Yahoo Finance Sportsman’s Warehouse Holdings, Inc. (NASDAQ:SPWH) Q4 2023 Earnings Call Transcript
Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) Q4 2023 Earnings Call Transcript April 3, 2024
Sportsman's Warehouse Holdings, Inc. beats earnings expectations. Reported EPS is $-0.23331, expectations were $-0.3. Sportsman's Warehouse Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Sportsman's Warehouse Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Riley Timmer, Vice President of Investor Relations. Thank you. You may begin.
Riley Timmer: Thank you, operator. Participating with me on the call today is Paul Stone, our Chief Executive Officer; and Jeff White, our Chief Financial Officer. Now I'll remind everyone of the company's safe harbor language. The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding expectations about our future results of operations, demand for our products and growth of our industry. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described in the company's most recent Form 10-K and the company's other filings made with the SEC.
We will also disclose non-GAAP financial measures during today's call. Definitions of such non-GAAP measures as well as reconciliations to the most directly comparable GAAP financial measures are provided as supplemental financial information in our press release, included as Exhibit 99.1 to the Form 8-K we furnished to the SEC, which is also available on the Investor Relations section of our website at sportsmans.com. I will now turn the call over to Paul.
Paul Stone: Thank you, Riley, and good afternoon, everyone. Let me start by reminding everyone the mission of Sportsman's Warehouses to provide outstanding gear and exceptional service to inspire outdoor memories. This is the core of our company and what we will continuously lean into as we carefully navigate a microeconomic environment. As we reported earlier in the earnings release, the business remained under pressure during the fourth quarter with net sales coming in at the low end of our guided range. However, earnings per share exceeded the top end of our guidance range with both our inventory and debt levels finishing the year better than we expected. We will continue to prioritize the pay down of debt with free cash flow generation as we move through 2024.
We view 2024 as a year to reset the organization and return the business to profitability, creating a strong foundation for anticipated profitable growth in 2025. During my first 4 months, I spent my time visiting stores, getting to know our associates, talking with our customers and getting to know many of our vendors and their perspectives. I also reviewed technology and talent needs for the organization. My early assessments confirmed why I chose to join Sportsman's Warehouse and also provide visibility into the opportunities that exist to become the leader in specialty outdoor retail. Our strategy is on resetting and rebuilding the fundamentals of great retail, which for Sportsman's Warehouse are great gear and exceptional service. While some of our key initiatives are still taking shape, we took several early actions in the areas I mentioned just a moment ago.
Given the importance of technology, culture and operating great stores, we made some leadership changes in these areas bringing in best-in-class talent for our key roles. We now have an experienced retail team, including veteran outdoor retail professionals who each have a track record of successful execution with organizations like Walmart and Sam's, Target, Academy Sports and Cabela's. Importantly, I have worked with many of these executives at other high-performing organizations. We speak the same language, know what's expected, and we're already moving very quickly. Other areas where our strategic efforts will be highly focused in 2024 include creating stronger channel capabilities, making improvements to our loyalty program and precise execution of our digital and traditional marketing strategies.
We also see opportunities to better support the customer through the use of technology. By creating wheel styles equipping our store associates with improved tools, we will be better prepared to service the customers. Additionally, we are refining our marketing mix model to better understand what resonates with our customer. This allows us to be more productive with our current marketing dollars, to capture more share of the online sales and further increase our omnichannel care base. This is another way for us to further streamline and gain greater efficiency within the current organization. Currently, we are viewing the foundational techniques for marketing as well as making sure we're building the right tools and capabilities to support our omnichannel efforts.
Today, our focus will be on finding the most productive uses of our marketing resources as we continue to improve our capabilities, evolve our programs, invest strategically and leverage our current on-channel platform. I also see opportunities to refine and evolve our loyalty program. While over 50% of our sales come through our Loyalty members, I believe there's an opportunity to improve the value proposition of the program, drive more engagement with our members through personalization, attract and retain more members and increase the lifetime value of our existing customers. As I mentioned earlier, part of the reset of 2024 will include investments in needed tools and technology to support our base of stores. We recently partnered with Blue Yonder, a best-in-class supply chain management solution to develop a comprehensive merchandising assortment and planning software system.
