How Gun Sales Benefited One Retailer and Why It Won't Last

Sportsman’s Warehouse Holdings Inc. (NASDAQ: SPWH) reported first-quarter 2018 results before markets opened Thursday. The sporting goods retailer posted a 14.8% year-over-year rise in revenues to $180.1 million and a jump of 17.5% in same-store sales.

The company also announced an amendment and restatement of its credit agreement that it said would save it about $4.5 million annually. That might have been enough to boost shares by a point or two, but Sportsman’s Warehouse stock climbed more than 8% Thursday. It’s mainly about gun sales.

On the company’s conference call, CEO Jon Barker said:

Firearm units on a same-store sales basis were up 14.9% as we continue to gain market share in the states we serve. Firearm revenue increased 17.5% on a same-store sales basis for the first quarter, a significant improvement from the fourth quarter, largely driven by an increase in traffic as a result of recent policy changes by our competitors.

Those competitors would Walmart Inc. (NYSE: WMT), Dick’s Sporting Goods Inc. (NYSE: DKS) and Kroger Co. (NYSE: KR), owner of Fred Meyer stores, that have stopped selling assault-style weapons or making sales to people under 21 years of age. Stores that continue to sell all kinds of guns include Big 5 Sporting Goods Corp. (NASDAQ: BGFV) and Cabela’s, a sporting goods store that was acquired last year by privately held Bass Pro Shops.

Barker, Sportsman’s Warehouse’s CEO, also pointed out how ammunition and other goods sales performed:

Ammunition increased 9.3% in Q1, also an improvement from Q4’s 4.7% decline. We are very encouraged by our performance in the firearm and ammunition categories in the first quarter that are reflective of solid market share gains. Our nonhunting categories decreased 0.5%, a sequential increase from Q4’s 3.2% decline with the primary improvement driven by our fishing and clothing categories.

Investors should not expect the upswing in gun and ammo sales to last, however. Chief Financial Officer Kevan Talbot explains:

For the second quarter, in terms of firearm demand, while we expect to continue to capture additional market share given recent competitive dynamic changes, we do not expect the same level of firearm demand going forward as we saw in Q1 given some pull forward that also occurred at the same time.

In response to a question regarding why a continuing benefit from less competition is unlikely to produce a full-year benefit for the company, Barker said:

So it’s clearly a combination of pull forward that happened in Q1 and market share gains. We can see it in specific regions where we compete against some of the competitors who have made changes. We’re hearing it from our customers on a daily basis. The question that’s unclear for any of us at this point is how much of that market share [is] long term versus pull forward. We’re optimistic that a good — that a portion of it is market share gains for the long term, but only time will tell how much.

Talbot added: “We don’t believe that the firearm and ammunition demand will continue in the second quarter that we saw in the first quarter.”

Big Five Sporting Goods reported first-quarter earnings earlier this month and, answering a question on a pickup in gun and ammo sales, CEO Steven Miller said:

I’m not sure. The word is it’s too early to comment on that, but the category has remained somewhat soft. Although certainly, not as impactful to our overall results as we experienced throughout last year. I mean, we’re not to be overly granular in talking about the category that’s, again, we have when it’s been more dramatic to our results. But right now, just one category. We will say that it’s running though still soft but again, not as soft as it was by far over the course of 2017. I should point out that we maintain a tailored firearm offering that’s much different than many of our competitors. So I’m not sure that we’re going to be extremely impacted by what’s going on competitively in the marketplace.

Though neither company seems to want to say it, we’ll give them a hand. Gun and ammo sales did pick up in the aftermath of Parkland, Florida, high-school shooting on Valentine’s Day, but it was the typical response to a mass shooting by some Americans who think that gun sales will be prohibited the next day. Never happens and probably never will. And while these CEOs don’t want to say it, they know it. Without these spikes, gun sales hardly make a difference to big retailers.

Shares of Sportsman’s Warehouse rose by 8.5% on Thursday to close at $5.10 in a 52-week range of $3.40 to $6.99. The 12-month price target on the stock is $6.21. The stock was inactive in Friday’s premarket session.

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