spwh_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q 


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36401


SPORTSMAN’S WAREHOUSE HOLDINGS, INC. 

(Exact Name of Registrant as Specified in its Charter)


Delaware

 

39-1975614

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

7035 South High Tech Drive, Midvale, Utah

 

84047

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (801) 566-6681


 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $.01 par value

SPWH

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

    

 

 

 

 

 

Large accelerated filer

    

Accelerated filer

    

 

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act:☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒ 

 

As of August 30, 2019, the registrant had 43,230,023 shares of common stock, $0.01 par value per share, outstanding.

 

 

Table of Contents

SPORTSMAN’S WAREHOUSE HOLDINGS, INC.

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements (unaudited):

3

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

Condensed Consolidated Statements of Operations

4

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4. 

Controls and Procedures

29

 

 

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

31

 

 

 

Item 1A. 

Risk Factors

31

 

 

 

Item 5. 

Other Information

31

 

 

 

Item 6. 

Exhibits

32

 

 

 

 

Signatures

33

 

We operate on a fiscal calendar that, in a given fiscal year, consists of the 52- or 53-week period ending on the Saturday closest to January 31st. Our fiscal second quarters ended August 3, 2019 and August 4, 2018 both consisted of 13 weeks and are referred to herein as the second quarter of fiscal year 2019 and the second quarter of fiscal year 2018, respectively. Fiscal year 2019 contains 52 weeks of operations and will end on February 1, 2020. Fiscal year 2018 contained 52 weeks of operations ended on February 2, 2019.

 

 

Table of Contents

References throughout this document to “Sportsman’s Warehouse,” “we,” “us,” and “our” refer to Sportsman’s Warehouse Holdings, Inc. and its subsidiaries, and references to “Holdings” refer to Sportsman’s Warehouse Holdings, Inc. excluding its subsidiaries.

 

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 

 

This Quarterly Report on Form 10-Q (this “10-Q”) contains statements that constitute forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this 10-Q are forward-looking statements. These statements may include words such as “aim,” “anticipate,” “assume,” “believe,” “can have,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “objective,” “plan,” “potential,” “positioned,” “predict,” “should,” “target,” “will,” “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our plans and objectives for future operations, growth or initiatives and strategies are forward-looking statements.

 

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that predicting the impact of known factors is very difficult, and we cannot anticipate all factors that could affect our actual results.

 

All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:

 

·

our retail-based business model is impacted by general economic conditions and economic and financial uncertainties may cause a decline in consumer spending;

·

current and future government regulations, in particular regulations relating to the sale of firearms and ammunition, may impact the supply and demand for our products and our ability to conduct our business;

·

our concentration of stores in the Western United States makes us susceptible to adverse conditions in this region, which could affect our sales and cause our operating results to suffer;

·

we operate in a highly fragmented and competitive industry and may face increased competition;

·

we may not be able to anticipate, identify and respond to changes in consumer demands, including regional preferences, in a timely manner; and

·

we may not be successful in operating our stores in any existing or new markets into which we expand. 

 

The above is not a complete list of factors or events that could cause actual results to differ from our expectations, and we cannot predict all of them. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements disclosed under “Part I. Item 1A. Risk Factors,” appearing in our Annual Report on Form 10-K for the fiscal year ended February 1, 2019 and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this 10-Q, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, and public communications. You should evaluate all forward-looking statements made in this 10-Q and otherwise in the context of these risks and uncertainties.

 

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements we make. These forward-looking statements speak only as of the date of this 10-Q and are not guarantees of future performance or developments and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly, whether as a result of new information, future developments or otherwise.