With this tool, we will have improved capabilities with inventory management, store planogramming, seasonal regional auto replenishment as well as improved in-stock and productivity reporting. This will also help facilitate the expansion of our omnichannel capabilities, which is the regional and seasonal customer expectations. The other area of technology investment involves workforce management software. This tool will allow us to officially staff our stores and be closer aligned with the peak hours of customer business. This alignment, along with changes we have in our store compensation and leadership structure are important investments as we navigate towards our continuous goal of exceptional service. As we reported, during the fourth quarter, we further reduced our inventory levels and made significance to get out of products and brands that simply do not resonate with our core customer.
While we made good progress during the fourth quarter, we will continue to closely manage our inventory levels and merch mix. This will ensure we have the right products in the right location at the right time, creating inventory efficiency, which allows us to better service our customers and improve our overall merchandise productivity. Significantly reducing inventory as outlies to invest in newness and relevant seasonal products as we prepared and binds into our key spring outdoor season. We are currently seeing positive trends in camp and fish as we invested in newness and depth going into these early spring season. Another piece to our inventory management strategy includes rationalizing our SKUs and refining our product assortment. This will allow us to drive the following: improved inventory productivity and churns, better depth of the key and never out items, new local and regional product offerings and improved overall in-stocks and customer shopping experience.
Over the last few months, our merchant team has successfully worked through this initiative in a number of product areas. As we navigated through lower in Q4 inventory, we were very purposeful in how we prepared for our key spring season, particularly fishing. This is a category where we have a right to win, especially at the local and regional level. For the first time ever, our fishing set was in place by mid-February with depth and critical items. I talked about 2024 being a reset year. Here's what the spring reset meant to the fishing category. First, we rationalized the assortment. We're moving 40% of the SKUs and 30% of the vendors. Next, we reassorted the category across all regions and stores with local relevance and accuracy. Then we invested in depth into key products and our local product offerings.
And finally, we reset the sales forward to align our in-store presentation with the new assortment, including better productivity of our in rain caps and expanded feature space. It's the execution of key initiatives such as this that gives me confidence we are moving the business in the right direction to once again merchandise and operate great stores. Along with tight inventory management, we expect to maintain both rigor and discipline on our variable SG&A cost. Last year, we eliminated about $25 million of indirect cost out of the business, and we'll continue to manage these efforts carefully. My objective is to further select the assets of the business using 2024 as a reset year to get us back to operating profitably. We're gaining our edge of being the best local and convenient choice is what separates Sportsman's Warehouse from the competent.
This means having a great year in providing exceptional service in each of our 146 stores every day. I firmly believe we are implementing the right strategies and making the necessary improvements to solidify the foundation of this company to return us to profitability and increase shareholder value. With that, I'll now turn the call over to Jeff.
Jeff White: Thank you, Paul, and good afternoon, everyone. I'll begin my remarks today with a review of our fourth quarter and full year fiscal 2023 financial results, then cover our liquidity and capital allocation plans and finally, review our outlook for 2024. As Paul mentioned, net sales for the fourth quarter were $370.4 million and came in at the low end of our guided range. This is compared to $379.3 million in the fourth quarter of the prior year. Our net sales remain pressured from a challenging macroeconomic environment and persistently high inflation weighing on our consumer discretionary spending through the holiday season. As a reminder, 2023 was a 53-week year, which result in 1 extra week in the fourth quarter when compared with the prior year.
The 53rd week for 2023 contributed $15.4 million net sales and resulted in an additional $0.06 loss to EPS compared to the prior year's 52-week period. Same-store sales decreased 12.8% in the fourth quarter on a 14-week basis compared with the same time period of fiscal year 2022. Excluding the additional week, same-store sales in the fourth quarter were down 12.8%. Looking at comparable sales by department, hunting was the best performing category during the fourth quarter, down 3.9% on a 14-week basis compared to prior year. This outperformance versus the run rate of the company was driven by items that correlated with holiday gift giving such scopes and optics. All other departments were down double digits in the quarter, reflecting the tough macroeconomic environment and underscoring the importance of having the right inventory for the right location and season so we can provide a better overall shopping experience for our customers.
During the holiday season, the customer came in specifically for the promotions with very little attachment to other items in the store, highlighting the continuing inflationary pressure on our core customer base. On our last call, we outlined our strategy to further promote and mark down distressed portions of our apparel and footwear inventory in an effort to end the year in a much healthier position. During the fourth quarter, we successfully executed on this plan, exceeding our goal and ending the year with $354.7 million in inventory, $10 million below our guidance. By reducing inventory nearly $90 million in the quarter, we generated excess cash flow, allowing us to pay down our debt by over $59 million. Gross margin for fourth quarter was 26.8% versus 32.4% in the prior year period.
