Greetings, and welcome to Sportsman's Warehouse Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to your host, Rachel Schacter of ICR. Please go ahead.

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.sportsmanswarehouse.com[ph]. 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'll begin by reviewing the highlights of our third 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 very pleased with our third quarter results, which were at the high-end of our guidance on the top and bottom line, excluding the eight recently acquired stores that were not included in our original outlook. For the quarter, net sales increased 8.7% to $242.5 million driven by a 4.8% comp increase and 11 new stores, including eight new stores acquired at the end of Q3. These eight new stores were rebranded and grand opened as Sportsman's Warehouse locations in the last two weeks of Q3. The eight stores saw a nice grand opening sales lift, which also contributed to our non-comp sales growth for the quarter. Comparable sales increased 4.8% which came in ahead of our expectations partially due to an 80 basis point lift from generator sales in California, driven by devastating wildfires and related power outages. Our thoughts are with everyone impacted and we are grateful to the many first responders and our store associates who helped with the recovery efforts. Continued strong performance across our mature stores and e-commerce platform, were also notable comp drivers in the quarter. Gross margins were approximately flat with prior year period, including a modest benefit from sell-through of lower cost inventory included as part of the acquisition of the eight stores. Operating expenses were impacted by 130 basis points of deleverage, largely attributed to pre-opening and…

Thank you, Jon. I'll begin my remarks with a review of our third quarter results and then discuss our outlook for Q4 and full year 2019. Most of the financial figures discussed on today's call are reported on a U.S. GAAP basis. In the instances where we report non-GAAP financial measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures in our earnings press release, which we issued earlier today. Also please note, that both our reported and projected results include the impact of eight new stores that were open for business for the final two weeks of Q3 2019. Third quarter 2019 net sales were $242.5 million compared to $223.1 million in the third quarter of fiscal year 2018, an increase of $19.4 million or 8.7%. Same-store sales increased 4.8% which was above the high-end of our previously guided range of 1.5% to 4.5% growth. We saw same-store sales growth in every one of our product categories in Q3 2019. The fishing department had the highest growth rate at 9.0% led by rods and reels, terminal tackle and lures. The clothing category grew 8.3% compared to prior year, led by men's hunting apparel, men's fishing apparel, and men's sportswear. The camping department also showed strong growth at 6.8% led by generator sales, which was significantly impacted by the California fires and associated power outages. Firearms and ammunition sales grew 4.9% in the quarter versus prior year. We ended the quarter with 103 stores operating in 27 States. Total square footage growth was 13.6% compared to the third quarter of fiscal year 2018. Q3 2019 gross profit was $84.2 million, compared to $77.6 million in the third quarter of fiscal year 2018, an increase of $6.6 million or 8.5%. Gross margin was relatively flat at 34.7% versus 34.8%…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.

Hi. Good afternoon, everyone. Congrats on the nice results. I guess, it seem like you gave us some quantification for the impact of the Field and Stream acquisition in Q3 which was about – I’m taking it that $1.9 million of expenses. But I'm looking more towards Q4, where you're calling for a little bit of comp in sales pressure, but that's a pretty healthy EPS. It looks like there is a pretty solid inflection in margin performance. So could you help us understand the impact of the Field and Stream stores on the model in Q4, if there is a big swing factor with a better gross margins or better sales?

Hey Peter, it's Jon. Good to talk to you. There is two things influencing the margin outlook in Q4. One is the inventory purchased with the eight acquired stores, we were able to purchase that at a discount to normal rates. The other thing that is critical to understand as we entered into Q4 holiday season of this year, we were better prepared than we've ever been on our marketing and our promotional cadence. And we've stayed true to that and kept our margins very solid. Some of that came from first cost of goods and rebate negotiation, some have stayed with just a really clear marketing strategy, and we expect to stay with that marketing strategy and stay rigorous on our margins and our profit to the remainder of the quarter. So those two things combined are driving the optimism in our margin outlook for Q4.

Very helpful. And I guess on the – as a follow-up on that Field and Stream discounted inventory, will you largely be sold through a majority of that by the end of Q4 or should we expect some carryover into 2020 as well?

Peter, the carryover into 2020 – fiscal 2020 will be minimal.

Yes, okay. And then pivoting to different topic on the competitive landscape. So Walmart has had a pretty high profile announcement about the emphasizing the ammo category. Are you seeing some discounting of ammunition in the channel? And maybe furthermore, I know you have stores that are right next to Walmart, are you seeing any sales benefits at this point from perhaps a market share gains?

Yes. So Peter, good question. As you know there is three major retailers that are assessing or have clearly communicated their desire to limit hunting and shooting sports. As you mentioned, Walmart is exiting categories around handgun ammunition and MSR, AR platform ammunition. We saw in mid-November the pricing start to get more aggressive from those stores. We are now seeing a situation where it appears that they are dwindling through that inventory at a price point that's very, very promotional. And our understanding is that the new receipts into Walmart have stopped. So over the next few weeks, we expect to see that ammunition be sold through. That's creating some, I'll call it, near-term pressure on ammunition pricing in that commodity class, which we are not chasing. We are staying with our everyday low pricing in our traditional promotional cadence. The exciting thing for us as we look forward to 2020, every one of our stores has at least one Walmart within 20 miles. The average distance is eight miles and in some cases probably about a dozen of them, we actually share a parking lot more than a couple of hundred yards. So while near-term, it is creating some pressure on the sales for that category, long-term as they exit those categories, which we expect are somewhere between $250 million and $300 million nationwide. There's a nice market opportunity for us to go after. We've – as you can imagine – we've known for some time what's happening on that, on their side of the business through their press releases and our work with vendors. And we have already started to reforecast our inventory purchases to ensure that we maintain our in-stock position and our margin position in 2020.