2

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SPORTSMAN’S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Amounts in Thousands, Except Per Share Data

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

August 3,

 

February 2,

 

 

    

2019

    

2019

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

1,475

 

$

1,547

 

Accounts receivable, net

 

 

239

 

 

249

 

Merchandise inventories

 

 

289,311

 

 

276,600

 

Income tax receivable

 

 

1,080

 

 

 —

 

Prepaid expenses and other

 

 

10,653

 

 

15,174

 

Total current assets

 

 

302,758

 

 

293,570

 

Operating lease right of use asset

 

 

183,486

 

 

 —

 

Property and equipment, net

 

 

97,984

 

 

92,084

 

Deferred income taxes

 

 

 —

 

 

2,997

 

Definite lived intangibles, net

 

 

233

 

 

246

 

Total assets

 

$

584,461

 

$

388,897

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

64,891

 

$

24,953

 

Accrued expenses

 

 

58,050

 

 

56,384

 

Income taxes payable

 

 

 —

 

 

1,838

 

Operating lease liability, current

 

 

32,483

 

 

 —

 

Revolving line of credit

 

 

127,126

 

 

144,306

 

Current portion of long-term debt, net of discount and debt issuance costs

 

 

7,915

 

 

7,915

 

Current portion of deferred rent

 

 

 —

 

 

5,270

 

Total current liabilities

 

 

290,465

 

 

240,666

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt, net of discount, debt issuance costs, and current portion

 

 

23,760

 

 

27,717

 

Deferred income taxes

 

 

412

 

 

 —

 

Deferred rent, noncurrent

 

 

 —

 

 

41,854

 

Operating lease liability, noncurrent

 

 

181,117

 

 

 —

 

Total long-term liabilities

 

 

205,289

 

 

69,571

 

Total liabilities

 

 

495,754

 

 

310,237

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $.01 par value; 20,000 shares authorized; 0 shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $.01 par value; 100,000 shares authorized; 43,230  and 42,978 shares issued and outstanding, respectively

 

 

432

 

 

430

 

Additional paid-in capital

 

 

85,422

 

 

84,671

 

Accumulated earnings (deficit)

 

 

2,853

 

 

(6,441)

 

Total stockholders' equity

 

 

88,707

 

 

78,660

 

Total liabilities and stockholders' equity

 

$

584,461

 

$

388,897

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

SPORTSMAN'S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Amounts in Thousands Except Per Share Data

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net sales

 

$

211,766

 

$

203,288

 

$

385,783

 

$

383,347

 

Cost of goods sold

 

 

138,544

 

 

131,011

 

 

258,388

 

 

255,504

 

Gross profit

 

 

73,222

 

 

72,277

 

 

127,395

 

 

127,843

 

 

 

 

 

 

 

 

 

 

 —

 

 

 

 

Selling, general, and administrative expenses

 

 

63,460

 

 

59,088

 

 

122,990

 

 

118,305

 

Income from operations

 

 

9,762

 

 

13,189

 

 

4,405

 

 

9,538

 

Interest expense

 

 

2,353

 

 

4,334

 

 

4,458

 

 

7,891

 

Income (loss) before income taxes

 

 

7,409

 

 

8,855

 

 

(53)

 

 

1,647

 

Income tax (benefit) expense

 

 

1,911

 

 

2,304

 

 

(92)

 

 

925

 

Net income

 

$

5,498

 

$

6,551

 

$

39

 

$

722

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.15

 

$

0.00

 

$

0.02

 

Diluted

 

$

0.13

 

$

0.15

 

$

0.00

 

$

0.02

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,130

 

 

42,896

 

 

43,065

 

 

42,812

 

Diluted

 

 

43,155

 

 

42,921

 

 

43,090

 

 

42,837

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

SPORTSMAN'S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Amounts in Thousands

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended August 3, 2019 and August 4, 2018

 

 

Common Stock

 

Restricted nonvoting
common stock

 

Additional
paid-in-
capital

 

Accumulated
(deficit) earnings

 

Total
stockholders'
equity

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Amount

    

Amount

    

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 5, 2018

 

42,833

 

$

428

 

 —

 

$

 —

 

$

83,068

 

$

(36,019)

 

$

47,477

Vesting of restricted stock units

 

59

 

 

 1

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

 —

Issuance of common stock for cash per employee stock purchase plan

 

45

 

 

 —

 

 —

 

 

 —

 

 

202

 

 

 —

 

 

202

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

482

 

 

 —

 

 

482

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

6,551

 

 

6,551

Balance at August 4, 2018

 

42,937

 

$

429

 

 —

 

$

 —

 

$

83,751

 

$

(29,468)

 

$

54,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 4, 2019

 

43,174

 

$

432

 

 —

 

