Greetings, and welcome to the Sportsman's Warehouse Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Riley Timmer, Vice President of Investor Relations. Thank you. Riley, you may begin.

Thank you, operator. Participating with me on the call today is Paul Stone, our Chief Executive Officer, 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. Those are 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 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 sportsmans.com. I will now turn the call over to Paul.

Thank you, Riley, and good afternoon, everyone. It's an honor to be here, and I'm excited to lead the Sportsman's Warehouse team as the next CEO. As one of the leading specialty outdoor retailers, I look forward to partnering with our more than 5,000 dedicated associates across the organization for what I believe is a very promising future. The mission of Sportsman's Warehouse is clear: we provide outstanding gear and exceptional service to inspire outdoor memories. This is the core of who we are as a retailer and one of the key reasons why I chose to join and lead this great company. During my time with the competing large outdoor retailer, I quickly learned that all those who participate in the outdoor share a passion that is unmatched. When one of our customers walk through our doors, they expect to talk with someone knowledgeable and feel their passion for the outdoors, whether it be hunting, fishing, or camping. As a company who prides itself on having that local, homegrown image and feel, it's critical that we serve our customers with vigor and passion. We will continue to build on being the outdoor company of choice, not for retail theatrics, but for the value, the deep assortment and the absolute unmatched service we provide. Looking now at our Q3 results. Sales for the quarter came in above our stated expectation, led by our hunting and shooting sports category. However, the difficult microenvironment continues to pressure consumer discretionary spend, creating a continued headwind for the business. While there were some bright spots in our hunting and fishing categories during the months of August and September, soft sales trends persisted during these two months of Q3. In early October, unfortunate world events resulted in sales improvements in our shooting sports category, which…

Thank you, Paul. I'll begin my remarks today with a review of our third quarter fiscal 2023 financial results, then cover our outlook for the fourth quarter of 2023. Net sales for the third quarter of fiscal 2023 were $340.6 million compared to $359.7 million in the third quarter of 2022, a decline of 5.3%. Same store sales decreased 11.4% compared to the third quarter of 2022. In looking at comparable sales by department, our hunting department same store sales were down 10.6% versus last year. Breaking it down further, ammunition comp sales were down 10.6% with firearms down 5.2% in the quarter. While the first two months of Q3 saw pressure from the macroeconomic environment and consumer discretionary spending, sales in early October turned positive in these two categories due to the tragic events that took place in Israel, leading to war and social unrest. These events led to the majority of our guidance beat on a top- and bottom-line basis for Q3 2023 compared to guidance. Looking now at our other departments. On our last call, we highlighted the need to begin strategically promoting and marking down portions of our apparel and footwear inventory as we move through the second half of this year. I am pleased with our progress. However, we are executing a more aggressive strategy with our promotions during Q4 to ensure that we achieve our planned inventory goals and end the year in a much healthier position. It's important to note that this is a one-time effort to quickly eliminate non-go-forward brands, styles, and slow-moving inventory that does not resonate with our customer. This will, however, allow us to expand the breadth and depth of the products and brands that our customers are seeking when they shop our stores and websites. When looking at…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ryan Sigdahl with Craig-Hallum. Please proceed with your question.

Hey, good afternoon, guys.

Hey, Ryan.

Curious on -- you mentioned competitors are promoting as well. Curious how much of that is them trying to reduce inventory into the holiday season. Really a temporary kind of reset, or do you think it's necessary based on the health of the consumer today?

I think it's two-fold. I do think that out in the industry, out in retail, we see retailers overstocked and moving through inventory, but also if you look at the health of the consumer as we look at the patterns that we've seen from our customer coming into the stores, they are seeking the deals and they are buying the deals and then they're moving on to their next purchase. So, I think all retailers are seeing that in the industry as we sit here today.

Quick one and then I have one more. Was ammo and firearms, were they -- did they remain positive in November?

Are you saying -- so we saw a nice lift in October from the unfortunate events in Israel. The event-driven demand cycles, as we see them today, are much shorter-lived. So, I would say that that was a short-lived event-driven demand cycle that we saw really benefit October. And then, we've returned back to normal consumer behavior in November.

Good. Last one for me. Just on the store opening, how much flexibility do you have with none plan in 2024, but did that trigger any one-time terminations of leases and other costs? And are you able to hold any of those locations, basically deferring them until 2025 or later?

As we think about the no new store openings in '24, we didn't exit out of any leases that we were in for 2024. We just chose not to execute on signing leases for 2024. So, our pipeline that we have is currently working on the 2025 opening schedule. We were able to keep the deals that we had going working and able to extend them into a 2025 timeline.

Great to hear. Thanks, Jeff. Welcome, Paul. Thanks.

Thank you. Our next question is from Eric Wold with B. Riley Securities. Please proceed with your question.

Thanks. Good afternoon, everybody. I guess first just kind of a couple follow-up questions on the kind of new store opening or no new store opening guidance for '24 I guess. Will the decision to kind of restart kind of development and kind of openings in '25, is that driven solely by your comfort with a balance sheet sometime during '24, or do you actually need to see sales and margins improve from current trends before you want to open additional store? Here's another way, are store opening returns still attractive to you at current operating levels?

