our operating performance and believe they are frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Other companies in our industry, however, may calculate Adjusted EBITDA and Adjusted EBITDA margin differently than we do. Management also uses Adjusted EBITDA and Adjusted EBITDA margin as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. Management believes Adjusted EBITDA and Adjusted EBITDA margin allow investors to evaluate our operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of our core operating performance.
Adjusted EBITDA is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net
27
income or other condensed consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to:
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA may be defined differently by other companies, and, therefore, it may not be directly comparable to the results of other companies in our industry; |
| ● | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and |
| ● | Adjusted EBITDA does not reflect income taxes or the cash requirements for any tax payments. |
The following table presents a reconciliation of net income, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA for the 13 and 26 weeks ended July 31, 2021 and August 1, 2020.
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | ||||||||
| | July 31, | | August 1, | | July 31, | | August 1, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | | ||||
| | (dollars in thousands) | | ||||||||||
Net income (loss) | | $ | 17,723 | | $ | 32,461 | | $ | 28,173 | | $ | 31,331 | |
Interest expense | | | 266 | | | 1,017 | | | 492 | | | 2,551 | |
Income tax expense (benefit) | | | 6,195 | | | 12,009 | | | 9,147 | | | 11,160 | |
Depreciation and amortization | | | 6,360 | | | 5,318 | | | 12,136 | | | 10,681 | |
Stock-based compensation expense (1) | | | 1,027 | | | 818 | | | 2,043 | | | 1,554 | |
Pre-opening expenses (2) | | | 1,183 | | | 431 | | | 1,378 | | | 819 | |
Hazard pay (3) | | | — | | | 1,500 | | | — | | | 2,600 | |
Acquisition costs (4) | | | 2,461 | | | 6 | | | 5,306 | | | 35 | |
Store closure (5) | | | — | | | — | | | — | | | 1,039 | |
Adjusted EBITDA | | $ | 35,215 | | $ | 53,560 | | $ | 58,675 | | $ | 61,770 | |
| | | | | | | | | | | | | |
Net sales | | $ | 361,778 | | $ | 380,989 | | | 688,770 | | | 627,824 | |
Net income margin | | | 4.9% | | | 8.5% | | | 4.1% | | | 5.0% | |
Adjusted EBITDA margin (6) | | | 9.7% | | | 14.1% | | | 8.5% | | | 9.8% | |
| (1) | Stock-based compensation expense represents non-cash expenses related to equity instruments granted to employees under our 2019 Performance Incentive Plan and Employee Stock Purchase Plan. |
| (2) | Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location. |
| (3) | Expense relating to bonuses and increased wages paid to front-line and back office associates due to the COVID-19 pandemic. |
| (4) | For the 13 and 26 weeks ended July 31, 2021, includes $2.5 and $5.3 million of expenses incurred relating to the pending merger with Great Outdoors Group. For the 13 and 26 weeks ended August 1, 2020 includes expenses incurred relating to the acquisition of cash, inventory, furniture, fixtures, and equipment, and certain other assets related to Field & Stream stores operated by DICK’S in fiscal year 2020. |
| (5) | Costs and impairments recorded relating to the closure of one store during the first quarter of 2020. These costs were recorded as a component of selling, general, and administration expenses on the condensed consolidated statement of operations. |
| (6) | We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to changes in interest rates. Our revolving credit facility and term loan carry floating interest rates that are tied to LIBOR, the federal funds rate and the prime rate, and, therefore, our income
28
and cash flows will be exposed to changes in interest rates to the extent that we do not have effective hedging arrangements in place. We historically have not used interest rate swap agreements to hedge the variable cash flows associated with the interest on our credit facilities. Based on a sensitivity analysis at July 31, 2021, assuming the amount outstanding under our revolving credit facility would be outstanding for a full year, a 100 basis point increase in interest rates would not have increased our interest expense significantly. We do not use derivative financial instruments for speculative or trading purposes. However, this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2021.
Inherent Limitations in Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the 13 weeks ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11, “Commitments and Contingencies” to our condensed consolidated financial statements for additional information, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. There have been no material changes in our assessment of our risk factors from those set forth in our Fiscal 2020 Form 10-K.
ITEM 5. OTHER INFORMATION
None
30
ITEM 6. EXHIBITS
Exhibit Number |
| Description |
| | |
31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1** | | |
| | |
101.INS* | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH* | | XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SPORTSMAN’S WAREHOUSE HOLDINGS, INC. | |
| | |
Date: September 8, 2021 | By: | /s/ Jon Barker |
| | Jon Barker |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: September 8, 2021 | By: | /s/ Robert K. Julian |
| | Robert K. Julian |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
32