$

 —

 

 

84,753

 

$

(2,645)

 

$

82,540

Vesting of restricted stock units

 

 2

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock for cash per employee stock purchase plan

 

54

 

 

 —

 

 —

 

 

 —

 

 

175

 

 

 —

 

 

175

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

494

 

 

 —

 

 

494

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,498

 

 

5,498

Balance at August 3, 2019

 

43,230

 

$

432

 

 —

 

$

 —

 

$

85,422

 

$

2,853

 

$

88,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Twenty-six Weeks Ended August 3, 2019 and August 4, 2018

 

 

Common Stock

 

Restricted nonvoting
common stock

 

Additional
paid-in-
capital

 

Accumulated
(deficit) earnings

 

Total
stockholders'
equity

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Amount

    

Amount

    

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 3, 2018

 

42,617

 

$

426

 

 —

 

$

 —

 

$

82,197

 

$

(32,825)

 

$

49,798

Impact of change for ASC 606 adoption

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,635

 

 

2,635

Vesting of restricted stock units

 

320

 

 

 3

 

 —

 

 

 —

 

 

(3)

 

 

 —

 

 

 —

Payment of withholdings on restricted stock units

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(699)

 

 

 —

 

 

(699)

Issuance of common stock for cash per employee stock purchase plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 

202

 

 

 —

 

 

202

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,054

 

 

 —

 

 

2,054

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

722

 

 

722

Balance at August 4, 2018

 

42,937

 

$

429

 

 —

 

$

 —

 

$

83,751

 

$

(29,468)

 

$

54,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 2, 2019

 

42,978

 

$

430

 

 —

 

$

 —

 

$

84,671

 

$

(6,441)

 

$

78,660

Impact of change for ASC 842 adoption

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

9,255

 

 

9,255

Vesting of restricted stock units

 

198

 

 

 2

 

 —

 

 

 —

 

 

(2)

 

 

 —

 

 

 —

Payment of withholdings on restricted stock units

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(369)

 

 

 —

 

 

(369)

Issuance of common stock for cash per employee stock purchase plan

 

54

 

 

 —

 

 —

 

 

 —

 

 

174

 

 

 —

 

 

174

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

948

 

 

 —

 

 

948

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

39

 

 

39

Balance at August 3, 2019

 

43,230

 

$

432

 

 —

 

$

 —

 

$

85,422

 

$

2,853

 

$

88,707


The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

5

Table of Contents

SPORTSMAN'S WAREHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in Thousands

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

 

 

August 3,

 

August 4,

 

    

 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

 

$

39

 

$

722

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

 

9,245

 

 

8,887

Amortization and write-off of discount on debt and deferred financing fees

 

 

 

170

 

 

1,893

Amortization of definite lived intangible

 

 

 

13

 

 

276

Change in deferred rent

 

 

 

 —

 

 

(865)

Gain on asset dispositions

 

 

 

(311)

 

 

 —

Noncash lease expense

 

 

 

14,002

 

 

 —

Deferred income taxes

 

 

 

307

 

 

120

Stock-based compensation

 

 

 

948

 

 

2,054

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

10

 

 

(69)

Operating lease liabilities

 

 

 

(14,895)

 

 

 —

Merchandise inventories

 

 

 

(12,710)

 

 

(58,474)

Prepaid expenses and other

 

 

 

634

 

 

(1,804)

Accounts payable

 

 

 

39,040

 

 

36,332

Accrued expenses

 

 

 

1,860

 

 

3,420

Income taxes payable and receivable

 

 

 

(2,918)

 

 

(3,676)

Net cash provided by (used in) operating activities

 

 

 

35,434

 

 

(11,184)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

 

(14,761)

 

 

(10,585)

Proceeds from sale of property and equipment

 

 

 

311

 

 

 —

Net cash used in investing activities

 

 

 

(14,450)

 

 

(10,585)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net (payments) borrowings on line of credit

 

 

 

(17,180)

 

 

113,829

Increase in book overdraft

 

 

 

319

 

 

5,860

Proceeds from issuance of common stock per employee stock purchase plan

 

 

 

174

 

 

202

Payment of withholdings on restricted stock units

 

 

 

(369)

