SPWH - NASDAQ

Hello, everyone, and welcome to Sportsman's Warehouse Fourth Quarter and Full Year 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. You can also go to the company's Investor Relations page where you can find the presentation and follow along. Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Riley Timmer. The floor is yours.

Thank you, operator. Participating on our Q4 and fiscal year-end 2024 call today is Paul Stone, our Chief Executive Officer; and Jeff White, our Chief Financial Officer. I will now remind everyone of the company's safe harbor language. The statements we make today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding expectations about our future results of operations, demand for our products, and growth of our industry. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described in the company's most recent Form 10-K and the company's other filings made with the SEC. We will also disclose non-GAAP financial measures during today's call. Definitions of such non-GAAP measures as well as reconciliations to the most directly comparable GAAP financial measures are provided as supplemental financial information in our press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com. I will now turn the call over to Paul.

Thank you, Riley, and good afternoon, everyone. First, I want to thank the thousands of outfitters across Sportsman's Warehouse who work every day to provide our customers with great gear and great service. Those 2 guiding principles remain the foundation of our strategy as we continue to execute and deliver improved top-line performance. As we've been sharing each quarter through 2024, Phase 1 of our transformation strategy this past year was centered on resetting and rebuilding the critical fundamentals of great omnichannel retail. That included a reset of over 100 stores to improve sight lines, enhance feature space, showcase end caps with relevant merchandise, and convert the drive aisles into sellable space, all providing a much-improved shopping experience for the customer. Additionally, we hired a seasoned retail veteran with expertise and turnarounds to lead our marketing and e-commerce teams. Under her leadership, we've made a significant shift in marketing platforms to better align with modern shopping behaviors and have already contributed to improved traffic, both online and in our stores. Throughout 2024, we carefully managed our inventory and continue to refine our merchandise to meet local and seasonal demand. As a result, we ended the year with both lower and much cleaner inventory versus the prior year, and we generated positive cash flow. As I look ahead, I believe there's an opportunity to gain greater inventory efficiency as we narrow our focus on what the customer values most. Jeff Dunn as our new Chief Merchandising Officer, will lead that charge, bringing decades of experience, his leadership is making an immediate impact. I'm confident in his ability to execute our merchandising strategy. Throughout my remarks, any comparisons I make to last year will be in comparison to the same 13 weeks and will remove the extra week from fiscal 2023. Now I will highlight the financial progress achieved this year, which again was Phase 1 of our company's transformation and turnaround strategy. Q4 comp sales down 0.5% versus down 12.8% in Q4 last year. Q4 adjusted EBITDA of $15 million versus $5 million in Q4 of last year, reduced our net debt by $27 million. We decreased inventory $13 million versus last year and ended the year with liquidity of $131 million, an increase of $40 million compared to the end of last year. As we move through 2024, we steadily improved the sales trends each quarter, giving us confidence that the turnaround strategy is gaining traction and has us on the path for a return to comp store sales growth in 2025. In firearms, I'm pleased that once again this quarter, we outpaced the adjusted NICS data, suggesting we outsold the industry. In Q4, the adjusted NICS was down 4.5%. However, our firearm unit sales increased mid-single digits. That trend carried into February, where we once again outpaced the adjusted NICS this time by a double-digit margin. What we are seeing, however, is lower sales dollars from lower average unit price as the consumer is trading down to more affordable firearms. That said, we will strategically continue to lean into our core firearms, making the necessary adjustments to our assortments and inventory, meeting the customer where they see value, which is critical given the continued pressure on the consumer. In the quarter, our camping and fishing departments both saw growth with fishing up double digits. We were well prepared for holiday. This, coupled with our ongoing merchandise and inventory productivity strategy, provided our customers with the core goods and promotions they were looking for as they shop for the holiday. With inventory now in a much better position, we can make the necessary strategic buys to support the seasons and have depth in what the customer needs when they shop for their hunting and fishing solutions. Building on 2024's momentum, e-com-driven sales once again comped positive, up double digits in the quarter. More effective marketing and an improved user experience for higher traffic and transaction, trends that have carried into 2025. We remain focused on strengthening our omnichannel strategy to enhance the seamless customer experience across our digital channels and our stores. Looking ahead now to the next phase of our business transformation plan. Our goal in 2025 is to return the company to same-store sales growth, improve our gross and overall operating margins, and pay down our debt. We will get there by simplifying our operations to focus on our core business, hunting and fishing solutions. Going back to our