Greetings. Welcome to the Sportsman’s Warehouse First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Riley Timmer, Vice President of Investor Relations. You may begin.

Thank you, operator. With me on the call today is Jon Barker, Chief Executive Officer and Jeff White, Chief Financial Officer of Sportsman’s Warehouse. I will now remind everyone 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 include statements regarding our expectations about 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 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 financial 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 with the SEC today, which is also available on the Investor Relations section of our website at sportsmans.com. I would also like to note that today’s materials include an earnings conference call PowerPoint presentation, which is available at sportsmans.com in the Investor Relations section of the website. You can utilize this deck as a reference with today’s prepared remarks. I will now turn the call over to Jon Barker, our CEO.

Thank you, Riley. Good afternoon to everyone on the call and thank you for taking the time to join us today. In my remarks today, I will provide an update on our first quarter performance, comment on the current trends we are seeing with our consumers and review a few key elements of the growth strategy for our omnichannel business model. Following my comments, Jeff will provide additional details on our first quarter as well as discuss our outlook for the second quarter of 2022. Finally, we will open the call up for questions. First, regarding our Q1 business performance. We are pleased with our first quarter 2022 results and finished the quarter at the high-end of our sales guidance, while significantly exceeding the top end of our earnings per share guidance. I believe that these successes illustrate the fundamental strength of the business, underscored by the strategic initiatives and omnichannel capabilities we have implemented over the last couple of years. As many of you know, the first quarter comparison versus the prior year is difficult given the large inflow of government funded stimulus money in 2021 relating to the pandemic. That said, same-store sales in the quarter performed slightly better than we expected, down 11.6% compared to the first quarter of 2021. Comparing same-store sales to pre-pandemic in Q1 2019, we were up 38.2% in the first quarter of this year. As we continue to execute on our 2022 strategic growth drivers and leveraging our omnichannel platform, we will maintain focus on the following, growing our store footprint, growing sales generated from sportsmans.com, leveraging our growing customer data and improving the customer shopping experience by modernizing certain stores in our fleet. Starting with continued expansion of our retail store footprint. During the first quarter, we successfully opened 3 new…

Thank you, John. I will begin my remarks today with a review of our first quarter fiscal year 2022 financial results. I will then review our outlook for the second quarter of 2022. Net sales for the first quarter of fiscal 2022 were $309.5 million compared to $327 million in the first quarter of 2021, a decrease of 5.3% over the prior year period, but at the high end of our guidance. This decrease was primarily driven by a very tough comparable period as we anniversaried the demand driven by the economic stimulus received last year. Same-store sales decreased 11.6% in the quarter compared with the same quarter of the prior year. This decrease was primarily driven by lower sales demand across all product categories due to the tough year-over-year comps. While down versus last year on a same-store basis, we did see solid performance in the apparel and footwear categories. First quarter 2022 gross profit was $99.1 million compared to $104 million in the first quarter of 2021, a decrease of $4.9 million. Gross margin was 32% for the quarter, an improvement of 20 basis points versus the prior year comparable period. Higher product margins and favorable mix contributed to the gross margin increase over the prior year period. These increases were partially offset by higher overall freight costs. We continue to expect transportation costs to be a headwind to the gross margins during the remainder of 2022. SG&A expense of $96.1 million for the first quarter of 2022 was an increase of $5.7 million or 6.3% compared to the first quarter of the prior year. As a percentage of net sales, SG&A expense increased to 31% compared to 27.7% in the first quarter of the prior year. This increase was primarily driven by resuming our normal marketing related…

And our first question comes from the line of Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Hi, guys. First question for me is just anything to callout in cadence of sales during the quarter can you just talk about how sales kind of trended throughout the quarter?

Yes, Mark. This is Jeff. Nice to talk with you. Just to give you some color on the quarter, I would say that as we went through the winter season, we saw very strong sales in particular cold weather categories, ice fishing etcetera, had very good performance. To Jon’s remarks, as we got towards the end of the quarter, the weather started to warm up across the country and we entered more into the summer vacation season that is when we started seeing some initial slowdown in the consumer behavior, which has trended into the beginning weeks of what we have seen in Q2 and that was the reason for the cautionary remarks that Jon gave it in during his part of the conversation.