 

 

(699)

Borrowings on term loan

 

 

 

 —

 

 

40,000

Payment of deferred financing costs

 

 

 

 —

 

 

(1,331)

Principal payments on long-term debt

 

 

 

(4,000)

 

 

(135,127)

Net cash (used in) provided by financing activities

 

 

 

(21,056)

 

 

22,734

Net change in cash

 

 

 

(72)

 

 

965

Cash at beginning of period

 

 

 

1,547

 

 

1,769

Cash at end of period

 

 

$

1,475

 

$

2,734

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest, net of amounts capitalized

 

 

$

4,356

 

$

7,867

Income taxes, net of refunds

 

 

 

2,519

 

 

4,672

 

 

 

 

 

 

 

 

Supplemental schedule of noncash activities:

 

 

 

 

 

 

 

Noncash change in operating lease right of use asset and operating lease liabilities from

 

 

$

14,523

 

$

 —

remeasurement of existing leases and addition of new leases

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued expenses

 

 

$

1,571

 

$

2,975

Landlord receivable relating to deemed sale leaseback transaction

 

 

 

 —

 

 

1,717

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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SPORTSMAN’S WAREHOUSE HOLDINGS, INC.

AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

Amounts reported in thousands, except per share data and store count data 

(1) Description of Business and Basis of Presentation

Description of Business

Sportsman’s Warehouse Holdings, Inc. (“Holdings”) and its subsidiaries (collectively, the “Company”) operate retail sporting goods stores. As of August 3, 2019, the Company operated 94 stores in 24 states. The Company also operates an e-commerce platform at www.sportsmans.com. The Company’s stores and website are aggregated into one single operating and reportable segment.

Basis of Presentation

The condensed consolidated financial statements included herein are unaudited and have been prepared by management of the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company’s condensed consolidated balance sheet as of February 2, 2019 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments that are, in the opinion of management, necessary to summarize fairly our condensed consolidated financial statements for the periods presented. All of these adjustments are of a normal recurring nature. The results of the fiscal quarter ended August 3, 2019 are not necessarily indicative of the results to be obtained for the year ending February 1, 2020. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019 filed with the SEC on March 29, 2019 (the “Fiscal 2018 Form 10-K”).

 

(2) Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are described in Note 1 to the Company’s Fiscal 2018 Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with prior GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease. However, unlike prior GAAP—which required only finance (formerly capital) leases to be recognized on the balance sheet—the new ASU requires both types of leases to be recognized on the balance sheet. The ASU took effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This standard can be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes certain practical expedients that an entity may elect to apply, including an election to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842,

Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which make improvements to Accounting Standards Codification (“ASC”) 842 and allow entities to not restate comparative periods in transition to ASC 842 and instead report the comparative periods under ASC 840.

 

The Company adopted ASC 842 using the modified retrospective approach at the beginning of the first quarter of fiscal 2019, coinciding with the standard’s effective date. In accordance with ASC 842, the Company did not restate comparative periods in transition to ASC 842 and instead reported comparative periods under ASC 840. Adoption of the

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standard resulted in the initial recognition of operating lease right-of-use (“ROU”) assets of $183,000 and operating lease liabilities of $214,000 as of February 3, 2019. These amounts were based on the present value of such commitments as of February 3, 2019 using the Company’s incremental borrowing rate (“IBR”), which was determined through use of the Company’s credit rating to develop a rate curve that approximates the Company’s market risk profile. The adoption of this standard had a material impact on the Company’s consolidated statement of income, balance sheet, stockholders’ equity (deficit) and cash flows, with a $9,300 net adjustment recorded to beginning retained earnings on February 3, 2019 due to the acceleration of recognition of a deferred gain and derecognition of the related deferred tax asset the Company was amortizing relating to the historical sale of owned properties. In addition, the Company completed its evaluation of the practical expedients offered and enhanced disclosures required in ASC 842, as well as reviewed arrangements to identify embedded leases, among other activities, to account for the adoption of this standard.

 

The Company elected the following practical expedients:

 

·

A package of practical expedients allowing the Company to:

1.

Carry forward its historical lease classification (i.e. it was not necessary to reclassify any existing leases at the adoption date of ASC 842),

2.