founding in 1986, these 2 areas are the DNA of Sportsman's Warehouse and continue to be what most of our customers come to us for. Our 2024 consumer research showed that hunting and shooting remains stable categories with consistent demand based on participation rates and fishing continues to grow steadily, posting a 10-year CAGR of about 5%. These are robust businesses with plenty of room for us to grow, and there's a unique role we can play in the market. We have the scale to offer competitive pricing and the community connections to be the local hub for hunting and fishing. We can out-afford the local independents and out local the big box competitors. We have defined 4 strategic initiatives for 2025 to leverage and enhance this competitive advantage. Number one, be narrow and deep in hunting and fishing to improve our in-stock levels in the 20% of key products that drive 80% of the business. We do this by improving our merchandising efforts to win the seasons at a local level within hunt and fish. Over the past several years, we have tried to be everything to everyone rather than focusing on the core hunting and fishing items that drive the majority of our business. This spread our inventory dollars too thin, resulting in out-of-stock for the items that matter, continually disappointing our customers. Going forward, we've narrowed our assortment focused to be deep in the items that matter most to our customers and our performance on the same or less inventory dollars. We have already missed sales and disappointed the customer by being late to key hunting and fishing seasons, including critical micro seasons. We've made the necessary adjustments and technology investments to assort and merchandise to the store geography and be seasonally ready by both occasion and species. We are already seeing the benefits of fishing where we are comping double digits by being ready and regionally right for the start of spring fish. Two, lean into local. We do this by leveraging our talented store outfitters who have the local connections in the community and the local knowledge our customers seek. We will also leverage our outfitters as local influencers, sharing their stories and content to connect with local customers. On the merch side of local, we will provide an improved offering of local brands and products, hyper-focused on the needs of that market. Each store now has a merchandising voice to help ensure local product needs are met. For example, our Alaska market is unique to all other regions with its local needs. Historically, we have not provided the local autonomy to successfully merchandise those stores. This year, we are already set for spring with local brands and products that the customer expects when shopping our stores. Number three, become the authority in personal protection. Personal protection, a 365-day year occasion, has sizable growth potential. Today, personal protection is already near 25% of our total sales with a narrow focus on firearms and ammunition. If you look at the statistics, 72% of U.S. firearm owners cite protection as the primary reason for ownership. This part of our business also appeals to a broader demographic than hunting and fishing, providing opportunity to attract a new type of customer. We are building key product depth with important personal protection partners such as SEG, Springfield, and GLOCK, names and brands that resonate with our customers. Additionally, rain shooting, which is a part of our personal protection business, brings customers in regularly for firearms and ammunition. We have deepened our relationships with a few select vendors to ensure we are always in stock in key items for rain shooting. Finally, we signed an exclusive store-in-store partnership agreement with Byrna Less-Lethal. We believe this is an incremental purchase and complement for the current firearm owner and a less intimidating option for those who are not comfortable owning or carrying a gun. With our already established stores and website, we believe we can drive additional sales by leveraging our marketing platforms and Byrna's strong base of influencers. Fourth, strengthen our brand awareness. The core of our business strategy is positioning Sportsman's Warehouse as the go-to destination for local hunting and fishing solutions. Currently, our brand awareness is very low in our trade areas. To address this, we are executing a focused plan to expand brand awareness, drive traffic, and reengage our core customers. We have significant upside potential in our trade areas, and it starts with ensuring customers know we are there and what we stand for. This starts with redefining our brand equity and launching a new omnichannel brand campaign to ensure we stand out in the marketplace. We are also building a robust content marketing capability and rolling out an integrated grassroots program that aligns local sales planning with community activations. Finally, we are implementing an omnichannel selling approach centered on big-bet promotions to capture customer demand. Through this strategy, we will strengthen our brand presence, increase transactions, and reclaim share in our core markets. Setting underneath these 4 strategic initiatives is the continued strengthening of our infrastructure. For example, we're in the early phases of operating Blue Yonder. This will assist in our improved management of inventory as we define the tools and processes to formalize our approach to seasoning and locally relevant merchandise. I am confident in both our plan for 2025 and the team's ability to execute with speed. We hold a unique position in the outdoor market and believe through these major initiatives, we will return Sportsman's to sales growth, improve our gross margin, and further pay down our debt. With that, I'll now turn the call over to Jeff.

