Sportsman’s Warehouse: Short-Term Pain Has Led To An Interesting Opportunity (SPWH)

The past year or so has not been kind to every company. Many firms have experienced pain, whether it be on the top line or bottom line or both. One such example of this can be seen by looking at Sportsman’s Warehouse Holdings (NASDAQ:SPWH), a business that operates as an outdoor sporting goods retailer with 131 stores spread across 30 states. Unfortunately, market conditions have not been particularly kind, causing comparable store sales to plunge even as the number of stores in operation continues to grow. In the short term, this is not enjoyable. But management is focused on the long haul and believes that now is the time to continue investing in growth. Add on top of this, just how cheap shares in the company are, and I cannot help but to rate it a ‘buy’, a rating that reflects my view that shares should outperform the broader market for the foreseeable future.

A great deal of pain right now

Back in early July of 2022, I wrote an article discussing my bullish stance on Sportsman’s Warehouse. Leading up to that point, the company had established for itself a solid track record. But more recently, it suffered from sales and profitability declines. Despite these troubles, the company was engaging in stock buybacks and was continuing to emphasize growth initiatives. Because of these factors as well as the fact that shares of the business looked cheap, I ended up rating the company a ‘buy’. Since then, things have not gone exactly as planned. While the S&P 500 is up 6.2%, shares of Sportsman’s Warehouse have seen downside of 7.3%.

You would think that I would be deterred by this return disparity. But as a long-term investor, I don’t mind short-term gyrations all that much. To truly understand why the company has performed as it has, I would like to first point to its financial results for the third quarter of its 2022 fiscal year. During that time, sales for the company came in at $359.7 million. That’s 10.3% lower than the $401 million reported the same time one year earlier. This is really remarkable when you consider that the company saw its store count rise year over year, climbing from 119 locations to 131. The real culprit during this time was a softness in its comparable store sales. This number plunged by 15%, driven by lower demand across most of its product categories because of the response to consumers to inflationary pressures and the possibility of a recession. It is worth noting, however, that comparable store sales are still 19.5% higher than what they were in the third quarter of the company’s 2019 fiscal year.

One of the bad things about any asset-intensive business is that even a small change in revenue can have a big change in bottom line results. Such has been the case here. Net income in the third quarter of 2022, for instance, came in at only $12.9 million. That’s down from the $21.9 million reported one year earlier. It is true that operating cash flow for the company improved year over year, turning from a negative $10.5 million to a positive $6.5 million. But if we adjust for changes in working capital, the metric would have fallen from $41.7 million to $26.3 million. Meanwhile, EBITDA for the company also took a hit, dropping from $39.3 million to $29.1 million.

The same factors that negatively impacted results in the third quarter relative to the same time one year earlier also impacted results for the first nine months of 2022 as a whole. Sales of $1.02 billion came in lower than the $1.09 billion reported the same time one year earlier. The pain here was associated with a 12.1% drop in comparable store sales. Though relative to the same time frame of the 2019 fiscal year, this number is still up 28.8%. On the bottom line, the company experienced some pain as well. Net income dropped from $50 million to $29.5 million. Operating cash flow improved from negative $78.3 million to $14.5 million. But on an adjusted basis, it fell from $91.9 million to $75.9 million, while EBITDA shrank from $98 million to $72.7 million.

When it comes to 2022 in its entirety, management has said that overall revenue should be between $1.39 billion and nearly $1.41 billion. Earnings per share, meanwhile, should be between $0.98 and $1.08. At the midpoint, this would translate to net income for 2022 in its entirety of $39.8 million. If we annualize results experienced so far, we would get adjusted operating cash flow of $144.7 million and EBITDA of $101.3 million. Using these figures, I calculated that the company is trading at a price-to-earnings multiple of 8.7. The price to adjusted operating cash flow multiple should be 2.4, while the EV to EBITDA multiple should be 4.4. If financial performance were to revert back to the levels seen in 2021, these multiples would be lower at 3.2, 2, and 3.3, respectively. As part of my analysis, I also compared the company to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 4.9 to a high of 15.2. Three of the five firms were cheaper than Sportsman’s Warehouse on this basis. Using the price-to-operating cash flow approach, the four companies with positive results ranged from a low of 5 to a high of 20.3. In this case, our prospect was the cheapest of the group. And finally, using the EV to EBITDA approach, the range was from 2.4 to 10.1, with only one of the five companies coming in cheaper than our target.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
Sportsman’s Warehouse	8.7	2.4	4.4
DICK’s Sporting Goods (DKS)	11.1	20.3	5.5
Clarus Corp (CLAR)	15.2	N/A	10.1
Hibbett Sports (HIBB)	8.4	9.0	4.8
Big 5 Sporting Goods (BGFV)	4.9	5.0	2.4
Academy Sports and Outdoors (ASO)	7.9	10.4	4.9

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Despite the troubles the company is facing, management is still focused on the future. For 2023 as a whole, the company is expecting to open between 13 and 18 new stores. This would make it the best year for the company ever from a store opening perspective. As I mentioned already, the company is also taking advantage of how cheap its stock is. In the latest quarter, the company acquired 1.2 million of its shares for $10.4 million. That brings total purchases for the first nine months of 2022 to 6.5 million shares for a combined $62.4 million. Obviously, if the company’s fundamental condition doesn’t improve, this will look like a waste of cash. But it is nice to see management taking a bet on their company’s future and trying to optimize shareholder value should the firm ultimately increase in price moving forward.

Takeaway

At this time, Sportsman’s Warehouse may not be the best player in its market. For sure, the company is facing a great deal of pain because of current market conditions. But so far, management seems committed to their long-term strategy of growth. Shares of the business are remarkably cheap at this time on an absolute basis, while being near the lower end of the scale when compared to similar firms. Absent its fundamental condition materially worsening from here, I would say that some attractive upside for shareholders exists. And because of that, I decided to keep the ‘buy’ rating I assigned the company previously.