Avoid reassessing whether any expired or existing contracts are or contain leases, and

3.

Avoid reassessing initial indirect costs for any existing lease.

·

A practical expedient allowing the Company to not separate lease components (e.g. fixed payments including, rent, real estate taxes, and insurance costs) from nonlease components (e.g. common area maintenance costs), primarily impacting the Company’s real estate leases. The election of this practical expedient eliminates the burden of separately estimating the real estate lease and nonlease costs on a relative stand-alone basis.

·

A practical expedient related to land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and eliminated the need to reassess existing lease contracts to determine if land easements are separate leases under ASC 842.

 

The Company did not elect a practical expedient which would allow the Company to use hindsight in determining the lease term (that is, when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and to assess impairment of the entity’s ROU assets, since election of this expedient could make adoption of ASC 842 more complex given that re-evaluation of the lease term and impairment consideration affect other aspects of lease accounting.

 

In accordance with ASC 842, the Company determines if an arrangement is a lease at inception. The Company has operating leases for the Company’s retail stores, distribution center, and corporate office. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheet. Lease liabilities are initially recorded at the present value of the lease payments by discounting the lease payments by the IBR and then recording accretion over the lease term using the effective interest method. Operating lease classification results in a straight-line expense recognition pattern over the lease term and recognized lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Operating lease expense is included in selling, general and administrative expense, based on the use of the leased asset, on the interim unaudited condensed consolidated statement of operations. Leases with an initial term of 12 months of less are not recorded on the balance sheet and are not material; the Company recognizes lease expense for these leases on a straight-line basis over the remaining lease term.

 

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As the Company’s leases generally do not provide an implicit rental rate, the Company uses an IBR to determine the present value of future rental payments. The IBR is determined by using the Company’s credit rating to develop a yield curve that approximates the Company’s market risk profile. The operating lease ROU asset also includes any prepaid lease payments made by the tenant and is reduced by lease incentives such as tenant improvement allowances. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

 

For fiscal 2018, the Company evaluated and classified its leases as operating leases for financial reporting purposes, in accordance with ASC 840.

 

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In accordance with ASC 840, deferred rent represents the difference between rent paid and amounts expensed for operating leases. Certain leases have scheduled rent increases, and certain leases include an initial period of free or reduced rent as an inducement to enter into the lease agreement (“rent holidays”). The Company recognized rent expense for rent increases and rent holidays on a straight-line basis over the term of the underlying leases, without regard to when rent payments are made. The calculation of straight-line rent begins on the possession date and extends through the “reasonably assured” lease term as defined in ASC 840.

 

Additionally, in accordance with ASC 840, landlord allowances for tenant improvements, or lease incentives, were recorded as deferred rent and amortized on a straight-line basis over the “reasonably assured” lease term as a component of rent expense.

 

See Note 6 for a further discussion on leases.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. The

Company plans to adopt the updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.

(3) Revenue Recognition

 

Revenue recognition accounting policy

 

The Company operates solely as an outdoor retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the United States and online. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since the Company only extends immaterial credit purchases to certain municipalities.

 

Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:

 

·

Retail store sales

 

·

E-commerce sales

 

·

Gift cards and loyalty reward program

 

For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the products are tendered for delivery to the common carrier.

 

The transaction price for each contract is the stated price on the product, reduced by any stated discounts at that point in time. The Company does not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit point-of-sale contract with the customer, as reflected in the transaction receipt, states the final terms of the sale, including the

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description, quantity, and price of each product purchased. Payment for the Company’s contracts is due in full upon delivery. The customer agrees to a stated price implicit in the contract that does not vary over the contract.

 

The transaction price relative to sales subject to a right of return reflects the amount of estimated consideration to which the Company expects to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. The allowance for sales returns is estimated based upon historical experience and a provision for estimated returns is recorded as a reduction in sales in the relevant period. The estimated merchandise inventory cost related to the sales returns is recorded in prepaid expenses and other. The estimated refund liabilities are recorded in accrued expenses.  If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net sales and earnings in the period such variances become known.