Thank you, Paul, and good afternoon, everyone. I'll begin my remarks today with a review of our fourth quarter and full fiscal year 2024 financial results, then cover our liquidity and capital allocation plans, and finally, review our fiscal outlook for fiscal 2025. Net sales for the fourth quarter were $340.4 million and came in at the high end of our guided range. This is compared to $370.4 million in the fourth quarter of the prior year, which included a 53rd week. This extra week for 2023 contributed $27.1 million in net sales. When comparing the same 13 weeks last year to the 13 weeks this year, our net sales declined 0.9% in the fourth quarter. Adjusted for the 53rd week year, same-store sales decreased 0.5% in the fourth quarter compared with the fourth quarter of last year. This is the third consecutive quarter of improved same-store sales trends and a 520-basis point improvement over last quarter. We were pleased to see month-to-month trend improvements as we progress through Q4 with positive sales comps in both December and January. Looking at same-store sales by department, fishing, as it has been all year, was the best-performing category during the fourth quarter, up 10.3% on a 13-week comparable basis. This is a department where we made significant improvements to our in-stock, rationalized our SKUs, and at the same time, lowered our total department inventory. Camping was up 5.2% in the quarter, driven by improved seasonal readiness in this category. Footwear and apparel comps were down in Q4. However, we were still lapping tough comps from the prior year's clearance and liquidation events. With inventory in these categories being down almost double what their sales declines were in Q4, we are confident in the health and productivity of these categories as we move into 2025. The hunting and shooting sports department was down 1.7% year-over-year. However, as Paul mentioned, the number of firearm units sold increased mid-single digits for the quarter. Given the pressure on discretionary spending, we are seeing a trade-down to lower-priced firearms, which is pressuring our sales dollars in the category. While there is currently a trade-down happening in firearms with lower average unit value, we do see average order value remaining at an all-time high as we continue to place emphasis in our stores to add on and attachment items. Gross margin for the fourth quarter was 30.4% versus 26.8% in the prior year period. This 360-basis point improvement was primarily due to improvements in our apparel and footwear departments versus last year's clearance events, which pressured gross margin significantly. As a percentage of net sales, SG&A expense increased to 29.4% compared to 29% in the fourth quarter of the prior year. While SG&A was up as a percentage of sales on a year-over-year basis, SG&A dollars were down 6.8% or $7.3 million compared with last year. The most significant year-over-year decrease was in payroll, which was down approximately $2.4 million from last year, and our other operating expenses, which were down $1.8 million. Net loss for the fourth quarter was $8.7 million or negative $0.23 per diluted share compared with net loss of $8.7 million or $0.23 per diluted share in the fourth quarter of the prior year. During Q4, a $10.1 million valuation allowance related to our deferred tax assets was created, which put us in a net loss position. This noncash allowance does not affect the overall profitability of the company and has been excluded from adjusted net income. Adjusted net income in the fourth quarter was $1.6 million or $0.04 per diluted share compared with an adjusted net loss of $7.5 million or negative $0.20 per diluted share in the fourth quarter of the prior year. Adjusted EBITDA for the fourth quarter was $14.6 million compared with adjusted EBITDA of $5.3 million in the fourth quarter of 2023, a nearly 300% increase in profitability. Shifting now to the full fiscal year. For the full year 2024, we finished with sales of approximately $1.2 billion and adjusted EPS of negative $0.53 per diluted share. We continue to pull costs out of the business to align with our sales trends, ending the year with operating expenses $20 million lower than the prior year. Turning to our balance sheet and liquidity as of the end of 2024. For the full-year 2024, ending inventory was $342 million compared to $354.7 million at the end of 2023, a decrease of $12.7 million and better than what we expected when we reported Q3 earnings. Compared to the end of the third quarter, inventory is down nearly $96.1 million. We successfully moved to our seasonal inventory during the fourth quarter, which facilitated a cleaner and better-than-planned inventory balance and debt paydown at year-end. Inventory management will remain a focus area in 2025. The transition to a narrow and deep inventory strategy, the further rationalization of SKUs and vendors as well as moving more efficiently in and out of seasons will improve the productivity of our inventory. An example that gives us confidence in our strategy is the improvements we made in the fishing department. Fishing sales were up double digits in Q4 with lower inventory in that department on a year-over-year basis. When we have the right depth in the right products at the right time of year, we become much more productive with our working capital. For the full year 2024, we incurred approximately $14.6 million of net capital expenditures, primarily related to normal store maintenance and improved infrastructure investments in technology. Total CapEx for the year was about $5 million lower than our expectations. In regards to liquidity, we ended the year with a net debt balance of $98.7 million, generated $19.7 million of free cash flow, and ended with total liquidity of $131.1 million. We used our cash flow generated during the fourth quarter to pay down debt, and we'll continue to emphasize debt paydown as our primary use of free cash flow until we reduce our leverage ratio. Turning now to our guidance, starting with our net sales outlook. We estimate fiscal 2025 net sales to be in the range of negative 1% to up 3.5% over last year. Through our improvements to core product in-stocks and focus on local relevance in our grassroots categories of hunt and fish, we are confident that we can drive same-store sales growth in 2025, even given the tough macroeconomic environment. We expect adjusted EBITDA for fiscal 2025 to be in the range of $33 million to $45 million. We will accomplish this through continued management of our variable expenses and modest improvement in our gross margin. We expect CapEx for 2025 to be between $20 million and $25 million, primarily relating to technology investments to improve store service and merchandising productivity as well as our normal store maintenance. Regarding tariffs, given our low penetration in private labels and the countries from which we import, we believe our exposure is relatively low and expect only modest gross margin pressure. We will continue, however, to work with our vendors to assess any downstream impact of cost increases from higher overall tariffs. To reiterate, our priority for 2025 is to drive comp store sales growth, improve overall profitability, use excess free cash flow to pay down our debt, decrease our leverage ratio, and invest in needed technology. That concludes our prepared remarks today. I will now turn the call back to the operator to facilitate questions.

