Greetings, welcome to Sportsman's Warehouse Second Quarter 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Riley Timmer, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Operator. Participating with me on the call today is Joe Schneider, our Interim-CEO and Chair of the Board; 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 991 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 Joe.

Thank you Riley and good afternoon everyone. I’ll begin my prepared remarks by first providing an update on our CEO search. Next, I’ll talk through the key areas with the leadership team and I have been focussed. Then review our second quarter results followed by the actions we are taking. The search for Sportsman's Warehouse next CEO is the board’s number one priority. This search is progressing well and we are very pleased with the quality and experience we are seeing in candidates. The search committee continues to filter candidates and the board is expecting to fill the position soon. We'll keep you posted. Frankly, the second quarter was a disappointment from a net sales gross margin and profitability perspective. Sales in the quarter were down nearly 12% versus last year, with comp sales down 16% both lower than we expected. Gross margins were 32.6, which is 90 basis points lower than the second quarter last year. In addition, adjusted EBITDA was 4.2% which is down from 8.7% versus last year. In the quarter, we saw deterioration and revenue as we did not see store traffic improved from the first quarter like we had anticipated. This resulted in year-over-year declines in each of our departments. While we did experience a late start to our spring selling season and later in the quarter and seasonable warm weather, we believe that the difficult macro environment, macroeconomic environment, is leaving fewer dollars available for discretionary spending. We did however; see a bright spot in our omnichannel business where e-commerce continue to outpace the performance of our stores. Since I stepped in as interim CEO, I've been working with our strong management team looking at all aspects of our business. Specifically, we've been focusing on the following areas, supply chain and inventory, real estate,…

Thank you, Joe. I'll begin my remarks today with a review of our second quarter fiscal 2023 financial results, then cover our outlook for the third quarter of 2023. Net sales for the second quarter of fiscal 2023 were $309.5 million, compared to $351 million in the second quarter of 2022. Same store sales decrease, 16.1% compared to the second quarter of 2022. In looking at comparable sales by department, first our hunting departments, same store sales were down 17.5% versus last year, breaking it down further, ammunition comp sales were down 30% accounting for the majority of the departmental decrease in the quarter. In last year's second quarter, there was a significant full forward of demand as we started to return to normal in-stocks on key ammo calibers [Ph]. These calibers have been very challenging to procure over the prior two years making for a difficult year-over-year comparison. Our firearm sales on a comparable basis were down 10.9%. In reviewing our performance for the quarter versus the adjusted mix data, a key indicator of firearm sales we continue to outperform this industry measure which is down 12.7% in the same period. We believe this demonstrates that although sales were down year-over-year we are gaining market share in this key category to our business. Looking now at other departments within our business. Our fishing department was down 11.1% versus last year on a comparable store basis. Continuing the same trend as Q1, we experienced soft trends in fishing as we entered the second quarter. However, we saw months over month’s improvements in comparable store sales through the end of the quarter and into the beginning of the third quarter. During the second quarter, we also experienced softness in our payroll, camping and footwear departments as pressures on consumer discretionary spend…

Thank you. [Operator Instructions] Our first question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed.

Good afternoon, guys. I want to start with kind of guidance or the current Q3 quarter-to-date. We’ve seen specific categories that you're planning to increase promotions in discounts or is that generally across the entire business and company.

Hey Ryan, it's Jeff, great question. As we look into the Q3 guidance, the main areas are going to see if the more promotional end than we have historically been is going to be in the apparel and footwork category. I think it's something that you're seeing across all sorts of industries that those are kind of the areas where additional promotions are necessary. So that's going to be some of the key drivers of the promotional activity you see during Q3.

Anything across the other ones where maybe it's less severe but increased promotions or is hunting, camping kind of the other categories generally similar year-over-year?

There's going to be normal promotions throughout other categories. Within hunting, you're going to see it a little more promotional in the boat category, but that's a very small portion of the overall hunting business, but everything else you should see in normal cadence throughout the back half of the year in terms of promotional activity.

Great. And then, as you think about kind of the pressure on margins in the near term, you guys put out some medium term margin targets for each 10% EBITDA margins. I guess how comfortable are you still achieving that when things normalize, versus is there anything structurally changed in the business or the industry today?

