Sportsman's Warehouse - Healthy Growth And Earnings Alleviate Leverage Concerns

| About: Sportsman's Warehouse (SPWH)


Fast-growing outdoor sporting goods retailer.

Solid comparable sales growth accompanied by aggressive pace of store openings.

Profitability is good, leverage remains a little concern.

Sportsman's Warehouse (NASDAQ:SPWH) is a fast-growing outdoor sporting goods retailer which went public at the end of last week.

While the offering went poorly, with shares being offered below the lower end of the preliminary offering range, discounted levels might offer an interesting entry opportunity for prospective shareholders.

The Public Offering

Sportsman's offers a broad and deep merchandise ranging from first-time participants towards outdoor veterans. Merchandise offerings focus on right hunting, shooting, fishing, camping and related items. The company aims to offer an everyday low pricing strategy, and has extensively trained staff to best serve its customers.

Sportsman's sold 12.5 million shares for $9.50 apiece, thereby raising nearly $119 million in gross proceeds. The company sold 8.3 million shares, which thereby raised $79 million, while the remainder of the shares were being offered by selling shareholders.

The offering was a disappointment, as bankers and the firm aimed to sell shares in a $11-$13 price range. Weak demand prompted the underwriting syndicate to lower the price far below the low end of the preliminary offering range.

Some 30% of the total shares outstanding were offered in the public offering. Trading at $9.50 per share in the aftermath of the offering, the equity in the business is valued at $446 million.

The major banks that brought the company public were Credit Suisse, Goldman Sachs, Baird, William Blair, Piper Jaffray, Wells Fargo Securities and D.A. Davidson.


Sportsman's has grown to a specialty retail store chain operating 47 stores across 18 US states at the moment. Stores have an average size of 48,000 gross square feet, making them typically quite large.

Sportsman's cites a report by the National Sporting Goods Association and other sources in its S1-Filing that the US outdoor activities retail sales total $50 billion in 2012. A focus on healthy and active lifestyles, product innovation and higher discretionary income for certain consumers are helpful in growing this market.

Revenues for the fiscal year ending on February of 2013 totaled $526.9 million, which is up by 39.9% on the year before. While operating earnings more than doubled that year, reported GAAP earnings fell to $28.1 million on the back of a much higher effective tax rate.

Topline growth continued as revenues for the first nine months of the year ending on February of 2014 rose by 38.3% to $467.4 million. Earnings rose marginally to $14.3 million for the period, as debt incurred left Sportsman's with much higher interest rate expenses. Note that the fourth quarter is typically the strongest quarter for the company, and I believe that full year revenues of $700 million, combined with earnings of $20-$25 million for the full year should be attainable.

Being held by a private equity firm has resulted in a rather high debt position. Sportsman's paid $20 million in interest on roughly $290 million in debt for the first nine months of 2013 alone. The planned proceeds will be used to repay debt and could save the company easily $5-$10 million in interest payments per annum.

Trading around $9.50 per share, the market values equity in the firm at $446 million. This values equity at merely 0.6 times annual revenues and roughly 15 times earnings, assuming an earnings rate of $30 million is attainable going forwards.

Investment Thesis

As noted above, the offering of Sportsman's was a disappointment, with shares being sold 20.8% below the midpoint of the preliminary offering range. Around this level, shares have settled following the initial pricing.

Investors are not pleased with the company's stock, despite strong headline growth results. Some key risks of the offering include the concentration of activities in the Western part of the US, potential pressure on discretionary spending, the reasonably leveraged capital structure, the ambitious growth plans and the fact that hunting and shooting make up little over half of total revenues.

While reported same-store sales growth results of 25.3% for the year ending on February of 2013 are impressive, growth slowed down to 7.2% in the first nine months of last calendar year. While this is still impressive, the slowdown in this growth is remarkable at least. This means that future growth is more geared towards store openings, which is much more capital-intensive. Note that average stores are huge, generating roughly $15 million in annual sales.

While Sportsman's is a bit short on capital and holds a bit of debt, growth remains solid, and so are earnings. The valuation is not excessive, which is certainly the case if new stores produce further earnings growth and debt is contained. While some leverage risk is prevalent, I believe shares can offer value if they were to sell-off a bit further going forwards.

Disclosure: I 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.