[Operator instructions]. It comes from the line of Matt Koranda with ROTH Capital.

Maybe just – it's encouraging to hear that the comps flip positive for the back half of the quarter. And so I'm curious to hear maybe year-to-date, how they trended through February and March. I know you mentioned in the prepared remarks that you outperformed NICS in February. So were you seeing positive sales in February as well from firearms and ammunition? Maybe just start there.

Yes, Matt, thanks for the question. This is Jeff. As we've moved into '25, we're seeing encouraging trends as we continue to focus on the pillars that Paul laid out. So for the month of February, I would say we are seeing a continuing comp positive from what we saw in January. And then as we've moved into March, the one thing I'll just highlight that's being called out is the shift in holidays, you have Easter falling into April, which caused us to push some of our large ads back into the April -- kind of end of March, April time frame. So I think there's a shift that's occurring there, but we saw really good trends through February.

And then maybe just cadence of the year. I know we're talking about a flip to positive comps for the full year. So maybe just, Jeff, if you want to kind of walk us through how you're thinking about how the year sets up. It sounds like maybe we're starting out in a positive place in the first quarter. But as we kind of get deeper into the year, how do we think about the comps? And then store opening timing, maybe just nice to see you get back to some store growth. Could you talk about sort of the timing of the one store that you guys plan to open?

Yes, it's a great question. To highlight, I go back to what I said. I think we're going to see a shift in Q1 with the change in holiday. You have a kickoff to spring a lot later than last year, almost 3 weeks later than last year. So I do think Q1 is going to feel the pressure of that later start. But then as we move into Q2, Q3, there's a big opportunity for us to really win, again, going back to the strategic pillars that Paul highlighted, as we lean into fishing, lean into hunt, see a lot of upside opportunity in Q3 and Q2 and then rounding out Q4 as we just are better with our merchandising. So I think we see more upside Q2, 3, and 4 than we do Q1 with just the shift of the holiday. In terms of the new store opening, right now, it's slated for the end of Q3, beginning of Q4. We'll keep everyone posted on the exact opening date. But right now, I penciled it for the end of Q3, beginning of Q4 time frame.

