Description

Introduction

I wrote up SPWH about four years ago. The stock performed okay, and generally worked as most of the key elements around the competitive dynamics in the industry proved to be on the mark. This will be a brief write-up, mostly to highlight elements of the story which deserve an update. In February 2021, the company agreed to be acquired by Great American Group (owner of BassPro and Cabela’s) at $18/share. That merger was terminated in December 2021. After recent events, which includes the receipt of a $55M break fee and strong cash flow generation over the last two years, the company now has a balance sheet with a net cash position, an improved competitive landscape and a competent management team set to execute on a market opportunity in which the company can nearly triple its store base in coming years.

Background

-  In February 2021, the company received an offer to be acquired for $18/share on 2/21 by Bass Pro parent Great American Outdoors Group. That deal got cancelled on 12/2/21 as a result of antitrust concerns due to overlap in ~24 markets. BassPro had 177 stores ~$7B sales (including 82 Cabela’s which it bought for ~$4B in 2017), while SPWH has 110 for ~$1.5B FY22E sales. 

-   Since that original offer, ebitda and cash flows have been quite strong on the back of growth in outdoor sports like hunting, fishing and camping during Covid. SPWH did ~$150M ebitda in the subsequent 12 months and entirely de-levered the balance sheet, save for operating leases.

- The merger break fee nets out to ~$40M after taxes and puts the company in a net cash position. (It’s worth noting the receipt of the break fee has yet to be captured by Factset.)

In recent years, Dick’s, Wal-Mart and Gander Mountain have all pulled back or exited entirely from the guns and ammo business. This leaves SPWH to compete only with BassPro and Cabela’s on a national basis, and mostly with mom/pop independent players who are estimated to comprise ~65% of the outdoor specialty market today.

While COVID induced two banner years for the company, a number of lasting offsets have occurred over this period

o   Over two years, there are 12M new gun owners in the US, up ~17%

o   The company store base and ~sq. ft. are also up ~20%.

o   eCom sales were nearly non-existent at 2019 FYE. Now they comprise ~8% of sales and are growing quickly, partly aided by unique programs like the company’s FLL, in which they can ship firearms to one of ~400 – 500 Independent Firearm Dealers across the US they have partnered with to deliver firearms ordered online.

o   The company now has ~3M loyalty members, up from nearly zero at 2019 FYE.

o   And of course, the company now has a clean balance sheet with a net cash position, from nearly 7x net debt/ebitda at 2019 FYE.

Current situation

We are contemplating a down year next year on comps, ebitda and earnings. But from there, the company has an opportunity to grow on each of these metrics while expanding its store count from ~120 to ~300 over time. The company recently offered up a growth algorithm that calls for:

o   Mid to high single digits annual sq. footage growth

o   Low to mid single digit SSS growth

o   And high single digit adjusted ebitda margins

 Clearly, the trajectory of gun sales are the wild card. Sales that plateau at a level on a par with 2021 (like February’s recent NICCS data highlighted) would likely combine to produce a fantastic investment result. Should gun sales take a material and lasting step down, it seems downside is reasonably well protected, but its impact on earnings growth may not produce much excitement in the near term.

 Capital allocation is another consideration, and it seems clear the company is currently evaluating a share repurchase program. This could come in the form of an ASR, along with a steady augmentation of 2-3% shrink to the share count on an annual basis thereafter. 

     In a big picture view, a retailer with a strong competitive position that can generate double digit topline growth, modest operating leverage and augment this with 2 – 3% share repurchases per should garner an attractive valuation. It is also worth noting, that while, small, there were a few insider purchases around current levels shortly after the deal broke and the stock fell. 

Risks

- A lasting and meaningful step down in purchases of guns and ammo

- Consumer risk

- Inflation 

Catalyst

- Share repurchases

- Continued strong EPS reports and improved investor awareness

- Gun market plateaus at an elevated level