SPWH – Sportsman's Warehouse Holdings

[ikussain]

My first stock write-up. Please judge as harshly as you can.

SPWH.pdf

[Spekulatius]

So the entire thesis is build upon predicting gun sales in a nutshell. Seems like a big gamble to me.

[ikussain]

I admit that it may have been confusingly worded, but the entire point of the thesis is that the company seems to be hit by declining sales nowhere near as much as what total sales would suggest. Company is a bargain despite declining nationwide sales. If sales improve, you get some extra for free. And the current price provides a cushion of 50% if you are willing to accept 10x certain free cash flow as a fair price

[Foreign Tuffett]

Thanks for the write up. Always good to have stuff like this posted on the forum.

 

It's a pass for me, for the following reasons:

 

* I would be cautious about trying to est. sustainable FCF for a leveraged retailer like this. For many retailers free cash flow is a "here today, gone tomorrow" phenomenon. 

 

* Why is their store base so fragmented? The most recent 10-K lists ten different states with only a single store. The lack of scale in individual markets makes marketing challenging.

 

* I think they are over leveraged generally, especially considering that they don't own any real estate whatsoever.

 

* If I were somewhat bullish on the US gun market I would probably favor RGR, which is a superior business with a much stronger balance sheet. If I were very bullish on the US gun market I might consider something leveraged like this, but I'm not -- so it's a pass for me.

[writser]

It should also be noted that Mr. Barker has every incentive to make it work. He currently holds 378 thousand shares of the company – 0.9% of company, of which he and his wife purchased on open market about 92 thousand over the last two months at a weighted average price of $3.9. Over those two months he has been buying at as high as $4.75 per share.

 

One could also say: his salary in 2018 was $1.8 million, of which $1m was in cash, so his stock holdings are almost irrelevant in comparison to his current and future earnings. Also, he basically was given the vast majority of these shares in the form of RSU's, it's not like he bought them in his personal account .. And buying $100k worth of shares is a token amount for a 50 year old senior executive with probably a few million to his name. I'd say that is more a PR stunt than an investment. In other words: I wouldn't read too much in this.

 

A few more thoughts:

 

- Your cashflow multiple ignores debt: I'd look at EV/FCF which seems to be closer to 10. How does that compare to peers? Isn't something like DDS more attractive (just a random retailer that I looked at a bit a few months ago)?

- What is your estimate of fair value? When would you sell? Is there a margin of safety?

- Do you actually own the stock?

- What about lease obligations? They aren't mentioned in your report at all.

- Similarly, I feel you don't pay too much attention to the debt load. What are interest rates?  Covenants? When is it due?

- There are a lot of 'according to the company'-s :P . I'd take those with a bit of salt, usually everything is great, "according to the company".

- For example, if capex is very low compared to depreciation, have you considered that the company is underinvesting?

- A very quick glance at morningstar or whatever leads me to believe that your $35m FCF number is very optimistic. What is the average FCF for the past 5 years? If they generate so much cash, where is it?

 

 

In general I am left wondering: is your writeup a pitch designed too be as compelling as possible or a rational stock analysis? Because after reading your write-up it seems a foregone conclusion SPWH will go up but I don't know .. "The business model is simple, barrier to entry, they will emerge stronger than ever". The writeup ticks all the boxes, but is investing in retail really that simple? In general I like a bit more nuance and skepticism. You focus a lot on gun sales, insider ownership, but are these issues really that important in the grand scheme of things? The company has a huge debt load, you are basically buying an option.

 

Though if you want to submit this to a contest or something I could see why you would write it this way.

 

Anyway, thanks for sharing and keep up the good work.

[5xEBITDA]

"Sustainable Free Cash Flow" for a stressed retailer that has filed bankruptcy twice in the last ten years is a good one.

 

This thing is levered 3.5x and levered free cash flow is closer to $20 million, so your EV is really closer to 8x cash flow (adj. for rent capitalization). LTM Adj. EBITDA is $64 million, which is likely going to keep going down (down 6% just since the end of 2018). So lets say you get out of 2019 with $55 - 60 million. Analyst estimates are currently towards the high end, for reference. That would leave with you around $10 million levered free cash flow. Not great. At 4x EBITDA (a big, big if), this thing is worth around $472 million and your EV is currently $578 million.

 

They have $1.7 million cash, and $8 million debt they have pay this year as of 1Q19. Availability under the credit agreement is currently $19.3 million, but that is subject to a borrowing base calculation which may likely change if operations continue to get worse (I did not read into it). So after debt repayment, your FCF to equity is likely closer to $10 - $12 million...how are they going to de-lever $160 million of debt that is due in 2023 (means you really need to solve it by 2021 / 2022 latest)?