Maybe just one more if I can sneak one in on the balance sheet and free cash flow and how the EBITDA projection that we have for this year might convert to free cash flow. Maybe, Jeff, if you could just handle sort of how to think about free cash flow conversion from the EBITDA guidance that you gave. It sounds like there's probably some more opportunity from working capital and inventory efficiency. So maybe just help us understand sort of how much opportunity there is there as we kind of build out sort of conversion to free cash flow models here?

Yes. Well, I'm not providing guidance for an exact number of free cash flow. We feel confident in our ability to continue to generate positive free cash flow by working through our -- first is top line profitability, increasing comp store sales, increasing margin, increasing gross margins, and all the way down to operating margin. As we highlighted in the year-end call, there is more efficiency to be had from the inventory line. I think as we continue to work through certain types of metrics inside our inventory and really focus on our core in-stock and productivity, there's opportunity there for us to continue to execute on that as we move through the year and really into the year-end period. One highlight that I will make, and we called it out last year, as we go into these seasons and we make sure that we're seasonally ready, the inventory flow and cadence of inventory is going to be a little bit different than what it's been historically. We can no longer be late to seasons. We need to make sure we're early in the season. We are in stock and we are ready to go. So I think that changes the flow of inventory a little bit. So there's going to be different peaks and valleys as we move throughout the year, but feel very confident in how we're going to manage inventory throughout the year and where we will end 2025 at.

I would just add, Matt, I think -- I mean, we had a huge opportunity around hunt last year. I felt like this quarter-to-quarter play as we were looking at working capital, we had misses there. We have an opportunity as we get into Q3 to ensure that we hit the hunt season and to be able to wind this thing down as we go through hunt and then go through the holidays. But I think you're spot on. I mean, the efficiency of our inventories is a big North star here as we think about what we can do and how we're seeing the productivity of the core goods today.

Our next question is from Anna Glaessgen with B. Riley Securities.

I would love to start on the trade-down you noted in firearms. I understand it's pressuring your average unit price. But if you could give a little bit more historical perspective, is a trade-down environment an environment in which you've historically gained market share? And is that something we should be contemplating as an opportunity in '25?

Yes. And it's a great question. As we've drilled in and really focused on the in-stocks, we have the opportunity to refine our assortment and make sure we're in stock in the right goods, knowing that we're seeing that trade-down pattern. Our merchant team and the operations team inside the business has proactively been making the adjustment to ensure that we're in stock on what the customer is gravitating towards. So being able to be in stock in the right place in the right time, I think, is attributing to the beat that we had on the adjusted NIC, making sure that we're meeting the customer with the value that they want is what we would attribute to why we outperformed mix in Q4, and we continue to do so. So as we think about that trade down, while the average unit of retail is down on the guns, what we're very pleased with is our ability in the store to continue to attach and add additional items to the basket. So while we've seen a decline in the AUR on firearms, the AOV on the basket across the category has stayed relatively flat, if not up, as we continue to focus on the attach and the additional units that we're driving in those transactions.

And going back to the commentary on the call, you noted that there's a really high penetration among gun owners and the broader demand of the category within personal protection, I think you said something like 72%. Could you give us some perspective on where your mix within the category stands today and where you see that ahead as you kind of shift the mix to that customer?

Yes. I think primarily, Anna, we look at it today where it is all really focused on handguns and ammunition as we think about what our total subcat of personal protection is. And I think as we look at this going forward, we have a huge opportunity to be able to look at it both from a lethal and a nonlethal standpoint. But the relative mix is it's right at the 25% mark around personal protection, the way that we classify today. And like I said earlier, it's primarily handguns and the ammunition for the handguns, and that represents a disproportionate amount of our business, and we've really done nothing to be able to stand it up to isolate it within the site or to be able to communicate externally to the broader consumer base around personal protection. So we're very bullish knowing that this is a 12-month, 365-day year opportunity for us to be able, if we're not in a microseason growing fish and hunt, that we have an opportunity to be able to tell a story around personal protection.