 

Contract liabilities are recognized primarily for gift card sales and our loyalty reward program. Cash received from the sale of gift cards is recorded as a contract liability in accrued expenses, and the Company recognizes revenue upon the customer’s redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying a historical breakage rate of 3.0% when no escheat liability to relevant jurisdictions exists. Based upon historical experience, gift cards are predominantly redeemed in the first two years following their issuance date. The Company does not sell or provide gift cards that carry expiration dates. ASC 606 requires the Company to allocate the transaction price between the goods and the loyalty reward points based on the relative stand alone selling price. The Company recognized revenue for the breakage of loyalty reward points as revenue in proportion to the pattern of customer redemption of the points by applying a historical breakage rate of 35% when no escheat liability to relevant jurisdictions exists.

 

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

 

Sales returns

 

The Company estimates a reserve for sales returns and records the respective reserve amounts, including a right of return asset when a product is expected to be returned and resold. Historical experience of actual returns and customer return rights are the key factors used in determining the estimated sales returns.

 

Contract balances

 

The following table provides information about right of return assets, contract liabilities, and sales return liabilities with customers as of August 3, 2019:

 

 

 

 

 

 

 

 

 

    

August 3, 2019

    

February 2, 2019

Right of return assets, which are included in prepaid expenses and other

 

$

1,366

 

$

1,496

Estimated contract liabilities, net of breakage

 

 

(18,784)

 

 

(20,298)

Sales return liabilities, which are included in accrued expenses

 

 

(2,039)

 

 

(2,233)

 

For the 13 and 26 weeks ended August 3, 2019 the Company recognized approximately $215 and $505 in gift card breakage and approximately $350 and $660 in loyalty reward breakage, respectively. For the 13 and 26 weeks ended August 4, 2018, the Company recognized approximately $186 and $505 in gift card breakage and approximately $288 and $553 in loyalty reward breakage, respectively.

 

The current balance of the right of return assets is the expected amount of inventory to be returned that is expected to be resold. The current balance of the contract liabilities primarily relates to the gift card and loyalty reward program liabilities. The Company expects the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions over the next two years. The current balance of sales return liabilities is the expected amount of sales returns from sales that have occurred.

 

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Disaggregation of revenue from contracts with customers

 

In the following table, revenue from contracts with customers is disaggregated by department. The percentage of net sales related to the Company’s departments for the 13 and 26 weeks ended August 3, 2019 and August 4, 2018, was approximately:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

 

 

August 3,

 

August 4,

    

August 3,

    

August 4,

 

Department

    

Product Offerings

    

2019

    

2018

    

2019

    

2018

 

Camping

 

Backpacks, camp essentials, canoes and kayaks, coolers, outdoor cooking equipment, sleeping bags, tents and tools

 

19.3%

 

20.4%

 

15.9%

 

16.2%

 

Clothing

 

Camouflage, jackets, hats, outerwear, sportswear, technical gear and work wear

 

7.4%

 

7.3%

 

7.7%

 

7.3%

 

Fishing

 

Bait, electronics, fishing rods, flotation items, fly fishing, lines, lures, reels, tackle and small boats

 

17.5%

 

17.0%

 

15.0%

 

14.5%

 

Footwear

 

Hiking boots, socks, sport sandals, technical footwear, trail shoes, casual shoes, waders and work boots

 

7.3%

 

7.6%

 

7.3%

 

7.0%

 

Hunting and Shooting

 

Ammunition, archery items, ATV accessories, blinds and tree stands, decoys, firearms, reloading equipment and shooting gear

 

41.1%

 

39.7%

 

46.6%

 

47.4%

 

Optics, Electronics, Accessories, and Other

 

Gift items, GPS devices, knives, lighting, optics (e.g. binoculars), two-way radios, and other license revenue, net of revenue discounts

 

7.4%

 

8.0%

 

7.5%

 

7.6%

 

Total

 

 

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

 

(4) Property and Equipment

Property and equipment as of August 3, 2019 and February 2, 2019 were as follows:

 

 

 

 

 

 

 

 

 

 

 

August 3,

 

February 2,

 

 

    

2019

    

2019

 

Furniture, fixtures, and equipment

 

$

74,273

 

$

71,820

 

Leasehold improvements

 

 

95,692

 

 

94,573

 