Hey Eric, it's Paul. Yeah, thanks for the question. I think, as we looked at it and we've had the discussions over the last 30 or 40 days and trying to build out what the '24 pipeline looks like, I think we looked at it two-fold. One, the opportunity to pay down debt being a huge focus for the organization. And two, I think us really working on the fundamentals and the details of retail as we continue to move through the inventory and the distressed inventory and to really put focus on with our buying team and being regional and aligning with where we need to be. So, I think it gives us two-fold the opportunity. One, to work on the fundamentals, at the same time, working behind the scenes on real estate for '25 because we truly think that it's a competitive advantage we have. It's to be able to be in these small markets and open stores. But I think for us, it gives us the opportunity to sell down the distress, get in a much better position from an inventory level with new inventory and buying deep on the 80-20 principle that we have here while we're working to be able to pay down debt.

Got it. I guess, I still have one last question there. I mean, is opening a store in the current levels still mature and attractive, or would you actually want to see things improve?

Yeah, Eric, this is Jeff. I'll tell you that, as we look at the real estate market and the competitiveness in the market, there is a -- we're at an all-time low in terms of retail space availability. So, there are deals being done out there in the market where a few years ago we would have been able to find an attractive location and those deals now are not hitting the hurdles that we expect out of our new stores in terms of productivity. So, for me, focusing on new store productivity, hitting those minimum thresholds of 10% four-wall EBITDA and 20% ROIC is key to our real estate strategy. And as I look at the space and our plan going forward, focusing on those return metrics is going to be key into our real estate strategy.

Thank you. That's helpful. And then, without any new stores next year, I guess excluding -- if you start building towards the end of year for a store to open '25, excluding that just what is kind of the CapEx plans for next year? Are you still doing any remodels, upgrades, what kind of maintenance?

Yeah, we'll have to do normal maintenance. And if you look into the script, I gave a range of what we spent on new stores this year. We've invested more than $45 million in new stores and refreshes this year. And then, if you bump that up against the CapEx guidance that I've given, that'll give you kind of an understanding of what normal maintenance CapEx looks like in a year. We're going to have to maintain the fleet next year. But in terms of big amounts invested in refreshes and new stores, I don't think you'll see that coming through the pipeline.

I do think there'll be a piece from a technology standpoint as we look at us being able to invest and continue our investment as far as merchandising, planograms, how we operate the stores, and then just for ease for the customer that these are things that we'll have to invest in. I would just add that to the everyday, day in and day out, CapEx that you would typically have.

Okay. Final question if I may. I know you mentioned, Jeff, that the aggressive discounting you'll be doing in the fourth quarter is playing into that 600 basis point to 800 basis point reduction in margins year-over-year. How much of that is kind of one-time from these actions versus maybe structural that needs to continue in the next year?

Eric, that's a good question. I want to emphasize all of that degradation and margin is relating to this one-time event of us clearing through this inventory We are hitting it very aggressive in the fourth quarter to ensure that we're clean of it by year-end and we start 2024 in a much better position so we can position Sportsman's Warehouse for success.

Perfect. Thank you, guys. Appreciate it.

Thank you. Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Hi guys. Just want to follow up a little more in depth on that last question. As we think about the 600 basis point to 800 basis point decline here in Q4 versus 300-plus basis point in Q3, is it really -- is it purely just clearing out and finding -- getting rid of this excess inventory and apparel and footwear, or how do you compare kind of the holiday Black Friday promotional environment this year versus last year?

Hi, Mark. This is Jeff. That's a good question. If we look at just the overall holiday environment. I think most retailers are coming out and Sportsman's included with the issue of driving traffic. So, in order -- in effort for us to drive traffic, we're really focusing on heavily discounting the apparel and footwear, making it known. If you're subscribed to our advertising campaigns, you'll see that we're going to hit it heavily over the next three weeks before Christmas. So, we're using that as a traffic driver to get people into stores and shopping the other products. So, I'll frame up again that the 600 basis points to 800 basis points is driven primarily by the reduction in margin in the apparel and footwear that we're moving through the end of the year.

Okay. And if you could maybe tell us what percent or how you feel about as of today that you've moved through of that inventory and maybe how much it has moved since the end of Q3?

I will say...

Maybe a different way to look at that is, do you feel like you'll be done by the end of the year?

We've moved through a very good portion of the inventory in Q3. What we have left to move through in Q4 is items that we have to take deeper discounts on, which makes the margin impact more significant than it did in Q3. I was very happy with the team's execution in Q3 on moving through the clearance apparel and footwear. I'm very pleased with the progress, but the items that we have left over are going to need much deeper discounting in order to move through the remainder of it by the end of the year.

Okay. And then I think you guys may be called out a little bit within the ammunition category, some margin pressure. Can you walk us through maybe anything that's going on, just as we look specifically at that? Is that just inventory being back fully stocked and need to move some of that? Or any additional insights into the ammo space would be great.