Okay. Anything to callout on weather and I know you guys don’t typically talk much about weather, but did we see later, what weather that maybe impacted sales?

Yes, Mark, it’s Jon. Good talking to you. Actually, we continue to see cold weather in the West, especially it snowed here in Utah at several inches on Saturday and Monday. And the ice fishing season was extended later than I think I’ve ever seen certainly in the industry. So, we are still optimistic that as the weather changes we will see an improved trend in outdoor, the ability for people to participate outdoor. Of course, we do believe that the macro inflationary impacts are also a consideration that we need to be thoughtful as we navigate the next quarter.

Okay. And then without seeing the Q here for segment data, any particular segments to call out that are doing well or any maybe that are underperforming. I know you called out pellet grills, for instance on the call, but any segments maybe that are worth calling out that are doing well or poorly?

Yes, Mark, a couple of things to call out for you. We have seen obviously very good performance from the ammunition category. Coming back in stock as we came out of last year and being able to offer that product to the consumer, we have seen very healthy demand for that and that has continued through as we sit here today. A couple other callouts that we have made note of is what Jon mentioned, really good performance in our apparel and footwear categories. I think that kind of speaks to where the consumer is thinking about participating, but seeing that those good results out of there, was something that we are very pleased through during Q1.

Mark, I will add on the firearms segment of the business. We have seen some headwinds on the personal protection product, specifically to handguns and personal protection shotguns. Alternatively, we have seen very healthy performance in our hunting and bolt action rifle business.

Excellent. I will jump back into queue for anymore. Thank you.

Thank you, Mark.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum. Please proceed with your question.

Good afternoon, Jon, Jeff. Appreciate taking our questions.

Happy to.

Curious on so you mentioned inflation starting to take a toll on the consumer, curious if you could break that down a little bit more between traffic trends versus just downsizing kind of between the good better best assortments or I guess where you are seeing more of that change in consumer behavior recently here?

Yes, Ryan, this is Jeff. Good to talk with you. To start off, I think the biggest trend in consumer behavior that we are seeing is a pullback from high consideration items. So as we think about the business, you can break it down into some of those hard goods that are high consideration versus the consumable items that we have in our business. We are still seeing very good trends in items that are consumable that can be anything from food to fishing baits to ammunition. So obviously, there is still a consumer that’s participating and coming in and picking up those consumables. But on some of the higher considerations, we mentioned pellet grills there could be some high price point kayaks, anything that is really towards the top end of the price range where the consumer does not have the expendable income. Those are the categories and areas that we are seeing pullback in.

That’s good. Your participation is still good for longer term trends. Have you broken out or do you breakout I guess kind of the breakup between those of consumable versus equipment, I will say purchases or high consideration items?

We only break that out in our 10-K and give specific numbers as a percentage of overall units sold in the 10-K. To give you a little color, I would tell you that it is running north of where we ended last year at as a percentage of units, so that if you go and look through the 10-K, you should be able to find where we ended last year at. We are running north of that currently as we go through Q1.

Helpful. Switching over inventory, so it’s up decently sequentially year-over-year, how much of that is safety stock versus and kind of say opportunistic ordering as you mentioned, Jeff, versus just growing store base and just getting back to normal?

Yes, it’s a really good question. And you highlighted some good points there. I think the first is the growth of the store base. One thing I’d like to highlight is, if you look back 3 years, we had a very few number of stores in the eastern part of the United States. We have grown that over 3x in the last 3 years. So as you think about the seasonality and the different trends of participation as it comes to the Eastern United States, there is obviously different seasons that we are making sure that we are inventoried for appropriately in a much larger store base. So, as you look at the inventory makeup, part of the growth that we have had is ensuring that we have sufficient inventory to capture all the different seasons that we now participate in from the fishing season in Alaska to the summer or the spring fishing season down in Florida. Other than that, I would tell you that as we thought about inflation, there are things that we had the opportunity to purchase right now where we knew that there are price increases coming down the line and we may have gone out and built some safety stock in those to try to offset some of the inflationary pressures that the entire retail industry is going through currently.

