Sportsman's Warehouse: Missing the Firearms Boom

Sportsman’s
                                      Warehouse: Missing
                                      the Firearms Boom
 Sportsman’s Warehouse
NASDAQ: SPWH
 August 26, 2017

                                    Forward View is reiterating our Hold rating on Sportsman’s
Nathan Yates, M.S.F.
                                    Warehouse, but we’re cutting our price target by $2 to $4.
 Director of Research
 nathan@forwardviewconsulting.com   One-Year Stock Price Chart

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                     Earnings Summary
• Sportsman’s
  Warehouse beat
  the 2Q EPS
  consensus and
  our estimate by
  $0.02.

• The company’s
  revenue
  essentially met
  our estimate
  and the
  consensus.

• FY17 guidance
  was tightened,
  but the high-end
  was also
  trimmed.

• We remain
  concerned
  about the
  company’s
  long-term
  growth now that
  firearms           The Forward View
  demand is                  Forward View is reiterating our Hold rating on Sportsman’s Warehouse,
  rational.          but we’re cutting our price target by $2 to $4. In reality, our model forecasts a
                     valuation somewhere between $4 and $5. We don’t issue price targets down to the
• PT: $4             penny, though. The stock could be a buy under $4 and a potential short over $5.
                     Most importantly, we don’t see a profitable trade at the current price. About 30%
                     of the company’s revenue is protected from e-commerce competitors due to
                     online sales restrictions, but the other 70% of sales are threatened by Amazon
                     (NASDAQ: AMZN) and other digital retailers. In 2Q, Sportsman’s Warehouse’s
                     e-commerce revenue rose 6.9%... to $2M. That’s a small component of total sales.

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Chart 1: Sportsman’s Warehouse SSS

        As the chart above illustrates, Sportsman’s Warehouse is seeing the same retail weakness that we find
across the sector. 8 of the 9-point decline in SSS can be attributed to the firearms and shooting categories, but
we can still say that the company’s other merchandise categories aren’t growing broadly. Camping and fishing
gear comps were down y/y in 2Q. We are concerned that Sportsman’s Warehouse primarily views the firm’s
website as a way to direct shoppers to stores instead of as a unique selling channel. We hear mixed messages
from Sportsman’s Warehouse regarding the importance of e-commerce. Forward View remains unimpressed by
the company’s digital marketing and website design. The mobile layout of the Sportsman’s Warehouse website
is simply disappointing and outdated. (Take a look for yourself.)

         We would be remiss if we didn’t note that Sportsman’s Warehouse ended 2Q with $1.8M in cash on-
hand and almost $133M in long-term debt. The company’s credit line actually increased by $15M during 2Q,
and the balance sheet is clearly risky. With quarterly interest expenses averaging around $3.5M, Sportsman’s
Warehouse doesn’t have much cushion to absorb business disruption or unexpected costs. This balance sheet is
a particularly significant concern due to the rapid pace of change occurring across the retail sector. Forward
View can’t justify allocating capital to a volatile industry without selecting an inherently stable business as your
investment vehicle. Graham and Dodd made this point back in the 1940 edition of Security Analysis, and we are
compelled to agree with the first luminaries of investment research. Sportsman’s Warehouse has a limited
margin of safety, and lest we forget, the company has been in bankruptcy less than 10 years ago. (A liquidity
crisis sank Sportsman’s Warehouse in 2009.) Balance sheet analysis is unfortunately becoming passé as
investors focus on earnings and future growth instead of stability and cash. The lack of general interest in the
balance sheet is exactly why we’re explaining our concerns.
        In summary, Sportsman’s Warehouse’s stock is priced at an appealing level with a PE ratio under 8 and
a PS ratio under 0.25. We’re simply concerned about the company’s balance sheet and e-commerce threats.
Retail is changing, so we’re inclined to be conservative with our recommendations.

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Earnings Estimates

Valuation

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Quantitative Forecast

Model Updates

•   3Q: Revenue growth rate cut by 240 bps, gross margin increased by 30 bps, SG&A leverage reduced by
    20 bps, tax rate increased by 60 bps, diluted EPS trimmed by $0.01
•   4Q: Revenue growth rate increased by 200 bps, gross margin reduced by 30 bps, SG&A leverage trimmed
    by 40 bps, diluted EPS trimmed by $0.02
•   FY17: Diluted EPS trimmed by $0.01, revenue estimate cut by $3.1M
•   FY18: Diluted EPS estimate trimmed by $0.08, revenue estimate cut by $25.2M

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                     Disclaimers & Disclosures
Analyst Certification: I, Nathan Yates, certify that the views expressed in this publication accurately reflect my personal views about
the subject companies and their securities. I also certify that I have not, am not, and will not be compensated directly or indirectly in
exchange for expressing any specific recommendation in this report.

             Recommendation                                                Expected Return
             Buy                       Shares are expected to deliver alpha
             Hold                      Shares are expected to match the market's risk-adjusted return
             Sell                      Shares are expected to underperform the market

Required Disclosures: I, Nathan Yates, may own long or short positions in securities mentioned in Forward View Consulting
research, however I will not invest in securities listed in the Forward View Formal Coverage document. I will not trade in any
securities that have been mentioned in Forward View Consulting research within the three days following publication of said research.
I confirm there is no known affiliate ownership in, or employment by, companies formally covered by Forward View Consulting. I
also confirm that I have, and will seek, no insider knowledge of companies formally covered by Forward View Consulting.

Important Disclosures: Forward View Consulting employs various equity valuation methodologies to develop investment ratings,
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