And then just one more, if I could. I want to go back to Matt's kind of line of questioning around March. From other retailers, we've heard that tariff news and other headlines, if not directly impacting the categories, have broadly impacted the consumer. It seems that you're attributing kind of a slower environment to kind of calendar shifts rather than a consumer slowdown. So I guess just expanding on that, have you seen any change in consumer behavior around these headlines?

I don't think around the headline of tariffs, we've seen consumer behavior change. On the firearm side, we mentioned that we're seeing a reduction in the average unit of retail there, and we've been seeing that throughout 2024. So I don't think that's something new to us. In terms of tariffs, we made some proactive moves, and it's a very small portion of our business from a private brand perspective that has exposure to tariffs. And we pulled forward some receipts earlier in the year to offset that. But we haven't seen a reaction in consumer behavior. I would say more so what we have seen in March is just a timing perspective of some of the biggest ads. If we think about two of our largest ads that we ran last year, we ran them at the beginning of March and kind of mid-March. This year, we're running them mid-March, beginning of April. So there's a significant shift in some of our biggest ads, and we're attributing it to that because those ads now have kicked off, and we're confident in the trends that we're seeing.

Yes. We just use that around both FIG and our spring shooting event are two huge spring events and as Easter shifted this year and really the kickoff of spring and fishing, we shifted both of those events where they're more towards the back end of the queue where they would have been in the middle of the Q plus. So as we come into April, we're lining up with these two events in the month of April. We think we'll have some carryover into May due to some of the state's regulation and with firearms on what that looks like from a timing or a hold period. So the shift was strategic around basing everything on Easter.

Our next question comes from Mark Smith with Lake Street.

I will stay on the theme here of kind of consumer behavior. Just as you see customers maybe squeezing the check a little bit on firearms, are you seeing that in any other segments and businesses as well? And if so, do you feel like you either are or will be inventoried in the right way to kind of hit that trend?

Mark, thanks for the question. I would call out one thing that we've kind of adopted is there are certain types of ammunition going with range-type activity, the everyday shooting ammunition that we made some strategic price moves on earlier in the year to make sure that we kind of run at an everyday low price. I think you've got to meet the consumer with the value that they're expecting and you have to stay competitive in the areas that are driving traffic into the store. So obviously, that's part of our consumable business. We're going to continue to look at the consumables as it relates to other categories, whether it be fish, camp, hunt to ensure that we are competitively priced on items that we know drive traffic, and we have to meet the customers' value or they will go someplace else. So as we get them in the door, the offset to that, obviously, is, as I mentioned earlier, doing a really good job building the basket. We put a lot of work into the stores, making sure we have the right merchandise. So when we get them in the door, we see a good attach rate and we see good units per transaction with a high average order value in the transaction.

I would just add, Mark, I mean, the work we did on everyday low price on the ammo piece of to ensure that the nine or 10 ammo SKUs that drive a disproportionate amount of our overall ammo business is when we got to EDLP, we were able to see a significant uptick in what the performance looked like there. And as we think of fish. I think rod and reel combos have been on fire, and that's typically one of the things. I think when you see a little bit of pressure on the fish, you see the rod and reel uptick, and we've clearly seen that in a big way, and we're positioned well from an inventory standpoint.

And as we think about kind of add-ons in consumables, especially in that kind of back-of-the-house firearms, shooting Sports segment, any commentary around kind of what you've seen within ammunition? And it sounds like you're seeing good accessory sales, especially as kind of add-ons with the firearm purchase. But any additional insights into what you're seeing outside of guns kind of in the back of the store would be great.

Yes. As you think about what we're adding on, it's really focusing on right now, it's going to be heavily focused on personal protection. So you're selling a lot of handguns and you're going to be attaching whether it be safety equipment, holsters. A large item that we drive on our firearm sales is our firearm service plans. It's a highly accretive margin item that offers an immense amount of value to the customer, so they don't have to worry about dealing with a claim or a cleaning or a scope mounting on that item. So our outfitters have done a really good job driving that attachment in the stores to ensure that we're providing the customer with incremental value as we use those ancillary services.