Yes, as we look at the margins, headwinds that we're going through right now. I do view them as short-term. This is something where we need to work through the back half of the year and through the consumer headwinds. As we move on into a healthier position in 2024 and beyond, and the consumer returns the normal behavior. I see gross margins in our margin profile returning back to a more normal cadence, but it is something that we have to work through right now in the short term.

Great. Thanks, guys.

Our next question is from Eric Wold with the B. Riley Securities. Please proceed.

Thank you. Good afternoon guys. A couple of questions I guess follow up on the last one around inventory and margins. Do you expect the margin impact to be localized, conclude in the back half of this year or there's some category, some products, that seasonally you'll have to carry in the next year, before you can really start promoting those, and so there might be some margin impact next year as well.

Our anticipation is that we move through all of these additional promotional items we have to do in the back half of the year and are able to go into 2024 in a healthier position, where we then transition more to just seasonal cadence is flowing good in and out of the stores.

And Eric, this is Joe. As we mentioned, we brought in a season veteran Brian Westfall, who is helping us navigate this and address the core inventory items and get back to a normal cadence on our inventory, which then impacts our margins, which should improve in 2024. So we're addressing it, taking the correct abaction, and getting back on track.

Okay. And then on the solar growth plan changes. You threw out a lot of things between kind of the current amount of climbers that you're seeing with your customer base, the inability to make you find that real estate that fits your goals, your return goals, also desired to pay down debt and focus cash well there. Maybe, help us understand, how much of the change in store growth plans for 2024 is really kind of a short-term focus on balance. So you're trying to focus on just having cash, you're getting back to your life position versus anything changed in your view, longer term around the strength of certain categories. Are you seeing something with the reason store -- that hasn’t been working that makes you rethink, you're just kind of either even longer-term plan or a really more all kind of short-term economic balance you've related versus a long-term strategy shift.

Yes, Eric, that's a great question. This is Jeff. Long-term strategy for Sportsman’s we still see immense amounts of light space and expansion opportunities for Sportsman’s to continue to take market share. We continue to see refraction from our competition in our core categories. So as we look at the 2024 real estate plan, I would frame it up that this is a short-term pause on what we're doing in terms of making sure our balance sheet is healthy as we then start to focus more on long-term growth objectives.

Got it. Thank you. Appreciate it.

Our next question is from Mark Smith with Lake Street Capital Market. Please proceed.

Hi guys. First off from me, just want to clarify and ask up stores open during the quarter, maybe what's open since the quarter ended, and kind of where the store count is. And I think Jeff, you said you've got two more to go, but any additional numbers you can go on that.

Yes, Mark great question. So as we sit here today, we have opened 13 of the 15 that we had planned for the year. So we have two more stores remaining to open. One of them will open in mid-September. The other one will open more towards mid-November.

Perfect. And then, I wanted to dig in just to the ammo [Ph] space a little bit. I think you said that it was down 30% on a comp basis. What are your thoughts around that segment? I know in the past you guys have talked about, ammo being kind of like the milk at the grocery store. As there's things you can do to drive additional sales there as we've seen inventory come back up or is there a hesitancy to get, you don't want to get overly promotional, maybe walk through your thoughts on that segment.

And Mark, that's a great question. I think it's a fine balance. We have to make sure we stay competitive in the market and look at the pricing, that we're seeing across our competitive landscape. And to your point, we also need to use it to drive traffic into our store. So, as we think about the go-forward, I expect that we're going to continue to see pressure similar to what we saw during Q2. We highlighted that that was the number one cause of margin degradation in Q2 as we looked at the comp sales on a year-over-year basis. So, I don't think that that's going to stop, especially in the consumer environment where we're in today, where people are really stretching every single dollar that they have.

Okay. And then as we think about the larger hunt shoot kind of category, we're still early in to kind of fall in some early hunting seasons. But, but any additional thoughts around demand, what you're seeing from these consumers, even licensed data, kind of anything's you can give us for outlook as you guys think about this really important fall hunting seasons and then moving into the holidays.

Yes, as we looked at the Q3 guidance, I'll tell you one thing we consider this is the while there's still people participating in hunting and buying hunting licenses, where we're seeing hesitation is the upgrading of their equipment or purchasing new equipment. So, the individual that's going out to hunt is making their rifle last another year. They're extending the life of their hunting boots. They're not buying a new backpack to go in the backcountry. So, while the consumer is pressured, I think that trend continues. Once the consumer gets healthier, I think we start seeing the refresh or the upgrade cycle start again. But when that happens, I think it's anyone's best guess.