Then just moving over to private label, curious what the penetration was, if you can call it on the quarter and then if there are any places where you are seeing that gain better traction versus maybe others where it’s a priority or focus going forward?

Yes, Ryan, it’s Jon. Just a couple of things, we don’t get the exact number in the queue. But I can tell you we are – we have seen some improvement over time. As I stated in the past, we are between 3% and 4% on average of our product is either exclusive, meaning it’s only available at Sportsman’s or it’s private label meaning it’s one of our brands. And we have designed and developed it. We see a path to high single-digits. We did see some improvement in Q1, specifically around our clothing category. As we look at the performance of our entry level camouflage clothing through Rustic Ridge, we saw nice improvements there on the – that’s the good – on the good, better best profiler product. And then our premier brand, kill it camouflage and outdoor wear, we saw significant improvement in sales of that product over the last quarter compared to prior year, again, driven by the investment that team has made into product design and unique features and benefits that are not found in other products for outdoor wear that are at the same price point. So, those are two areas within the clothing category that have shown very, very nice trends upward in sales.

Thanks. Good luck, guys.

Thank you, Ryan.

Thanks, Ryan.

Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

Great. Thanks, guys. Nice to be joining you. Wanted to talk about traffic or transactions versus ticket, I didn’t think I heard anything about that? And I don’t know if you have any thoughts on that? Is the kind of the transactions kind of maintain themselves and the down cops mostly due to ticket, how should we think about that?

Yes, it’s a good question, Scott. We don’t specifically release those numbers. Obviously, we do track them in a very detailed manner. We do not put that out publicly, I would tell you that on the trends of what we are seeing, the decrease in same-store sales is a combination of traffic and then a combination of ticket combined, I would tell you that the decline in traffic is closely correlated to the decline in same-store sales that we put out, but I am being cautious here as we have never put those numbers out into a public forum.

Okay, great. And then thinking about the merchandise, one more short-term one I want to go a little bit longer, thinking about the inventory levels and the fact that you kind of said the high-priced items are the ones you are struggling with. A lot of people we have been covering are talking about clearance activities, how should we think that with you guys with the inventory you are carrying, if the consumer continues to decelerate here kind of frame that for us if you would?

Yes. Scott, this is Jeff. I would tell you that as we sit here today, there is nothing that would cause us to think that we would need to be more aggressive than our normal clearance and promotional pattern that we have planned out for this current year. We are not seeing any of our competitors in the market, aggressively discount items that we compete with them in. And we are not forecasting that to occur. So, as I think about a promotional cadence, I don’t think it’s any different than what we have had historically. Now, I would caution you that for the last 2 years, our promotional cadence has almost been non-existent. So, what you may view as a more aggressive promotional cadence this year is more in line with what we have done as a business historically. On the inventory front, and those items that are higher consideration, I will tell you that as a company, we are keenly aware of the decrease or what declines in demand we may have. And we are actively monitoring those inventory levels and scenarios to make sure that we are not over inventories and need to do some sort of math clearance or discount to clear out of those items.

Perfect. And then my last one is a little bit more longer term. And obviously, new to the story, I saw the strategic acquisitions, they are up on the slide. And I was wondering, maybe if you could again, frame that a little bit. Are you thinking mom-and-pop? Are you thinking like smaller chains? Talk to us about that? And like maybe you have done this before, so we can take it offline? If you haven’t, I would love to hear a little bit more.

Scott, this is Jon, nice speaking with you. Just high level on the M&A, we are actively looking at three verticals or potential acquisitions could be ecommerce and an adjacent or content based business that would support Sportsman’s, could be retail that again, would be adjacent that could be an existing retailer or an independent or mom-and-pop as you referenced. And certainly on the brand building or private label, we purchased TAPCO a few years ago, that’s a product line that we will be launching later this year. So, we are looking at all three, we are being very disciplined and thoughtful in our M&A consideration as we sit here today, ensuring that we understand each of these potential acquisitions and how they might be accretive to the business in the long-term, especially given some of the recent changes in market conditions.

