Greetings. Welcome to the Sportsman's Warehouse Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.I will now turn the conference over to Rachel Schacter of ICR. Thank you. You may begin..

Thank you. With me on the call is Jon Barker, Chief Executive Officer; and Robert Julian, Chief Financial Officer.Before we get started, I would like to remind you of the Company's Safe Harbor language.

The statements we make today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements regarding our expectations about our future results of operations, demand for our products and growth of our industry.

Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, including those described under the caption, Risk Factors, in the Company's 10-K for the year ended February 2, 2019, 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 investors.sportsmans.com.Now I'd like to turn the call over to Jon Barker, Chief Executive Officer of Sportsman's Warehouse..

Thank you, Rachel. Good afternoon, everyone and thank you for joining us today. I will begin by reviewing the highlights of our second quarter performance, and then discuss our strategic initiatives that are driving market share gains as well as thoughts on the remainder of the fiscal year.

Robert will then go over our financial results in more detail and review our outlook, after which we will open up the call to your questions.We are pleased with our second quarter results, which were above our expectations on the top line and towards the high-end of our outlook on the bottom line.

For the quarter, net sales increased 4.2% to $211.8 million.

Comparable sales increased 1.7%, which was better than expected due to continued strong performance across our mature stores and e-commerce platform.Gross margins declined 100 basis points for the quarter largely due to product shift -- mix shift and we had 90 basis points of operating expense deleveraged.

We reported adjusted diluted earnings per share of $0.13 for the quarter. Robert will provide additional details in his section.Before reviewing our Q2 comp results in more detail, I want to take a moment to discuss the industry backdrop. The competitive environment and our key growth strategies that are driving our market share gains.

The outdoor sporting goods category remains highly fragmented with over two thirds of all firearm units sold by independent dealers.Given recent industry rationalization and changing competitive dynamics, including the category exit decisions of some competitors, we remain one of a few national retailers dedicated to outdoor sports, including hunting and shooting.

We offer an expansive breadth of assortment at everyday low pricing with a high level of customer service.

This offering combined with ongoing success of our merchandising initiatives, customer acquisition and engagement focus and omni-channel strategy is driving our outperformance relative to the industry, which was evidenced in our second quarter results.Importantly at the front of our initiatives was a focus on innovation, which further differentiates us in the marketplace.

The pace of innovation at Sportsman's Warehouse and the pipeline of innovation we see going forward, reinforces our confidence in our ability to build on these market share gains.I will now highlight a few of these initiatives and the progress we're making against them. Beginning with merchandising.

During the second quarter, we continue to expand our exclusive product offering within our Killik, Marquee outerwear brand, including a new camo pattern for the fall.

While we only recently launched this four weeks ago, we're already encouraged by the strong customer reception to the quality of the product and the value proposition of this private-label brand.As we said before, we will continue to increase our exclusive product penetration in other categories as we move throughout the year, including optics, backpacks and several unique firearms offerings.Turning to our strategies around customer acquisition and engagement.

We are particularly encouraged by the early performance of our previously announced partnerships with select licensed firearm dealers across the country.

This allows customers that don't have a Sportsman's Warehouse nearby to shop and buy the largest assortment of firearms of any national retailer through sportsmans.com and then pick up the firearm at one of our partner locations.As of the end of the second quarter, we expanded our network of third-party FFL partnerships to a total of 130 partners and 16 additional states outside our regions.

Through a combination of our retail footprint and the FFL partnership program, we now serve 41 states and covers 67% of U.S population within a 45 mile radius.While still early, the trends of both volume and average unit retail price of these firearms is very encouraging and another proof point that Sportsman's Warehouse as a unique assortment that is not available at any other retailer.

Over the coming months, we plan to continue on expanding these relationships with license firearms dealers with a goal of offering our assortment to a majority of U.S population within a short drive.As we scale this program into further our new customer acquisition efforts, we began testing marketing outside of our existing store regions to drive awareness of this program.

We will continue to test these marketing strategies as the year progresses.Our newly launched used firearms program where we buy except trade-ins and sell used firearms is now live in five stores and online. While still early, we’ve seen over 70% of used guns, gun transactions turned into a trade up.

Based on these initial results, we believe the service has the potential to drive increased customer engagement and strengthen customer loyalty, ultimately improving customer lifetime value.

