Greetings, and welcome to the Sportsman's Warehouse Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A 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 you to your host, Riley Timmer, Vice President of Investor Relations. Thank you, Riley, you may begin.

Thank you, operator. Participating on our second quarter 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, 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 99.1 for the Form 8-K we furnished with the SEC today, which is also available on the Investor Relations section of our website, sportsmans.com. I will now turn the call over to Paul.

Thank you, Riley, and good afternoon, everyone. Since joining Sportsman's Warehouse in November, my primary focus has been on revitalizing the company as a leading specialty retailer. Our mantra, which forms the foundation of our company and drives our mission, is great gear and great service. Initially, we concentrated on the great gear aspect, addressing distressed and slow-moving inventory, phasing out low-selling brands and refining our product assortments. This strategy aimed to free up capital tied to underperforming inventory, enabling us to invest in newness and core merchandise that aligns with our business and resonates with our customers. We will discuss more about the great gear strategy and our plans to boost sales during this call. The supporting foundational element is great service. I've spent my entire 35-year career running all levels of store operations and cannot emphasize enough the importance of service, especially for our unique business. We know customers have a choice when they shop. Our competitive difference and the way we win customers will be because of our great service. In the second quarter, we implemented a culture change in all our stores. We now refer to our employees as outfitters versus simply associates. Many of our talented outfitters are also passionate outdoor enthusiasts and have a natural affinity with our customers. We want them to share more of their local expertise and experiences rather than focusing on in-store tasks. We expect them to evaluate the customer outdoor needs and outfit them with merchandise in all departments throughout the store. While it may sound simple, this change is a significant shift in how our stores have historically operated. While we are encouraged by the progress, we are still in the early innings of our business reset and transformation. Turning now to our second quarter results. Our sales…

Thank you, Paul, and good afternoon, everyone. I'll begin my remarks today with a review of our second quarter 2024 fiscal results, then cover our liquidity, balance sheet and capital allocation strategy, and finally, provide additional context around our updated outlook for 2024. As Paul mentioned, net sales for the second quarter were $288.7 million compared to $309.5 million in the second quarter of the prior year. Sales came in below our expectations as our business remained pressured from a challenging macroeconomic environment, which continues to weigh on consumer discretionary spending. Same store sales decreased 9.8% in the second quarter compared with the same time period of fiscal year 2023. This represents an improvement of 380 basis points versus Q1 2024. We are optimistic that as we continue to execute our strategic plan, we will further improve sales and see better month-over-month comps as we move through the balance of fiscal 2024. Our most difficult comp will be the month of October, where we lapped the impacts from the Israel-Hamas war. Gross margin for the second quarter was 31.2% versus 32.6% in the prior-year period. This reduction as a percentage of sales was largely driven by increased costs associated with shrink as we revamped our methodology in the quarter to better align our counts with higher velocity SKUs and count more frequently in order to ensure better inventory accuracy as we focus on utilizing every dollar of inventory. We expect that shrink will continue to be a headwind in the back half of 2024 with these methodology improvements. Additionally, in an effort to end the summer season with clean inventory, we marked down seasonal goods, primarily in the apparel and camping departments, and we're pleased with the results of these efforts. As a percentage of net sales, SG&A expense was…

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

Hey. Good afternoon, guys. I want to start with shrink. I guess this is the first time I've heard you guys call that on, I think, really ever, which is different relative to a lot of other retailers. Can you walk through exactly what -- is it an accounting nuance where you're changing your methodology a little bit, or are you guys -- are you actually having theft in actual shrink that a lot of other retailers are having? Then, I'll follow-up quick one.

Hey, Ryan, it's Jeff. Good question. I would call it an accounting/operational change. As we move through the quarter and we were reducing inventory, there came to light a need to focus on inventory accuracy. So, we looked at the methodology underlying our cycle counts, increased cycle counts in areas of the business with higher velocity SKUs to make sure that we had better inventory accuracy. As we keep managing inventory closer and closer to the dollar and leveraging that asset more and more, the need to have accurate quantity on hand has become very apparent. So, it's been a change in our methodology. As we think about the go-forward, we're going to continue to work on the methodology in the back half of the year. Thus in my prepared remarks, I talked about the impact in the back half, but it was, again, to reframe, I would say it's more, operational/accounting methodology change than how you framed it up and increase in theft out the door.

Makes sense. And then just on the discounting, and maybe that's just me, but it seemed like you guys were discounting quite a bit of fishing as well kind of end of season. I guess, is that what we should expect going forward is kind of fresh new inventory, but still kind of heavy discounting at the end of the season to make sure you're clean going into the next season? Or is that just kind of a refinement going forward to try and balance the inventory and sell it through in more normal fashion?