Okay. That's very helpful and interesting. Maybe one last question for me. Jon, you had mentioned that the credit card launched, I think it was in October. The benefits that are presented on the website look quite attractive from a points perspective and interest rate financing. So curious on what the initial reaction is, maybe it's a little early, but is the card starting to resonate with consumers at this point?

Yes. I can give you some color for – at this point, we're not prepared to give any data points. But what I can tell you, Peter, is the combination of the Visa card and the in-store credit created an acceptance rate for our consumers that we've never seen before with our prior partner is on the credit card, so for – or in-store. So you know Alliance Data as the Visa card, the consumer is unable to qualify for the Visa card, we have an in-store Sportsman's Warehouse credit option through that's backed by Alliance Data. And what I can tell you is the response rate on the consumers and the acceptance rate is significantly better that we've experienced with our prior card that we had in the past and really right on track with our expectations as presented through Alliance Data. So we'll talk a little bit more about that. At the end of – at the next earnings call, I believe we launched that card right around the first week of October. So we only have a few weeks in, we're really pleased with the progress.

Okay. Sounds good. Thank you and good luck.

Thanks Peter.

[Operator Instructions] Your next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

Hey guys. Sorry, thanks for taking the question here. I apologize if I missed this, I jumped on a little late. But do you have – can you give us a sense for what your Field and Stream revenue impact is in the fourth quarter plan? And then as we think about 4Q EBIT margins, it seems like implied up maybe 75 basis points or so year-over-year. How is the gross margin look within that? And then just are you able to use out kind of what the contribution is from Field and Stream?

So Peter, this is Robert. A couple of comments. In Q3, we have this part of our filings. We have disclosed that the Field and Stream stores contributed about $3.8 million of revenue in Q3. So we beat Q3 revenue by about $7.5 million versus the midpoint of our guidance. Let's say half of it was the Field and Stream stores. Half of it was exceeding same-store sales growth at certainly higher than midpoint and even a higher than the top end of our range. We are not disclosing how much the Field and Stream stores are projected to impact Q4. We do not want to get into habit of reporting specifically the growth of any new store opening, the same way that we haven't provided specific sales numbers for Lansing or Fort Wayne and so on, although, there are probably some math that you can do to triangulate. We did effectively reduced our same store sales growth outlook for Q4 in more or less. We're sort of projecting the baseline business to be flat to our outlook, the last time we gave guidance. So you could probably triangulate something in there, the overall increase is probably due to some new stores, but we haven't provided more guidance than that specifically. As it relates to gross margin, it is true the discount in inventory that we received in this transaction has given a lift to margin in Q3 over that two week time period, it had about a 10 basis point impact. I would say the projected impact in Q4 is roughly 80 basis points or so. And so if you look at our gross margins, that is the lift that you would see in Q4 relative to that discount in inventory, which we expect to be, sold out – primarily sold out by the end of the quarter and as Jon said, probably will not impact our view of Q1 margins. I hope [ph] that answer your questions.

Yes. No, that's great. That was excellent. I guess just maybe – I mean that was doing a great job there, kind of framing, kind of the Walmart bang on it. Can you – is there similar color I can just at least [indiscernible] kind of the other players who were stepping back, maybe the timing and the cadence of maybe the when those headwinds might fall-off?

Peter, you cut out a little bit, but I think your question was the other retailers that are deemphasizing when that will happen. Is that accurate? Was that your question?

Yeah, just any color around what they're doing. And then when you see those processes being behind us.

I can tell you looking at the promotional activity that's happening by the two other retailers that we're referencing, there is a significant effort to reduce inventory, which I can only assume as part of a change in strategy in those categories. We do know that one of those two retailers has announced that they will close about between 20 and up to 35 of their stores because it does not fit their strategic assortment goal. We know that there's other folks that are deemphasizing and we are seeing that in their promotional materials and their marketing. We expect or we assume that a lot of that will flow through during Q4 they're taking advantage of the sales cycle and the traffic to move through this excess inventory. So that's part of our reflection of Q4 guidance, is what we're seeing a real time from those retailers and we expect them to be more normalized going into Q1 of 2020.

Okay. Thank you for that Jon. And I guess my last question would just be around the recent background checks, there is [indiscernible] quality of those, but more recently we saw some, I think any of the one from last month were down a bit, sort of your latest view maybe on the trend within background checks in the industry overall from that standpoint?

Yes. Peter, I think again, sorry for the phone connection, I'm not sure if that's you or me, but I think your question is around the kind of cadence of mix checks. I believe November adjusted mix was up 2.1%. I can tell you that if you look state-by-state, there were some significant changes this year state-by-state, specifically in the state of Washington. There was a legislation passed at the beginning of November, 2018 that was then enacted in mid-2019. If you look at the adjusted mix data, the state of Washington on adjusted mix in November was down 43% in firearm units background checks. So we're seeing pretty significant volatility in November depending on which state you look at. We've seen some other states that are up in the double-digit range. Our business continued to be solid. We were pleased with our same store unit expansion in Q3 and I can tell you we're very pleased with performance we saw over the key shopping holiday that we just went through.

Okay, great. Thanks. I apologize for the connection struck.

No, bother. Good talking to you Peter.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.

I want to thank everyone for their time today. A special thanks to all of our hardworking team members, who contributed to our successful third quarter and are working diligently to serve our customers during this holiday season. Thank you again for your time.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.