Given the margin profile of a used gun sale, these transaction have been accretive to the mix.Our loyalty program remains a key component of our customer acquisition and engagement strategy, and we experienced continued growth in Q2. We now have over 2 million members driving 48.3% of our revenue.

As an extension of our loyalty program, we're on track to launch in October our new Sportsman's Warehouse credit card program through a partnership with Alliance Data. This will provide greater access to credit for our customers through both a cobranded Visa and Alliance backed credit programs.

These programs will provide best-in-class benefits such as industry leading points accumulations and a variety of financing offers we believe our customers will find valuable.Another new service we're providing as part of our focus on customer acquisition and engagement is the introduction of free ladies only concealed carry training classes.

While we've always had training classes available for all customers, we thought it was important to create an informative inviting environment for female customers who want to learn to use a firearm with proper instruction in a safe environment.Moving on to our omni-channel strategy.

We now have completed all three of our plan store opening for this year. These standard format stores result in a 2.4% square footage increase in our Lansing Michigan, Murfreesboro, Tennessee and Fort Wayne, Indiana.

We are excited to announce that we are on schedule to open our first small format test concept shop in the fourth quarter as we focus on innovation and leveraging our expertise in outdoor sporting focus.This small format concept shop will include a family-oriented indoor range and will be branded legacy shooting center.

The center will be physically located in the same building as our new corporate office and will consist of an indoor firearms and archery range utilizing the highest level of technology and safety tailored for all firearms and archery enthusiasts.In addition, this facility will offer educational services, repair services in an extensive assortment of product related to these categories.

Our goal is to provide a safe, fun and family-oriented experience to our customers.Turning on to e-commerce. We continue to be very pleased with the strong results from our new website sportsmans.com and the success we’ve seen from buy online, pickup in store feature.

Our customers enjoy both, given the convenience it provides and we view this as an opportunity to further engage our customers when they visit our stores to pick up their purchases.For the second quarter, buy online, pickup in store orders increased over 80% versus the prior year.

In the second quarter, we also launched ship from store, utilizing our omni-channel capabilities to ship product directly from a store to a customer's home.

This new feature improves customer service, reduces transit times by shipping from an in-region store and leverages our in-store inventory.Shifting gears to our Q2 comp performance and the composition of our second quarter comparable sales results.

Firearm units across the company again performed better than the adjusted mix data nationwide and within our states.

This performance reflects our dominant positioning within the firearms industry, leveraging our extensive offering with value-added services that are driving customer acquisition and engagement.For the second quarter, firearm units increased 3.3% driven by growth across a broad spectrum of firearm products.

Firearms and ammunition sales increased 5.3% in Q2 2019.

Weather challenges in early Q2 impacted camping and footwear categories, which decreased 3.2% and 1.8% respectively, which was offset by fishing and clothing increases of 4.3% and 3.3%, respectively.In terms of our view of the industry backdrop as we enter hunting season and look to the rest of the year, our confidence continues to grow in the market opportunities as some retailers lessen their focus on hunting and shooting sports, and as the mix data becomes more stable.In summary, we are pleased with our second quarter results on the -- both the top and bottom line.

Our omni-channel investments combined with the progress we’re making on our innovative strategic priorities, differentiates us in a consolidated, but still fragmented industry, and strengthens our competitive position as we focus on driving continued share gains.

As you saw in our press release, we are narrowing our full-year sales guidance and reiterating our EPS guidance.

At this point, I will turn it -- which -- I’m sorry, which Robert will discuss in more detail.Finally as it relates to tariffs, we continue to work with our vendor base to understand the impact and identify the most effective way to offset the tariffs were possible.

These actions may include vendor negotiations, sourcing actions and where necessary and appropriate pricing action.With that, I'll turn the call over to Robert to discuss our financials..

net sales in the range of $231 million to $239 million. Same-store sales growth of 1.5% to 4.5% compared to the third quarter of fiscal year 2018. Net income in the range of $9.0 million to $11.7 million.

Projected diluted earnings per share of $0.21 to $0.27 and approximately 43.2 million weighted average common shares outstanding.We continue to expect net capital expenditures of approximately $16 million to $20 million in fiscal year 2019 with approximately $28 million to $30 million in gross capital expenditures offset by $12 million to $13 million in landlord incentives and sale leaseback transactions.With that, I will now turn the call back over to the operator for questions..