Yeah. Hi, Ryan, Paul. I think our big commitment was as we get to end of season is to ensure that we're not carrying any of our non-go-forward goods into the latter quarters. So, really that was strategic, and us saying we wanted to be able to, one, in fish, probably get out on some things we know we're not going to go forward with or clean up on some of the sub cats to ensure we're clean, but overall, it was -- that was the play as we came to the end of Q2 to ensure that we are not going to carry things forward that we knew that we were not going to replan on.

Great. Thanks, guys. I'll turn it over to the others.

Thanks, Ryan.

Thank you. Our next question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Hi, guys. Just wondering if we can get a little more insight into product mix. Sounds like all categories besides fishing were down. Can you quantify at all or maybe speak to which categories maybe had a tougher quarter than others?

Yeah, Mark. Thanks for the question. It's Jeff. To give you some more color, as we look at the apparel and footwear parts of the business, still going through the SKU rationalization or reset of that merchandising strategy. So, you'll see that those were more pressured than other parts of the business. As we look at areas of the business, camp performing slow to start off the quarter, but we saw better improvement in camp as we move to the back end of Q2. And then, pressure during the quarter in the ammunition category I would highlight. Just as we look at, peel back the hunt, there is some degradation in the ammo business in terms of customer attachment. And then, also, as we looked at the market in terms of our pricing, we've been proactive about some changes we've made there. I'm happy with the trends that we're seeing, but during the quarter ammo was impactful in the hunt category.

Okay. And then, wonder just any updates on as we think about kind of loyalty program, e-mail, credit card. I know it's still early in a lot of this reset and you've just got Susan and all, but any updates on those kind of products and how you're feeling about any advancements or evolution in those businesses?

Yeah. Well, evolution is needed, no question. And as we think about it from a timeframe, we'll definitely come back on what the timing looks like, but we're extremely optimistic about being able to put our loyalty in a better place. And then, I think as we look at our operations team out there from our credit card that we feel there's enormous upside in the partnership with marketing, loyalty and credit, but early stages. But I think overall, we're looking at all of, Mark, to be able to think of potential upside as we go through next year and really the loyalty will take work, but we're going to do the right work, already doing the right work now and what it should look like future state for us and how we compare with others, not just within the industry, but as we think about retail in general, what that offering should look like.

Okay. And last question for me. Just I think that you guys had said that kind of cadence through the quarter that I think comps had gotten better through the quarter. Any additional insights there? And I'm curious kind of a mix of price versus traffic as you were discounting maybe a little bit later in the quarter. Are you seeing those traffic improvements? Any additional insights there would be great.

Yeah, Mark, great question. To give you a little more color, as we think about the trends improving, started the quarter at a double-digit down comp, ended the quarter at a single-digit down comp. So good improvement through the quarter. So, we were happy with the trends. As we think about what that goes into, we're happy with what we're seeing at the start of the quarter with the first month in, but cautious about as we think about the back half of the year. We're anniversarying some large liquidation events. We have the anniversarying of the Israel-Hamas in Q3. So, I think the guidance that we gave is figuring in some caution into the back half of the year as we start to anniversary some of these significant headwinds.

I'll just add to that, Mark. The one thing and I think to highlight and what the team has been able as we've kind of reintroduced the outfitter is that our attachment is in a really good place in each month. We saw attachment grow as we were driving folks in through either promotion or getting out of our goods at the end of the season when we should get out of them, but I mean, the team has done a really nice job of being able to attach what we're looking at as historical rates. So, I feel good about that foundational work that's being done to be able to attach at a higher rate. And I think we saw that progress in a big way as we started through the Q and ended the Q.

Perfect. Thank you.

Thank you. Our next question comes from the line of Mark Herrmann with R5 Capital. Please proceed with your question.

Hi, guys. Thanks for taking my question. I have actually the same question as Mark, but I'll ask it a little bit different way. In terms of the cadence in hunting comp, would you pin any of that on either the California tax pre-buy having seen that come out of the West Coast stores more so, or any kind of increasing chatter about upcoming election, political kind of stuff or hunting seasonality or is there anything specific that you can point to that might have caused that?

Yeah, Mark, great question. This is Jeff. So, we did see some pull-forward demand in the state of California with the 11% tax that went effective at the end of June. As I look at the comp trend in the hunt category, we saw better benefit as we moved through July and I would say reinvented our go-to-market approach in terms of pricing, marketing, really focusing in on the hunt category. We saw better comp trends as we focused our efforts into those categories through the end of July. So, yes, we did see pull-forward in California. It's a large state for us, but more so than that, we saw better comp trends in the hunt category in July as we really narrowed our focus on the right in stocks in our core items with the right pricing in the right areas.