And then maybe last question for me is, is we think about getting more promotional here over the next quarter or two and a lot of this has been focused within apparel and footwear. Can you talk about using being promotional around your private label brands versus kind of national brands?

Yes, the other promotions will be more focused on the national brands. Our private label brands were able to manage very closely and make sure that we're still hitting the sell through and margin targets on those. So, you'll see the promotional activities more centered towards the national brand.

Great. Thank you.

Our next question is from Justin Kleber with Robert W. Baird. Please proceed.

Yes, good afternoon everyone. Thanks for taking the question. So first, just a clarification on the store traffic comment, did store traffic get worse on a same store basis relative to 1Q or did it just not improve as you had anticipated.

Great question, Justin. It did not improve as we anticipated. So traffic stays very flat to what we saw in terms of trends in Q1. And we just did not see the increase that we were expecting in Q2 to see.

Got it. Okay. And Jeff, on the 25 million in annualized cost savings that you cited. How much of that do you anticipate, realizing this year and can you talk about the buckets, the bigger buckets where you're sourcing these savings from?

Yes, the biggest bucket that we have in there Justin is going to be in the labor pool. So that's going to be an immediate savings that you recognize as you reduce your labor pool. And so we will start to see that flow through in the back half. In terms of other expense cuts, we're looking at contracts, we're looking at any discretionary spend. Those types of things are going to take a little longer to make sure that they come to fruition as we exit contracts or re-evaluate contracts and do those renegotiations. But I would say to bring that up, the biggest portion of the expense cuts are going to be in the labor pool.

Okay. And then Jeff, you mentioned the payroll I think per store was down 11%. How much room do you have for the cut before you reach, what I assume is some level of minimum staffing and stores?

Yes, this is Joe and one thing we don't want to do and we're very driven is we've got to continue to delight the customer and that customer experience and have an emotional attachment with Sportsman's Warehouse. So it's a little bit fluid on how much more we can do. We believe what we have done has taken the correct evaction where the difference between a need and a want. But again, the part that we do not want to cut is where we're disappointing our customer.

Yes, kind of makes sense. Last question for me guys, just on CapEx. You've spent 52 million year-to-date. I think the original guidance is 48 million to 56 million if I go back to the fourth quarter. So you're ready within that range. I guess, is that still the right range for CapEx. It's really going to slow that materially over the back half of the year. Or should we be thinking about a higher number relative to that initial plan? Thank you.

Yes, Justin great question, one little nuance on that, that’s on the cash flow in that section that's showing 52. We have landlord payments that we received for TI dollars that actually show up in operations. So the guidance that we're giving is on a net basis, net of those landlord allowances. So the guidance that we gave in the in our CapEx guidance would take that into consideration, that's going to be the difference that you have. So I am still comfortable with the range that we've given.

Got it. Thanks for that clarification, Jeff. Best of luck in the next quarter.

Thanks.

And we now have a follow-up question from Eric Wold with the B. Riley Securities. Please proceed.

Thanks. Just had a follow-up question. I know it's always difficult to compare, Sportman to other outdoor or kind of a activity retailers given the product mix which makes mix difference especially around hunting and ammo. But given kind of the cost trends and traffic trend you're seeing. Anything you can read into the demographic profile that you're reaching that's different from others or something that you're seeing different in your regions that maybe just in others, maybe something you kind of pointed that maybe why the trends you're seeing or maybe, on the worst side, compared and way.

Eric, great question. I think a big contributor there is the average income portfolio of our customer versus some of the other public companies that you've seen go out. I would say that our average customer trends to be a lower average income versus some of the public company comparables. That's significantly going to impact their ability for discretionary spend, which is really what Sportsman's is heavily penetrated in when you look at what we sell inside our store versus some of those other comparable public companies that have similar products, but it makes up a much smaller portion of their business.

Helpful. Thank you guys.

Yes, and Eric, to that end, we're really working very hard a getting more body through the door and then being productive with those consumers that come through the doors. In some of the stores, we've done seasonal pads of assortment. We have more refined regional assortment, so we're really are working hard on delighting the customer once they're in the door and capitalizing once we have them in within the four walls.

Perfect, thank you both.

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

Thank you for joining the call today. And thank you to all our dedicated employees around the country for their commitment to Sportsman's Warehouse. Together, we look forward to providing our customers with the best experience and customer service in the outdoor industry. Again, thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.