Construction in progress

 

 

13,281

 

 

1,743

 

Total property and equipment, gross

 

 

183,245

 

 

168,136

 

Less accumulated depreciation and amortization

 

 

(85,261)

 

 

(76,052)

 

Total property and equipment, net

 

$

97,984

 

$

92,084

 

 

 

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(5) Accrued Expenses

Accrued expenses consisted of the following as of August 3, 2019 and February 2, 2019:

 

 

 

 

 

 

 

 

 

 

August 3,

 

February 2,

 

    

2019

    

2019

Book overdraft

 

$

10,616

 

$

10,297

Unearned revenue

 

 

20,399

 

 

21,836

Accrued payroll and related expenses

 

 

10,548

 

 

11,590

Sales and use tax payable

 

 

4,671

 

 

4,250

Accrued construction costs

 

 

245

 

 

760

Other

 

 

11,571

 

 

7,651

Total Accrued Expenses

 

$

58,050

 

$

56,384

 

(6) Leases

At the inception of the lease, the Company’s operating leases have remaining certain lease terms of up to 10 years, which typically includes multiple options for the Company to extend the lease which are not reasonably certain.

The adoption of ASC 842 resulted in recording a non-cash transitional adjustment to ROU assets and operating lease liabilities of $183,000 and $214,000, respectively, as of February 3, 2019. The difference between the ROU assets and operating lease liabilities at transition primarily represented existing deferred rent, tenant improvement allowances and prepaid rent of $14,200, $20,600 and $3,800, respectively, which were recorded as a component of the ROU asset in connection with the non-cash transitional adjustment. As a result of the adoption of ASC 842, the Company also recorded an increase to retained earnings of $9,300, net of tax, as of February 3, 2019, in relation to the accelerated recognition of a deferred gain, and derecognition of the related deferred tax asset, which the Company was amortizing relating to the historical sales of owned properties it currently leases.

As of August 3, 2019, ROU assets recorded for operating leases were $183,486 and accumulated amortization associated with operating leases was $14,002. In the 13 and 26 weeks of fiscal 2019, the Company recorded a non-cash increase of $1,374 and $14,523, respectively, to ROU assets and operating lease liabilities resulting from lease remeasurements from the exercise of lease extension options and new leases added.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. 

In accordance with ASC 842, total lease expense, including CAM, recorded during the 13 and 26 weeks ended August 3, 2019 was $14,429 and $28,814, respectively.

In accordance with ASC 842, other information related to leases was as follows:

 

 

 

 

 

 

 

26 Weeks Ended

 

 

August 3,

 

    

2019

Operating cash flows from operating leases

 

$

(23,859)

    Cash paid for amounts included in the measurement of lease liabilities -  operating leases

 

 

(23,859)

 

 

 

 

 

 

As of August 3,

 

    

2019

 

 

 

 

Right-of-use assets obtained in exchange for new or remeasured operating lease liabilities

 

$

14,523

Weighted-average remaining lease term - operating leases

 

 

5.93

Weighted-average discount rate - operating leases

 

 

7.84%

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In accordance with ASC 842, maturities of operating lease liabilities as of August 3, 2019 were as follows:

 

 

 

 

 

 

 

Operating

Year Endings:

Leases

2019

 

$

24,179

2020

 

 

47,909

2021

 

 

44,155

2022

 

 

39,972

2023

 

 

34,766

Thereafter

 

 

83,100

Undiscounted cash flows

 

$

274,081

Reconciliation of lease liabilities:

 

 

 

    Present values

 

$

213,600

    Lease liabilities - current

 

 

32,483

    Lease liabilities - noncurrent

 

 

181,117

Lease liabilities - total

 

$

213,600

    Difference between undiscounted and discounted cash flows

 

$

60,481

 

 

 

In accordance with ASC 840, rent expense for operating leases consisted of the following:

 

 

 

 

 

 

 

13 Weeks Ended

 

 

August 4,

 

    

2018

Operating lease expense

 

$

13,336

Total lease expense

 

 

13,336

 

 

 

 

 

 

26 Weeks Ended

 

 

August 4,

 

    

2018

Operating lease expense

 

$

26,474

Total lease expense