Great. Thanks, guys. I will leave it. Appreciate all the answers.

Thanks Scott.

Thanks Scott.

And our next question comes from the line of Eric Wold with B. Riley Securities. Please proceed with your question.

Thank you. Good afternoon. Thanks for taking my question, Jon and Jeff. These two questions kind of follow-ons to the prior comments, when you – you talked about obviously seeing a little bit of weakness or softness in the higher price categories or products, have you seen those consumers that kind of trade down to a lower price products or just completely kind of avoid that purchase all together right now, it makes me kind of tough to read that, but anything around that?

Tough to read on the initiative – hey, Eric, it’s Jon, tough to read on the first couple of weeks of the season here in May. But it does appear there is softness in these higher consideration products. We mentioned a couple of examples earlier. We are being very thoughtful. And we think about our discipline around inventory in those products, whether that’s drills or personal protection, firearms or kayaks. Those are the areas that we are seeing the softness. It will take us a few more weeks into June before we will be able to understand the trade down trends from the consumer.

Got it. And then as ammo inventories have improved and you are seeing kind of traffic around growing that, maybe you can call out in terms of the behavior of the ammo buyers and they are coming out of the store maybe purchasing online, are they – do you see evidence of stocking up? Are they coming in and buying ammo and walking out or are you getting a larger basket of goods while they are in the store buying ammo?

Baskets about this, Eric, it’s basket on the ammo buyers about the same. We are starting to see again a better fill rate on that ammunition, the promotional target ammunition, whether that would be for a pistol, and MSR or 22 Rimfire, all much improved. So, we are seeing those customers that have been coming in looking at the shelf on a regular basis actually having the ability to walk out with a couple of boxes. We still have work to do as an industry, premium centerfire hunting ammunition and shotshell ammunition is still thin in supply and the demand is still extensive for that product. We are working with our key partners right now to ensure that we are in better in stock position at we go into hunting season. And then as we look at shotshell, I suspect that one is going to take a little bit longer from all the indicators we are seeing that we could be at the end of the year or longer before shotshell is where we need to – where we need to be as an industry. So, again trends are really, really improved in ammunition. But we have got a couple of categories we need to get in stock as an industry.

Just final question on that, anything about system wide and maybe varies by category, store, or maybe not at all, but any restrictions on the amount that you are letting people purchase on ammo right now?

There are certainly loading components of powers and primers that have some limitations. But effectively, on the ammunition side, limits have been removed.

Perfect. Thank you both.

Thank you.

And our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hi, this is Matt on for Peter. Thanks for taking our questions. You mentioned in the prepared remarks that transportation is expected to be a headwind for the rest of the year. Can you talk about the impact you expect this year maybe versus last year and then maybe also relative to pre-COVID? And then for our second question, we kind of were curious about your COVID cohorts that you acquired? Are they behaving any differently than previous cohorts, or is there anything to call out there? Thank you.

Yes. Matt, this is Jeff. Thanks for your question. I will cover the transportation costs. As we think about transportation costs, we have seen some decrease in the amount it takes to get a container across the seas from China, that has come down recently to I think the last time I checked, it was probably hovering around $9,000 or $10,000. So, that coming down is something that I think is very good for the overall industry. If we think about pre-COVID on that, I don’t think we will ever get back to a level where it was as cheap as it was pre-COVID, where it was running $4,000 or $5,000. In terms of domestic transportation, I think we are still seeing a similar trend in costs as what we have seen over the last few quarters. As we think about the future of those trends. The later we get into the year, the easier comp it gets because we are up against those increases last year. So, as you think about that moving forward, it’s still going to impact our gross margins, but the impact it’s going to have versus say Q1 is going to be a little bit less as we get towards into the back half of the year.