Thank you. [Operator Instructions] Our first question is from Peter Keith with Piper Jaffray. Please proceed..

Hey, good afternoon. It's actually Bobby on for Peter. Nice results. Just wanted to ask about the camping and fishing category, for the last two years there has been some noise there with the headwinds. It sounds like Q2 was off to a challenging start, but then improved as the quarter went on.

So maybe discuss how you’re thinking about the setup for Q3 this year? Thanks..

Bobby, this is Jon.

Just want to confirm your question, the setup for Q3 in camping and fishing is -- was that the question?.

Yes, that’s right..

Okay. So first of all, fishing in Q2 performed very well towards the end of the quarter. We had great fishing runs in the State of Alaska this year versus -- which was slightly out of cycle and the Northwest performed very, very well. The weather improvement at the end of the second quarter this year versus last year was also helped us.

As we look into Q3 we're not seeing anything in the lower 48 states to make us believe we will have a challenged fishing. We do have a series of fires in Alaska that we're watching right now because it is impacting the ability to travel. So all in all, we're fairly comfortable with fishing in Q3. Camping again nothing material to communicate on that.

We are expecting that to probably be in the flat to slightly down in Q3, which is the trend in camping..

All right. Thanks, Jon. And just one follow-up on tariff.

So can you just breakout, how you’re thinking about potential for List 4 tariff impact versus how it's been impacted through List 3, and is that all baked into earnings guidance at the moment?.

So, Bobby, this is Robert. We’ve actually seen fairly nominal minimal impact of tariffs so far this year. We had been working with our vendors in some cases some of that product was already on the water being delivered. We feel like the exposure in this year is relative -- relatively nominal.

It's hard to predict what’s going to happen with the tariffs going forward and we're not trying to project the impact into 2020, we are not providing any guidance in that regard right now. But in the short-term, the impact we found has been fairly nominal..

I think our -- if I may, Bobby, to add to that. I think our vendors are still little uncertain of what’s happening. Certainly we are all watching the same new cycle to gather, to try and understand how each parties going to react. Some of our categories are influenced greater than others and we are going to continue to stay very close to it.

We are talking to our vendors on a daily basis. And given our scale, we have the ability to work through this better than most in our industry. So we will keep watching it. We haven't built anything in for it, but now point and we will react if we can -- as we can.

I think like all of them, all retailers, we will have to ultimately pass some of the price increases on, if they flow through to the consumer and that’s -- that will be the piece that we all have to monitor the most..

And relative to your question about -- to your question about guidance, if there's any risk relative to the tariffs, it's captured within the ranges that we’ve provided on the top end and the bottom end.

There is nothing specific that’s been built-in for tariffs, but we feel like it's covered within the ranges that we're getting from the low end to the high-end..

Okay, got it. Thanks a lot for the detail..

[Operator Instructions] Our next question is from Ronald Bookbinder with Bookbinder & Associates. Please proceed with your question..

Good afternoon and congratulations on a nice quarter..

Thank you, Ron..

Thanks, Ronald..

On the inventory, the inventory is down a lot. It's even down sequentially from Q1 and we're headed into that, the largest -- larger season, and you’ve the expectation of positive comps.

So do you have enough inventory? Are you chasing any inventory? Are there any other stocks that are costing revenue? How should we look at that?.

Hi, Ron. As I’ve communicated along this path of getting the process, the rigor in place, we’ve to balance both our in-stocks and inventory turns together and we’ve been doing that nicely. Very pleased with our in-stock position today as compared to prior quarters. Not to say we aren't all -- we are pleased, but we’re never satisfied, Ron.

There is always a component here or there will do better on, but we're actually in a very good spot as we go into Q3 for the upcoming season..

Okay.

And on the training classes and the expansion into women-only training classes, do you use sponsors for those trading -- training classes, like Smith & Wesson with the lady Smith & Wesson line? Is there any, sort of co-advertising or something like that, that you use?.

Ron, we are. We are partnering with several of our vendors on these classes to make sure that not only do we have the very best training that can happen in the industry, but we are also providing those consumers with retail information to help them select the products that are right for them.

