What a brutal six months it’s been for Sportsman's Warehouse. The stock has dropped 29.4% and now trades at $1.73, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Sportsman's Warehouse, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sportsman's Warehouse Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Sportsman's Warehouse. Here are three reasons why SPWH doesn't excite us and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Sportsman's Warehouse’s demand has been shrinking over the last two years as its same-store sales have averaged 11% annual declines.
2. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability for retailers as it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.
Although Sportsman's Warehouse was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 1.4% over the last two years. Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. It’s unfortunate that Sportsman's Warehouse was one of them.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Sportsman's Warehouse’s $455.3 million of debt exceeds the $2.83 million of cash on its balance sheet. Furthermore, its 15× net-debt-to-EBITDA ratio (based on its EBITDA of $29.62 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Sportsman's Warehouse could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Sportsman's Warehouse can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Sportsman's Warehouse falls short of our quality standards. Following the recent decline, the stock trades at 1.9× forward EV-to-EBITDA (or $1.73 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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