And, Matt, on your second question, this is Jon. Regarding the cohorts from COVID, as you are aware, specific to the firearms industry and segment of our business we had about 15 million first time firearms buyers during that 2-year period, which is the largest uptake of first time buyers in the history of the industry. We have seen some changes in how those consumers are behaving. While many are returning to purchase additional equipment for the firearm or a second or third firearm, the percentage of those that absolute number is lower than we would have seen prior to the COVID run up. Our assumption in the data that we are reviewing and receiving from consumers in the industry is some of those first time buyers were focused on personal protection. They filled the need that they felt was appropriate given COVID and some civil unrest activities were happening in the country and may or may not pursue the opportunity to buy a second firearm. With that said, given the massive amount of first time buyers even at a lower percentage, buying second or third firearm, the opportunity for us at Sportsman’s Warehouse to capture that second, third, fourth firearm purchase is immense. And it is something that again, we have shown over time, our ability to gain market share against the adjusted mix and our numbers would indicate we continue to do so today.

Great. Thanks guys.

Thank you.

And our next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed with your question.

Yes. Good afternoon, guys. Thanks for taking the questions. Just Jeff, wanted to first follow-up on the comp guide for 2Q, is that the range you guys are living in today or does your guidance embed some incremental deceleration with balance in the quarter just given all the macro uncertainty you alluded to?

That’s a great question, Justin. I would tell you that the guidance we gave takes into consideration the trends that we have seen over the last couple of weeks in the consumer behavior.

Okay. And then as a follow-up, moving down the P&L from an earnings perspective, can you help us understand how you are thinking about gross margin on a year-on-year basis relative to the 20 basis points of expansion you delivered here in 1Q?

Yes. To add on – to cover that, I would tell you that we are going to continue to be focused on gaining back what we lost in gross margins. If you think about where this company has run historically, always historically been in that 33.5% gross margin range over the last couple of years, we’ve lost it. Jon and I focus right now is to continue to leverage our supply chain, work on our product margins. Mix is obviously going to help that. But I would say that as part of the guidance there is continued improvements along the trends that we have seen in gross margins. If we then talk through SG&A, obviously, in the guidance, there is some figuring in of the difference between fixed costs and variable costs. I would tell you that obviously there are some things within our cost structure that are fixed in nature. It takes a certain number of people to run the stores, utilities, rent etcetera. The guidance will take into consideration everything that we can do from an expense perspective to help offset the declines in same-stores that we are seeing.

It’s a helpful color, Jeff. Just maybe a follow-up on margins is if we look at product margins, are there any categories that have been supply constrained, where those margins are still at levels that you wouldn’t consider to be sustainable on a normalized basis?

That’s a great question. We have seen really healthy improvements in product margins over the last couple of years. And I would tell you that I think the category where we have seen the least improvement is in the firearms category, I think that that category stayed relatively flat even through COVID, we saw a little bump, but that has gone down basically back to where we sat pre-COVID on a margin basis. All other categories are performing very well. There are certain items within a category that become harder when it comes to fully burdened margin. If you take something like a pellet grill or a kayak, those large items where you can only fit certain number of them on our containers, obviously those are bearing a higher burden from a freight perspective than a container full of clothing or other small items like fishing lures.

Okay. Thanks for that last question. Just have you guys ever talked about the mix of firearms, Jon, you mentioned kind of the shotguns and the handguns, PPE, the MSRs have you ever broken out kind of your mix of firearms kind of within those separate categories?

Justin, we haven’t ever broken it out. I will tell you that it’s the balance of all that product right from the entry level first time plinking 22 to the competitive shotgun or buying a $10,000 shotgun that’s how we built this business. And it does take a very broad mix of product across all categories to be successful in this industry. So, we haven’t historically broken it out and there is no intention at this point to do so.

Well, that’s still helpful. Thank you, Jon and best of luck guys for rest of the year.

Okay, thank you.

Thanks, Justin.

And we have reached the end of the question-and-answer session. I’ll now turn the call back over to Jon Barker for closing remarks.

I want to thank you for joining the conversation today and thank you to all of our dedicated employees around the country for their commitment to making Sportsman’s Warehouse, the leading company in the outdoor industry. Together, we look forward to continuing to serve our customers. Thank you.

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