Yeah. I would just add to that is we saw that run up in June. We didn't see a huge pullback like traditionally you would see the month following the run up. But I think the work the team did to really stay engaged with the California consumer post the increase from a tax standpoint that we worked really hard on California, great state for us. We'll continue to focus on that state, but I think the work that was done where traditionally you see a huge run up and then you see a huge fall, we felt really good with the performance coming out of that and we continue to be able to target and market our California as we see different things happening. We just recently had a pullback on the one firearm per month, that just got pulled back. And the way we were able to go out and market that as soon as we got that notification is -- the team's done a really nice job being able to communicate. So, I'd add what Jeff said, but then on top of it say the work the team is doing to stay in constant communication with that state, as different things are happening, regulations coming down that we're able to move, and I think be a little bit more nimble than what we have in the past.

Okay, great. Thanks. Just a quick follow-up. Any commentary on the penetration of firearm service or warranty programs in the quarter?

As we look at those programs, to Paul's point in terms of loyalty and the other programs, we're seeing good trends. There's a lot of work to be done. FSP attachment, warranty attachment, I would say, Mark, is the highest that we've seen it. We're at a good run rate there. We continue to push that track. It is one of the KPIs, making sure we're informing the customer about the value-add proposition that it brings, but we're seeing good traction out of the FSP and warranty programs.

Yeah. To start the year and where we finished Q2, just every month, huge improvement, and what the team has been able to do to be able -- I think we've got a lot of momentum around our FSP program. As we go through the back half of the year, we only think that will improve, Mark.

Great. Thank you.

Thank you. Our next question comes from the line of Justin Kleber with Baird. Please proceed with your question.

Hey, good afternoon, guys. It's Justin Kleber. Thanks for taking the questions. First one for me. I was hoping you could maybe just share some color on conversion. I understand traffic is a challenge, but how is conversion trending when customers actually do step inside the store, particularly with the change in the labor model? Paul, you alluded to with more generalists as opposed to traditionally having more, I guess, department specialists. So, just any color on conversion, what you're seeing on that front would be helpful.

Yeah, I mean, I guess, without getting too far into the weeds, we're very happy with what we're seeing on the conversion piece, and as we look at our outfitters, being more generalists and specialists to allow us to attach. But right now, I think the color I would get behind it is we're at an all-time high. We're even higher attaching than we did during COVID. And that gives us, I think, great optimism as we think about and Craig is working with his teams to be able to drive that part of the business and getting great buy-in from our outfitters on what that looks like and as we attach. And we have our suppliers working with us on different attachment ideas, suggestions and ability to be able to spiff our outfitters, to really be able to incent them on the total package itself. So, I think not only what the operators are doing with the merchants and [brand] (ph), and the suppliers are helping us to be able to create really impactful attachment as we get these individuals in via either through the store or as they're coming in to be able to transact as they use our omni channel to be able to go through the firearm purchase plan.

Got it. Okay, that's very helpful color. Thanks. And then, a question just for you, Jeff, on the revised guidance. If I just take the change in EBITDA relative to the change in revenue, it's decremental margins look high at close to 70%. So, is that just because you've been cutting expenses for some time and there just isn't much left that can be taken out of the business? I mean, is that the right read, or is it more related to some of the promotional activity that you alluded to over the back half of the year?

Yeah, Justin, great question. I'll give you a little more color. So, we'll start with margin. As we think about margin, we're going into what is our prime season and hunt season. So, Q3 is going to be primarily driven by hunt season, not a lot of high promotional activity there as that's where we have the right to play. Really more promotional activity as we move into the holiday season and we're competing with disposable dollars with all retailers. So, we'll see promotional activity uptick in Q4. On the expense side, we're always looking for ways to maximize the business and we're going to continue to look this quarter and go-forward on what expenses we can take out. In terms of the magnitude, the quantity that we saw last year, we were able to take a lot out in a very short period of time. Every dollar that we find now is taking time and it comes as contracts come up for renewal. We're actively working with all of our landlords right now to try to renegotiate some rent rates. So, the dollars do not come at the high rate that they did last year. So, we do see kind of a leveling out of those expenses especially as we get into the back half of the year and start to anniversary the expense cuts from the year before. So, as you think about the guide, those are going to be the big things impacting it. To reiterate, we did still guide for positive free cash flow and that's going to be achieved through the ending inventory target. As you look at that reduction in adjusted EBITDA and then the ending inventory, we're going to be free cash flow positive through that ending inventory target and making sure that we really leverage that asset on the balance sheet.