This decrease was primarily driven by the promotional efforts to move through distressed apparel and footwear inventory as well as lower gross margins on ammunition. However, while down significantly compared with the prior year, gross margin in the quarter came in better than we expected as we did not have to be as aggressive as planned with our markdown to move through the distressed inventory. We estimate that the EPS impact from the gross margin relating to the markdowns was between $0.30 and $0.40 in the fourth quarter of 2023. As a percentage of net sales, SG&A expense increased to 29% compared to 28.1% in the fourth quarter of the prior year. This increase was primarily due to higher rent and depreciation expense from the addition of 15 new stores opened during 2023 and the stores refreshed over the last 2 years.
While SG&A was up as a percentage of sales on a year-over-year basis, SG&A dollars were down 9.8% on a per store basis versus Q4 of 2022. The most significant year-over-year decrease was in payroll, which was down approximately $3.9 million from last year or a decrease of 17.4% on a per store basis. During the back half of 2023, we undertook a comprehensive expense reduction initiative to align our costs with the declining trends of the business. These efforts resulted in approximately $25 million of annualized savings. We expect to continue to realize the benefit of these cost reduction throughout 2024 and will continue to reduce expenses where we believe we can simplify the business. Net loss for the fourth quarter was $8.7 million or negative $0.23 per diluted share compared with net income of $11 million or $0.29 per diluted share in the fourth quarter of the prior year.
Adjusted net loss in the fourth quarter was $7.5 million or negative $0.20 per diluted share compared with adjusted net income of $12.7 million or $0.33 per diluted share in the fourth quarter of the prior year. Adjusted EBITDA for the fourth quarter was $5.3 million compared with adjusted EBITDA of $28.2 million in the fourth quarter of 2022. Shifting now to the full fiscal year. For the full year of 2023, we finished with sales of approximately $1.29 billion and adjusted EPS of negative $0.64 per diluted share. For the full year of 2023, we estimate that the earnings per share impact from the clearing of distressed inventory was between $0.60 and $0.80. I will now take a minute and review our balance sheet and liquidity as of the end of 2023.
Full year 2023 ending inventory was $354.7 million, compared to $399.1 million at the end of 2022, a decrease of $44.4 million or approximately 20% on a per store basis. Compared to the end of the third quarter, inventory is down nearly $92 million. Successfully moving to our seasonal and distressed inventory during the fourth quarter, facilitated the better-than-planned inventory balance and debt pay down at year-end. This was important and provided us the open-to-buy dollars needed to lean into new merchandise to support our spring and early summer seasons to which we are already seeing success. Inventory management will remain a primary focus as we now expect to move more efficiently in and out of season and improve the productivity of our inventory as we continue to rationalize SKUs and vendors.
For the full year 2023, we incurred approximately $60 million of net capital expenditures, primarily related to the construction of our 15 new stores and ongoing fleet maintenance. In regards to liquidity, we ended the debt balance of $122.9 million and total liquidity of $91.4 million. We used our cash flow generated during the fourth quarter to pay down debt and we'll continue to emphasize debt paydown as our primary use of free cash flow until we reduce our leverage ratio. Turning now to our guidance. As we mentioned in the earnings release, we are adjusting our cadence and will now provide annual net sales and adjusted EBITDA guidance, which we will provide an update to you quarterly. Our focus will be on longer-term measures being a great retailer and returning Sportsman's Warehouse to profitability in 2024.
Starting with our net sales outlook, we estimate fiscal 2024 net sales to be in the range of $1.15 billion to $1.23 billion. We expect adjusted EBITDA for fiscal 2024 to be in the range of $45 million to $65 million. We expect CapEx for 2024 to be between $20 million and $25 million relating to technology investments to improve store service and merchandising productivity as well as our normal store maintenance. To reiterate, our priority for 2024 is to use excess free cash flow to pay down our debt, decrease our leverage ratio and invest in needed technology. As we carefully manage inventory and variable expenses, we believe we can return the business to profitability. That concludes our prepared remarks today. I will now turn the call back over to the operator to facilitate questions.
Operator: [Operator Instructions]. Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Mark Smith with Lake Street Capital.
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