Sportsman’s Warehouse: Recent pain presents a buying opportunity (NASDAQ: SPWH)

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Many people like to be active. It keeps you healthy and in many cases gives you exposure to the outdoors. So it stands to reason that there would be a number of companies dedicated to providing outdoor sports property products from which investors can choose. Such a company is Athlete’s warehouse (NASDAQ: SPWH). In recent years, the company has achieved attractive growth both in terms of turnover and profit. But due to recent weakness from a revenue and profitability perspective, and due to concerns about a potential economic downturn, the company’s shares have been hit quite hard. Since their 52-week high, the shares are down 44.1%. Undoubtedly, there could be additional pains this year. However, for those focused on the long term, the company’s stock looks pretty cheap. For this reason, I believe the company is a decent buying opportunity at this point.

An opportunity in the distribution of sporting goods

According to the Sportsman’s Warehouse management team, the company works like an outdoor sporting goods retailer that is focused on providing its customers with all the sporting goods they could want. The company achieves this through its large network of outlets, which currently has a total of 125 outlets. These stores are located in 29 states, with a particular focus on the western part of the United States, as well as in Alaska. The smallest of its stores is typically around 7,500 square feet, while the largest is 65,000 square feet. The current average size is approximately 38,000 square feet. The company doesn’t limit itself that much when it comes to location. It has stores located in metropolitan statistical areas as small as 75,000 and some stores are located in areas with populations over one million.

To better understand the business, it would be helpful to determine where its sales are coming from. In its most recently completed fiscal year, the company generated 54.2% of its revenue from the hunting and shooting product category. This includes ammo, archery gear, ATV accessories, tree stands, guns, and other related products. 13.1% of its revenue came from camping products such as backpacks, canoes, coolers, etc. It generated 10% of its income from fish products and 8.4% from clothing like camouflage, jackets, hats, etc. 7.5% of its revenue came from various other categories, while 6.8% was attributable to footwear.

Not too long ago the company was being acquired by Great Outdoors Group. However, this deal ultimately fell through. In return, in early December last year, the company received a one-time $55 million severance package. It looks like at least some of that profit will go to buying back more shares of the company. I say this because in March of this year, management announcement the launch of a $75 million share buyback program. At the current price, that would translate to 16.9% of the company’s outstanding shares.

Sportsman's Warehouse Financial History

Author – SEC EDGAR Data

In the years leading up to 2022, the company’s financial situation has been quite positive. Revenue has grown from $809.7 million in 2017 to $1.51 billion in 2021. It’s worth noting exactly where this increase in sales is coming from. The main contributor appears to have been a significant increase in the number of company stores. At the end of 2017, the company had only 87 sites in operation. By the end of last year, that number had risen to 122. In a healthy retail environment, you would also expect to see comparable store sales improve. But because of the pandemic, that picture has darkened. In its most recent fiscal year, the company recorded a 2.2% drop in same-store sales. But even that would have some pain associated with the end of the COVID-19 pandemic and the reopening of the global economy.

    Number of Sportsman's Warehouse stores

Author – SEC EDGAR Data

As revenue grew, profitability followed. Net income fell from $17.7 million in 2017 to $108.5 million last year. Other profitability metrics were somewhat mixed. Consider, for example, operating cash flow. This metric rose for a few years, from $30.8 million in 2017 to $238.8 million in 2020. But then, in 2021, it plunged, turning negative to the tune of $21.6 million. If we adjust for changes in working capital, however, the picture looks much more consistent. This metric would eventually drop from $47.6 million to $175.2 million, with each year being better than the year before. During the same period, EBITDA also improved from $72.8 million in 2017 to $136.6 million last year. However, it should be noted that the peak here for the company was actually 2020. In that year, EBITDA was $163.2 million.

Athlete's Warehouse Finances

Author – SEC EDGAR Data

Unfortunately, the company’s growth did not continue in fiscal 2022. Revenues in the first quarter for the year was $309.5 million. That compares to $327 million the company reported around the same time a year earlier. This 5.4% drop came even as the number of locations fell from 112 to 125. So the culprit was an 11.6% drop in same-store sales. Management attributed the decline to lower demand after a fairly strong recovery from the COVID-19 pandemic era. He also attributed some of the pain to social unrest. The largest drops in terms of category came from miscellaneous products sold by the company. The year-over-year decline was 19.4%. This was followed by a reduction of 15.7% in the camping category and 14.9% in the hunting and shooting category.

With the decline in revenue, profitability also declined. Net income of $2 million pales in comparison to the $10.5 million reported a year earlier. Cash flow from operations went from negative $4 million to negative $16.8 million. Even if we correct for changes in working capital, it would have gone from $18.6 million to $14.1 million. Meanwhile, the company’s EBITDA fell from $23.5 million to $12.9 million. Given these recent circumstances, I would personally prefer that management use their capital to improve operations. But as you’ll see, stocks are cheap enough that it’s not a bad idea to buy back stocks. This is especially true considering that the company’s net debt is just $40.8 million at the time of this writing. It’s small in the grand scheme of things.

SPWH Trading Multiples

Author – SEC EDGAR Data

Given the uncertainty surrounding fiscal year 2022, I have decided not to forecast what financial performance for the year might look like. Instead, I will be valuing the company based on the results of not just its fiscal year 2021, but also its fiscal years 2019 and 2020. Using our 2021 numbers, the company is trading at a price/earnings multiple of 4.1. Even if financial performance were to return to what it was in previous years, equities would remain cheap. Indeed, using our 2020 numbers, the company is trading at a price/earnings multiple of 4.8. The only way it seems high is if we use 2019 numbers, with our multiple ultimately totaling 21.9 in this case. Using the adjusted operating cash flow multiple price, we get a reading for 2021 of 2.5. That’s down from the 3.2 reading we get using our 2020 numbers and the 6.4 reading we get if we use our 2019 numbers. EBITDA, we get 3.5, 3 and 8.2 respectively.

To put the price of the company into perspective, I decided to compare it to five similar companies. On a price-earnings basis, these companies ranged from a low of 2.8 to a high of 28.4. Only one of the five companies was cheaper than Sportsman’s Warehouse if we use our 2021 results. Using the price/operating cash flow approach, the range was 5.0 to 57.2. In this scenario, our prospect was the cheapest of the bunch. The only way stocks looked rather expensive relative to their peers was when using the EV to EBITDA approach, that would give us a range of 1.3 to 22.2. In this scenario, four of the five companies were cheaper than Sportsman’s Warehouse.

Company Prizes / Earnings Price / Operating Cash EV / EBITDA
Athlete’s warehouse 4.1 2.5 3.5
Dick’s Sporting Goods (DKS) 5.9 7.6 2.6
Clarus (CLAR) 28.4 57.2 22.2
Hibett (HIBB) 5.2 8.3 2.8
Big 5 Sporting Goods (BGFV) 2.8 5.0 1.3
Sports and Outdoors Academy (ASO) 5.0 5.9 3.3

Carry

At this point, I understand why investors are cautious about Sportsman’s Warehouse. The recent weakness is not promising and it is quite possible that this weakness will continue if the economy suffers further. But with a low amount of debt on its books, the company doesn’t seem like a risky prospect in the grand scheme of things. In fact, it may be this kind of pain that opens the door for many investors. Since stocks are cheap in almost all scenarios, the company should offer a nice upside going forward. For this reason, I have decided to rate the company as a “buy” for the time being.

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