 

I'm not sure why you're ignoring working capital...very important for a retailer. In fact, for the last year working capital was a use of $15 million. Current inventory levels of $291 million helps build a positive NWC balance of $195 million, but if trends continue to worsen that inventory will likely be written down and you won't be able to bleed off working capital for liquidity. It is likely this thing has a negative NWC balance which has the opposite affect on liquidity if sales dry up further.

 

The reality is that the equity stub of a retailer who primarily sells firearms is going to trade based on politics. Sentiment towards further firearms legislation will drive earnings - more democrats pushing for restrictions will make sales go up and vise versa. I don't think you can really count on the cash flows from other products in the meantime, you even mentioned that people come to the stores to buy guns and end up getting other stuff. So if less are going in for guns, you have a problem with the rest of your inventory.

 

I mean if you think you have some insight into how politics will go over the next few years, have at this, but this is too much risk for me. I wouldn't even lend to this company.

[writser]

Good post, thanks.

[ikussain]

It should also be noted that Mr. Barker has every incentive to make it work. He currently holds 378 thousand shares of the company – 0.9% of company, of which he and his wife purchased on open market about 92 thousand over the last two months at a weighted average price of $3.9. Over those two months he has been buying at as high as $4.75 per share.

 

One could also say: his salary in 2018 was $1.8 million, of which $1m was in cash, so his stock holdings are almost irrelevant in comparison to his current and future earnings. Also, he basically was given the vast majority of these shares in the form of RSU's, it's not like he bought them in his personal account .. And buying $100k worth of shares is a token amount for a 50 year old senior executive with probably a few million to his name. I'd say that is more a PR stunt than an investment. In other words: I wouldn't read too much in this.

 

A few more thoughts:

 

- Your cashflow multiple ignores debt: I'd look at EV/FCF which seems to be closer to 10. How does that compare to peers? Isn't something like DDS more attractive (just a random retailer that I looked at a bit a few months ago)?

- What is your estimate of fair value? When would you sell? Is there a margin of safety?

- Do you actually own the stock?

- What about lease obligations? They aren't mentioned in your report at all.

- Similarly, I feel you don't pay too much attention to the debt load. What are interest rates?  Covenants? When is it due?

- There are a lot of 'according to the company'-s :P . I'd take those with a bit of salt, usually everything is great, "according to the company".

- For example, if capex is very low compared to depreciation, have you considered that the company is underinvesting?

- A very quick glance at morningstar or whatever leads me to believe that your $35m FCF number is very optimistic. What is the average FCF for the past 5 years? If they generate so much cash, where is it?

 

 

In general I am left wondering: is your writeup a pitch designed too be as compelling as possible or a rational stock analysis? Because after reading your write-up it seems a foregone conclusion SPWH will go up but I don't know .. "The business model is simple, barrier to entry, they will emerge stronger than ever". The writeup ticks all the boxes, but is investing in retail really that simple? In general I like a bit more nuance and skepticism. You focus a lot on gun sales, insider ownership, but are these issues really that important in the grand scheme of things? The company has a huge debt load, you are basically buying an option.

 

Though if you want to submit this to a contest or something I could see why you would write it this way.

 

Anyway, thanks for sharing and keep up the good work.

 

Thanks for reply, and great questions.

 

1. Good point on insider transactions. Somehow it got lost on me that most of the shares he is holding haven't vested yet.

2. On debt. Here is what I think - debt is a major risk, and even with the most optimistic projections company will not be able to repay it in full by the time it is due. The plan must be to repay some part - say one third, and hope to refinance. The risk here is that even if results are strong, if credit supply drains then the company is in serious trouble. So this makes company's 'intrinsic value' lower than it otherwise would.

3. I don't own the stock (Broke student). After rereading it I do realize that it looks as I am trying to sell the stock to forum members. Sure, the company is not Coca Cola, and it has some issues it needs to deal with. My key point was that the likely future may not be as gloomy as it is believed to be. In fact I am sceptical that politics is as important as people say. Gun sales kept increasing since Clinton and through Bush. My opinion is that the market got oversaturated, and the correction coincided with elections. People like finding causation relationship where there may be none.

4. I don't think they are underinvesting. As I wrote the maintenance capex is around $4.2 million, and the financials suggest they spent double that on existing stores.

 

[mwtorock]

i would put it into a basket of low EV/EBITDA multiple companies, but i dont think it is worth a moat yet.