Not just in the concealed carry firearm, the ammunition, the security afford at their home, the carrying purse or holster and the cleaning supply. So it's all working together with our key vendors..

And that must be benefiting the gross margin, do they give you any revenue towards that or …?.

Well, Ron, I can't really speak to the exact details of each of the relationships. But we have very good partners as you can imagine and they’re helping with these classes. We look forward to growing this to all of our stores over the coming months..

Okay.

And gross margin, how did transportation and the tight inventory impact the gross margin? And when should we anniversary the higher transportation cost or is it still increasing?.

So we didn't see much of a variance, Ronald in the freight and so on in gross margin. We did have a decline in gross margin, but as I mentioned in the -- my comments, it was mostly due to product margin and mix. We had seen some pressure in Q1 on freight and so on, but in Q2 that really wasn't much of a factor in our gross margin variance..

Okay. And lastly private-label kayaks, it look like a great product.

How did it do to compare to branded? How did it do to compared to your expectations? How was it?.

Hey, Ron, it's Jon. I said this, I think last year on the cooler as well, probably under forecasted those kayaks we sold through them very, very quickly and bought several more containers to replace what was sold.

So we're very pleased with the initial season on it and we will continue to build in the kayak business based on what we learned -- and what we learned..

Okay, great. Congratulations once again and good luck in the back half of the year..

Thanks, Ron..

Our next question is from Peter Benedict with Robert W. Baird & Company. Please proceed..

Hi, guys. Just a quick on here. So I think as we look to the third quarter and in the guidance midpoint around 3% comp, I think the earnings suggest that you still got the EBIT margins down a good bit, not as much as they’ve been.

But I’m just curious kind of the complexion gross margin versus SG&A, is the pace of SG&A growth just going to continue as we've seen it and or is there a change there? And then on the gross side, is it really just -- is it just a mix, I mean, the strength in the firearms obviously is going to weigh on that.

But just curious what the complexion of operating margins in 3Q?.

Yes. So on operating margins, let's start with gross margin. We did see some pressure on gross margin in Q2 and Q2 came in about 80 basis points below the midpoint of our guidance. That was primarily due to challenges in product margin.

The SG&A is actually been positive not in terms of absolute spend versus expectation, but we are able to hold our SG&A expenses flat on a pretty decent beat on revenue and so we saw some leverage there.

As we projected Q3 and the rest of the year for gross margin, we do see a slight decline in absolute margin from Q2 to Q3, but that is typical seasonality in terms of the holidays and so on. Maybe less so than the drop that we saw in the first half of the year.

On the SG&A side, we actually talked about previously that there was a bit of a step function increase in SG&A going from Q1 to Q2 and that, that would flatten out.

And that is what we are projecting in the second half of the year, SG&A being relatively flat in absolute dollars, but declining as a percentage of revenue as the two largest revenue quarters for us are in the second half of the year. And so the guidance reflects that, a little bit of pressure on gross margin.

On a full-year, year-over-year basis, I think we're down about 30 basis points in gross margin. And then we see that, we’ve that kind of step function increase in costs related to minimum wage increases and investing in people and so on.

And I think on a full-year basis, we are -- I think we’re also about 30 basis points higher as a percent of revenue on SG&A. But the SG&A absolute spend should flatten out in the second half of the year versus Q2..

All right. That’s all -- well it makes sense. And then just lastly and I apologize if you already mentioned this. Just on the inventory over the balance of the year, I mean where do we see inventory at the end of the year. And obviously, great performance here in the second quarter.

How we’re thinking about that at the end of the year?.

So our goal is to be at about two turns by the end of the year and we're on pace for that. We continue to see some improvements.

There is of course the change in inventory based on the seasonality as we build inventory, but we think on a year-over-year basis, we are going to see improvement both in turns and hopefully in our in-stock performance, and we're able to actually do both at the same time..

Okay. Terrific. Thanks. Good luck, guys..

Thank you..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Okay. First of all, I would like to thank everybody for their time today in the call and the follow-up questions. A special thanks to all of our team members, over 5,000 associates that everyday do a great job day in and day out.

Their hard work is driving our results and we look forward to building on this performance as we move into the second half of the year. With that, I will close the call. Thank you..

Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful evening..