After previously having a real rough ride following profit warnings at the start of the year, Sportsman’s Warehouse (NASDAQ:SPWH) has appeared to have entered a turnaround with the share price up over 250% over the last year, and 200% since March 2020. The company performed particularly well during lockdown, with sales accelerating as the majority of stores remained open. This performance is in line with firearms manufacturers, including Smith & Wesson (NASDAQ:SWBI) who have also seen their share price rally over recent months. Although Sportsman’s Warehouse has seen significant improvement in company performance and a justified rise in share price, I doubt whether the increased demand for firearms can be sustained for a long enough period to maintain the current share price run-up and pricey company valuation.
Sportsman’s Warehouse delivered strong Q1 results on the back of much improved firearms sales. The company beat expectations and reported an ‘adjusted profit’ in the quarter. Most prominently, net sales were up 41.8% from the same quarter the prior year to $246 million. Same store sales increased by 28.6% helped by a ‘surge in demand for firearms’, and overall numbers were also boosted by the acquisition of eight Dick’s (NYSE:DKS) Field & Stream stores in October 2019 and by the opening of other new store locations. It is also important to note the albeit smaller impact of other outdoor goods such as water filtration systems and dried food which also contributed to the improvement in overall net sales. The company has promised more new store openings for 2020.
The overall net increase in sales was against a poor period last year for the company, where they reported a miss on both EPS and revenues, sending the share price to near all-time lows. The company has transformed from that point as it rides the broader increase in demand seen across the market. However, without this, Sportsman’s Warehouse may find themselves in the doldrums once again, struggling to significantly improve performance without relying on external growth factors for a breakout.
The company also reported reduced headline losses for this quarter with a diluted loss per share of 3 cents which was far lower than the 13 cents seen last year. The same period for last year was a miss by 3 cents as the company reported a poor quarter.
Jon Barker, Sportsman’s Warehouse CEO, did say he believed Sportsman’s Warehouse could improve market share going forward:
We believe we are uniquely positioned to capitalize on market share opportunities and changing consumer behavior to become a larger and more profitable company.
Although the company continues to drive overall sales and market share, the real issues are regarding the company’s operating costs which over the last few years have moved far higher and chipped away at the company’s operating margins reducing operating income.
The company’s results from a margin standpoint weren’t strong. It is clear to see that as the business is structured at present, future increased profitability will have to be fueled by a greater drive in sales rather than improving margins. If the company fails to see continued growth in firearms sales, then rising costs and worsening margins would put them back into the share price plateau seen before the crisis. Gross profit in comparison to net sales was actually lower than Q1 of the prior year. With gross profit being 30.3% of net sales, compared to 31.3% the prior year – although it was fairly close, there was no improvement in margin from this standpoint.
Although demand for firearms has been very strong in the US during this crisis, significant uncertainty still remains about demand going forward as the current broader economic situation is very liquid and dynamic. The company highlighted this in their Q1 results where they would not issue full year guidance:
There is significant uncertainty and variability in the current economic environment. Therefore, we will not be providing forward guidance today.
If demand was to tail off, then the current share price run-up and valuation would be hard to justify as current sales drive falls, and profitability is also reduced with that.
Comparison to competitors
Sportsman’s Warehouse peers in firearms such as Smith & Wesson have also seen a large run-up in their share prices as demand for firearms rockets across the United States. When comparing Sportsman’s Warehouse consensus forward earnings to Smith & Wesson, the shares come in quite pricey:
Smith & Wesson ($1.57)
Source: Author-compiled table (data from Seeking Alpha)
Both companies maintain very similar debt levels, so for Sportsman’s Warehouse to trade at a substantial premium to Smith & Wesson is unjustified, in my opinion. Both companies have had large price readjustments as they have seen substantial increase in sales across the board.
Sportsman’s Warehouse has ridden the wave of a broader market firearms sales surge that has allowed them to increase revenues and deleverage the company’s balance sheet, reducing debt by $31m year on year to $144m as at May 2nd, 2020. The Q1 report really does read as nearly all positive boosted by the acquisitions and the rollout of new stores. The run-up in the share price now suggests that increased demand must be sustained at least over the medium term to justify the current valuation. Even potential further accelerated growth is largely priced in within the company’s current valuation. Although the company may continue to run with momentum, I see the current rise as over-extended.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.