Description

Sportsman’s Warehouse (SPWH) has been written up on VIC three times as a long since 2014 (that alone should tell you the stock has underperformed), most recently in March 2022 by uncleM. I’d encourage you to read uncleM’s writeup as well as this, since the thesis and value prop for SPWH has not changed all that materially, but the share price is down 59% since then and the share count is down 14%. At $4.79, SPWH currently trades at 0.65x book value.

So what’s happened since March 2022?

• After being a massive covid beneficiary with the outdoor activity trend, comps have not stabilized as expected. Here’s the quarterly trend, it’s ugly:

But as bad as the comp trend is, Q1 2023 revenue per avg. store is actually slightly above Q1 2019’s figure. It’s also worth pointing out that SPWH has been opening smaller stores more recently, and avg. sqft per location has declined from 39.1k in Q1 2019 to 37.5k in Q1 2023.

Additionally, weather has legitimately been a major issue for the start of spring fishing, hiking, and camping season. The store footprint is heavily concentrated in Western states. Below is a graph of snowfall for Alta ski resort (Utah) since 1980. 2023 was not only the highest year since 1980, it was 21% higher than the second highest year. Mammoth (California) has received 715 inches, 7% higher than the #2 season on record dating back to 1969 (https://www.mammothmountain.com/on-the-mountain/snowfall-history). This is a retail category where weather does actually matter. 

https://www.alta.com/stories/rolling-in-the-deep

Here is SPWH’s store footprint, heavily concentrated in areas that got a ton of snowfall:

Combine this weather impact with the ongoing macroeconomic issues, and it’s arguably a perfect storm for this concept to look uniquely bad right now. SPWH’s avg. customer has household income of $80-100,000 and has 2-4 kids. While not the lowest end Dollar General-type customers feeling the deepest squeeze, these customers are firmly in the crosshairs of inflation right now. SPWH also sells mostly hard goods that have a multi-year replacement cycle. While it may be nice to have a new fishing reel or tent or hiking boots, these are all things you can generally delay replacing for another season or two, especially if snow still on the ground means fewer (or no) potential usage occasions. The comp and AUV trends tell you that customers obviously loaded up on these items to some degree in 2020 and 2021, so I don’t think weakness in 2023 tells you that the category or concept is dead.

• An additional negative is that SPWH is currently without a permanent CEO after the retirement of Jon Barker on 4/14/2023. Reading between the lines, this was probably an "encouraged" retirement. Board Chair Joseph Schneider is currently serving as interim CEO. While a ship without a captain is not ideal, I do think this dynamic makes SPWH uniquely subject to being bought out. Great American Outdoors (Bass Pro/Cabela’s owner) agreed to buy SPWH for $18/share, for a transaction value of $1.04 billion, in late 2020. The companies terminated the deal in December 2021 following FTC scrutiny. FTC has obviously gotten even more aggressive in blocking deals since then, but ASO is slightly smaller than Bass Pro/Cabela’s, has a clean balance sheet, and the SPWH footprint would instantly provide them national scale (and diversification from the TX market) that it currently lacks. SCHEELS is private but is also a good operator with a very dedicated customer base. 

Academy (ASO) current 268 store footprint:

Bass Pro/Cabela’s current 171 store footprint:

Privately owned competitor SCHEELS has 34 locations, mostly located in the Midwest states.

What would an acquiror be getting? For starters, you’re paying less than book value for inventory that does not really go bad or change much season-to-season. That alone can make a deal make sense, but the scale benefits should make it attractive as well. The hunting and shooting category made up 54.9% of SPWH’s revenue in the latest FY and major brands here (Browning, Federal, Remington, Smith & Wesson, etc.) have significant market share. SPWH believes that 65% of the outdoor specialty retail market comes from independent mom and pops. Also notable is that of the 51,000 type 1 FFLs (federal firearm license), only 4,300 are held by chain stores. This industry should continue to get more concentrated as ecommerce grows and transportation logistics continue to get more complex. Also note that Carlo Cannell is the largest shareholder here with an 8.5% stake, but he has not filed a 13D (yet).

Valuation

Besides the liquidation angle or the value to a strategic acquiror, what’s this worth on a going concern basis (or to a non-strategic PE buyer)? It’s worth pointing out that despite awful comps and adj. EBITDA trends, SPWH is not a dying retailer by any means. They opened 11 stores in 2019, 10 in 2020, 10 in 2021, 9 in 2022, and plan to open 15 in 2023 (already did 5 in Q1). The current footprint is 136 locations so this is sizable unit growth. If they were running the JCP or BBBY shrink stores to grow profit playbook then I would say forget the below book value argument, but that’s just not happening. Hell, this isn’t an FTC-friendly argument, but if I was ASO I’d love to acquire these guys just to stop them from opening more stores in the Southeast.

Here's the adj. EBITDA trend (again, ugly):

I think this FY likely ends up in the $70 million range (~4.5% margin), potentially above (consensus is $85 million) but it’s very back-half loaded as Q1 was -5.6 and Q2 likely comes in around +10-12. Even at $70 million the EBITDA multiple is only 4.7x. As you look at the chart and specifically the 2018 and 2019 declines, recall that WMT and DKS were exiting the firearm/ammo category in a sloppy way and putting pressure on SPWH's key categories. This has now fully played out and ammo gross margin is still ~500bps above pre-covid levels (but also down ~500bps from the 35% peak).

Historically, pre-covid margins were in the 8-12% range and SPWH has a much bigger store base and higher AUVs today. A DCF with steady-state adj. EBITDA margins of 8%, 2% same store sales, LSD store growth, and an 8x terminal multiple gets you to $13 fair value. I wouldn't expect it to actually get there absent a buyout, but $9-10 seems more reasonable than $5. Net leverage is ~2.1x assuming $70 million of EBITDA this year, but they should get a working capital tailwind as they expect inventory to decline from $470 million at end of Q1 to $400 million by the end of Q4.

Catalyst

Return to positive same store sales in Q3/Q4, buyout, activist.