And I think just -- I mean, looking at FSPs have been a significant uptick. And I think like Jeff said, the value of it is great. But also as we look at even the key gun parts and really being able to narrow our focus on rings and bases and some of the basics where I think we've been too wide, we didn't have the depth and the working capital put towards that it really is giving a greater experience and allowing us to attach where -- like I said, we've just been too wide and we stood for nothing versus being able to narrow into three key partners around the base and rings and allowing us and our outfitters to be able to go to work to attach and to be able to create a complete package.

And last one for me, and I apologize if I missed it in the commentary, but e-comm, did you guys quantify mix or kind of where growth within kind of e-comm channel in the quarter? And if not, anything you can give or any insights into kind of how that business is trending?

We didn't quantify specifically. It was an area that comped double-digit positive for the quarter. e-comm is trending greater than 17% of the overall business. In terms of categories that we're continuing to see growth, I would say, for the most part, it was across all categories, but heavily weighted in firearms as well. That is an area where you can offer an entire SKU catalog. And as we've really dialed in our in-stocks, making sure, again, that we're meeting the consumer with the right amount of quantity and that we can satiate demand and be able to fulfill what the customer wants, I would say that is where we're seeing the opportunity and continued success as we've moved into 2025.

Our next question is from Ryan Sigdahl with Craig-Hallum.

Specifically on tariffs, I guess, what are you including in your guidance?

So great question, Ryan. We've included some of the expected cost increase from what we do source from some of the countries that may be impacted from tariffs. I'll just make sure that we understand that's a very small part of the business. It's less than 2% of overall COGS. So there are some private brand stuff that we will land that we've included into our guidance in terms of what we expect from margin hit in that. The bigger unknown I would just highlight is it's hard to assess every single downstream impact from a tariff that flows through our vendors and ultimately, it's going to flow through to the end consumer. So that is a process where we actively are assessing that on a constant basis and working with our vendors to make sure we understand all impacts on their supply chain and how it can flow through ultimately to Sportsman's and then flow to the -- what that means for the end consumer.

I would just add, I think we did a good job of getting ahead of it, in particular, in camp and wanting to be ready as we got to April, and we pushed some stuff in December and January as we were monitoring inventory, knowing we could take more in, take it in early that camp as we -- and with the high private label penetration that we were able to get those, get the containers in before we were able to fill anything from the tariff, which I think got us ahead of the curve this year as we go into it.

Very good. One store opening this year. As you evaluate the portfolio, are there any stores that are not 4-wall positive contributors that could potentially make sense to optimize the store footprint the other way?

Yes, it's a great question. It's one that we've gotten on a frequent basis. I would say that, yes, we do have stores that on a 4-wall basis are not contributing positive EBITDA. But in totality, the stores that aren't contributing do not amount to a material amount of dollars. So as you look at your portfolio and you assess trying to exit those leases, there are costs to exit a lease that far out -- far exceed what your loss is on an annual basis. So Paul and I have gone through that process in 2024. We looked at the ability for us to do that. I would say for the time being, we're putting those stores on life support and you're making sure that you execute on your strategy and see if you can't bring them up from there. As we go through lease renewals in the future, we will look at the profitability of stores coming up for renewal and exit stores that may not be profitable or may not be in good locations. If the center has become dilapidated or flighted, some of those areas may call for us to exit that location and choose to relocate or not kind of absorb the demand into neighboring stores. So that's a process that's always ongoing.

Last one for me, just free cash flow positive. Is that assuming stable inventory? Or are you assuming some positive working capital within that statement?

We will feel comfortable with being able to generate positive free cash flow with stable year-over-year inventory. I will reiterate, though, there is opportunity still in inventory and the working capital that we have invested there.

And our last question will be from Justin Kleber from Baird.

Just a few follow-ups. First, on tariffs. Jeff, could you just frame what percentage of your overall cost of goods are imported, either by you, which we know is very low, or your vendors? And are you guys seeing any of your vendors that import already trying to push through any cost increases?