Yeah. I would just add as we think about it from a cost standpoint, the one thing that we just need to keep in mind as we'll continue to find the takeaways of costs that are non-customer-facing and the ability to be able to take some of that cost savings and be able to put back to have a greater experience to help us sell and attach at a higher rate as we think about it in the stores. So, I'd throw caution there, but we know as we look at around great gear and great service, we're going to continue to invest in the stores.

Okay. And then just your response to my question there, Jeff, if I could just sneak one more in, as we think about the free cash flow generation and as we move into next year, recognizing it's too early to talk about '25. Just trying to understand, are there still opportunities to squeeze working capital out of the business or further bring down CapEx? Or is free cash flow next year more about really just driving EBITDA and less about kind of extracting cash from inventory or payables?

Yeah, it's a great question. I think to answer that, we're going to be driving more through EBITDA in terms of cash flow generation next year. As Paul mentioned in his prepared remarks, we took inventory too low at the end of Q2. You don't want to be walking into what is your prime season with inventory levels that we had and we're going to learn from our mistake. We feel confident with our ability to end the year where I'm guiding given that it's the slowest timeframe of the year, but we're going to have to be investing back into the core parts of the business, the 20% that drives the 80% as we move into next year. So, I don't see much room in inventory to squeeze out in terms of working capital. We're going to focus in on CapEx, make sure that we're spending the dollars that are most needed in the company that have the highest return. So, we'll keep managing that, but from a cash flow generation without looking too far into the future, next year is going to be driven off of EBITDA.

Okay. Thanks for all the time guys. Really appreciate it. Best of luck here in 3Q.

Thank you. Our next question comes from the line of Anna Glaessgen with Jefferies. Please proceed with your question.

Hey. Good afternoon, guys. Now with B. Riley. Thanks for taking my questions. I'd like to start on inventory. We're now -- through the process of cleaning up a lot, and I understand you expect to end the season pretty healthy, but now you're talking about investing in the open to buy, and I understand you feel that you ended this quarter too light, but considering that there was a lot of liquidation last year, I just want to touch on what are the demand signals or what are you looking for in terms of the categories you're chasing into and also what are the guardrails in place to make sure you don't end up over your skis in terms of inventory?

Yeah. Anna, it's a great question. And to Paul's point, our focus this year, where we ended Q2, we wanted to end in clean inventory. And we feel confident in the ability and how we executed. We feel that we ended very clean as we walked out of the summer season. What we need to invest back into is the core part of the business. Again, the 20% of the SKUs that drive 80% of the sales, as we make these strategic investments and we make the strategic investment in the back half of the year, that investment is focused on the core SKUs of the business that drives the majority of the demand. We have not had the ability or been good at investing in the core historically. Where we were last year on the liquidation, we had zero open to buy walking into holiday into the hunt season to invest in the core. This year we're in a much different situation where we can make these strategic investments and have confidence that it drives the business because we have the data that supports that they are the core SKUs that drive the business.

The thing I would add to it is that really for Q4 last year, we didn't have the opportunity to buy into really the seasonal holiday goods, and it was more around all focus was on the liquidation and clearance of merchandise. So, we feel comfortable with special buys and newness that's going to spring value. And I think to Jeff's earlier comments, as we come out of hunt, and hunt is our prime to be able to go and to be able to be in market in Q4 with value items, special buys, newness to allow the customers to see that and to be planned as we get into Q4 and the holiday season is going to be a point of differentiation that we didn't have last year. And then the other thing I would add is we are going to make strategic investment in inventory around the goods that Jeff mentioned with the intention of being able to get out of the goods by the end of the year knowing that we have the right goods in the right place and to invest and put them in the stores we know that we're going to be able to turn to allow us to be able to get to our inventory level that we're guiding to at the end of the year. So, we feel I think confident that the inventory purchase is in the right goods and will be in that core as we talked about the 80%-20% to allow us to be able to make that strategic investment and to be able to turn it by the time we get to close the year.

Thank you. Our next question comes from the line of Matt Koranda. I apologize. There are no further questions at this time. I'd like to pass the call back over to management for any closing comments.

By way of note, we'll be participating in both the B. Riley and Lake Street Conferences in New York City on September 12 and hosting in-person one-on-one meetings. Thank you, everyone, for joining today's call. And I do want to apologize for the technical difficulties. Thank you.

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