Yeah, I think the big driver on the margin degradation there is just the supply being fully back in stock. We saw a little bump in ammo during October with some of the demand-driven events, but that was really focused on very specific types of ammunition. Holistically, across the ammo category, we are in a well in-stock position. The manufacturers are pumping it out, and the industry is very well in-stock. So, we're seeing the pressures from that across the board.

Okay. And then, Jeff, I think you said -- I think you quantified kind of an inventory goal at the end of the year at $375 million. Correct me if I'm wrong. And then, talk about kind of your comfort level of getting there?

Yeah, you're correct, Mark. It was $375 million. It was somewhere below $375 million if we get specific. I am very comfortable with us hitting that target and achieving that target. There is nothing more important as we think about our year-end strategy than moving through inventory, getting it into a healthy position and getting productivity out of that inventory as we move into 2024. So, as we sit here today, I'm very confident in hitting that target.

Okay. And the last one for me. Just as we think about cost cutting, SG&A, you guys have done a good job thus far. Maybe just talk about where you're at in this total program? Are we kind of middle innings, or are we still early? Or if you worked through a lot of this cost cutting so far?

Hey, Mark. It's Paul. I'll take that. As we kind of made this assessment and the work has been done early on as far as efficiency and productivity gains that I think will continue, I mean, to push to simplify the business. And I think as we continue to simplify the business both for the employees, whether they be in the stores, distribution centers here at corporate, that we have an opportunity clearly to continue the momentum that we have from an SG&A. But I think our message is really around simplification of the business. So, we're going to continue to work at that. So, I would just kind of sum it up by saying we're not -- we think we have a lot of room to go here. And the fact of the matter is that we just want to simplify the business both for the employee and the customer.

Okay. Thank you.

Thank you. Our next question is from Mark Herrmann with R5 Capital. Please proceed with your question.

Hey, guys. Thanks for taking my question. Just to dig a little deeper on the promo situation in Q4, and kind of looking back at what happened already, would you say that the activity that you've had has been more successful at actually driving new traffic or more at driving attachments for firearms customers who are already coming in store, if you can break that down?

Yeah. Hey Mark, it's Paul. I think as we look at it, it's kind of a mixture of both, but we don't look at it and say exclusively that it was driving traffic to the store, but I think that the opportunity we had is once we had them in the store with the attractive discounts that was there, that it was able to help on attachment. But I wouldn't lean if I had to lean more one way, it would be helping us overall from attachments and what it looks like for the items in the basket versus the traffic to the store.

Okay, great. Thanks. And then, kind of looking forward, is there any -- can you break down the thought process into, is it geared more towards private label or branded for 4Q? Is it more higher-end versus lower-end goods? And is it limited to apparel and footwear? Are you going to go outside of those areas for the promos?

Yeah, I think it's -- when the team lined this up and really started at the beginning of Q3 into Q2 and they started this process of cleaning up, it just wasn't only apparel and footwear. I mean, there was a lot of work done behind the scenes around a lot of different departments from a cleanup, and they moved a lot, lot more. But as we get down to the end here, we have -- that's primarily what we have left and the reason for going deeper to be able to clean up in Q4 and get us to the position we need to be to start the fiscal year clean. I think Jeff said earlier, this is an opportunity. We've seen some small wins out there with subcategories where we've had really good work from SKU optimization, being able to pull back SKUs, condense where we're at and get more productivity from less SKUs, and we really like what that looks like. But I think as we look at this, in most cases, we're looking at it and saying it's mostly -- it's not private label that we be looking at it, it's more name-driven as we think about it.

Okay, good. Thank you. And then just same as kind of Mark's question and more -- another detail. I think you said payroll was down 8.4%. Is that representative of kind of in-store labor if you look at that only? And then, how do you think about how much further that could go before you really start impacting the customer experience that you talked about at the initial part of your presentation today?

Yeah, Mark, that's a good question. I just want to clarify. I think on a per store -- if we were to break down our payroll expense for the quarter, on a per store basis, we were down almost 22% versus prior year. So, we made significant headway in the payroll reduction, right-sizing that line item for what we're seeing in current business trends. And I will say that that's where, if we look at the expense cuts, the majority of them were executed on during Q3. As we think about go-forward opportunities, continuing to simplify the business, as Paul stated, I think is front and center in our mind. Whether that be looking at the contracts that we have outstanding, looking at some of our partners in terms of business operations, and then continuing to look at our staffing levels across the organization, not just in the stores, not just the distribution center, but everywhere to make sure that we're running as efficiently as we can.

And I think to your earlier point, we want to get ourselves in a position. I think the uniqueness of our brand and really what attracted me to Sportsman's was the employee base itself and the outfit that connect with the consumer that we have there. And I look at that as a huge opportunity for us to be able to enhance what that experience looks like as we simplify the business. So, I don't want to put ourselves in a position where we're, like you said, we're at critical mass where you're in a position where you're hurting yourself more than being able to drive sales. But I think there's a fine balance there as you look at this, and we're not going to take sight off of the customer. I think that is going to be the core of all the decisions we make as an organization around the customer.

Great. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Thank you for joining the call today, and thank you to all the 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. Thank you.

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