Yes. Justin, from a private brand perspective and from what we source and ship ourselves, it's less than 2% of COGS. So it's really a small amount. The thing about our industry on the vendor side, we have a lot of domestic manufactured products if you look at the highest penetration category of our industry. But again, what the assessment you have to do is where are they sourcing their goods from, where do raw materials come from, how do steel and aluminum tariffs start impacting ultimate supply chains. Those are the areas where you can get really detailed. We have not seen significant proactive price increases driven by the callout of tariffs to this point. That's not to say that we won't see that or it couldn't happen, but we have not seen a vendor come to us and make a pronounced statement that we're seeing a significant cost increase on the buying side because of tariffs to this point.

And then a follow-up on the e-com business. You mentioned, I think you said just over 17% penetration. How is the mix of that business fulfilled by the store today versus being shipped from the DC? And then just any color on how the profit model for the omni business has maybe evolved here over the past few years?

Yes. So, in terms of what's fulfilled from the store, over 75% of our e-com demand business is fulfilled at a location, meaning it's a buy online, pickup in-store item. So that is something that's truly unique about our business is the e-com and store footprint truly work as an omnichannel platform. As we look at the data, we won't say it publicly, but I can tell you that the amount of profitability driven from the e-commerce channel that impacts the store, so the amount of profitability that's driven into the store because of those buy online, pick up in-store items is significant. So it is a very unique business model where we truly do have an omnichannel platform where the e-com channel supports the stores and the stores support the e-com channel, and they work cohesively together to drive profitability. So really happy with the progress that's made there and how just integral it's become into the business.

Yes. A large percentage of all of our firearm sales start online. And then I think, as Jeff said, this is a true omnichannel experience. I think the moat that we have is ability to have that high of a percentage to be able to come into the store and us to be in a position with our outfitters to create a true experience and not be transactional as we go through it, but to really be able to surprise to light and to be able to help upsell the needs that they're looking for to go with the merchandise they're coming to the store for. So I think we'll continue to lean on it. It's a traffic driver for our store, and it gives us the ability to be able to increase AOV and UPT.

And last question, just on the gross margin outlook. Jeff, I don't know if you could put a finer point on what modest means. It seems like, to me, the midpoint of guidance would imply something closer to 100 basis points of expansion. But to me, that's more than modest. So just hoping you can maybe fact-check my math on that and give us maybe a more detail on how much gross margin expansion you're expecting in '25.

Yes, Justin, while I haven't provided gross margin guidance, I will tell you that as we lean into our pillars and to what Paul talked about, making sure that we're in stock on our core goods in fish and hunt is overall accretive to gross margin. So our focus this year on just ensuring that we're in stock in our core goods, and it's really a small percentage of SKUs that drive a large percentage of revenue, ensuring that we have those and we have the productivity driven by those, there is upside potential in just selling those goods because of one, you don't have to mark it down as frequent because it's a core good. There's less seasonality to it. Two, you're selling it all year round. There are items that you're never out. You always have them in stock. So there's really low seasonality. You have less markdowns on the back end. And then, in the items where we are seasonal, we have created a much cleaner in-and-out cycle to where we know that we're in seasons and out of seasons quickly, and we don't have to bear the burden of carrying those goods and taking significant markdowns. So, I frame that all up while I'm not giving guidance. There's a lot of opportunity just in going back to the basics of Sportsman's Warehouse and ensuring these in-stocks that provides the upside potential you're talking about.

I think the improved productivity, if we think about that and the focus on the core, but is significant for us. And then the other component is that we're just going to be methodical about being able to get into the season, take the marks when we need to take the marks and be out of that merchandise. And historically, we've held on to it. And just I think cramped it would be an understatement, our working capital to be able to put into the goods that really matter to the customer. So as important as we're measuring in-stock percentages daily on our core goods is to be able to get into a season where we at as we start the season, where we at to be able to measure what sell-through looks like, be able to hit our strike price and to be able to get out and clean those goods versus carrying it. So, it's equal the focus on the core to improve returns overall for the organization and then us looking at getting in the season and truly getting out of the season versus getting in late and carrying it all year. It's a pretty simple math.

And with that, we conclude our Q&A session, and I will turn it back to Paul for final remarks.

Thank you for joining the call today, and thank you to all our passionate outfitters around the country for their commitment to Sportsman's Warehouse. Together, we look forward to providing our customers with a great year and great service. Thank you.