From the K-Shaped Economy to the “Hold My Beer” Economy: Sportsman’s Warehouse $SPWH

I have been on the hunt, pun intended, for Consumer Discretionary Trump Trades, and I am pleased to have found Sportsman’s Warehouse (SPWH). SPWH is a hunting, fishing, camping, backpacking, shooting, etc. supply store with 147 locations of about 30,000 sqft each. While some specialty retail stores such as Vista Outdoors (VSTO) have been turning away from firearms, divesting of their kinetics, SPWH has been embracing them, and with the recent rise in violent crime, sales of firearms for self-defense has been a leading sales category in places like Arizona where illegal immigration is concentrated, and fishing opportunities are limited.

Because of the unique nature of US outdoor recreation, a lot of the products are manufactured domestically, and SPWH has extremely little exposure to potential tariffs, with only 3% of their private label products at risk. Meanwhile, for their branded merchandise, that number is likely higher, but this is an opportunity for shoppers to pivot to SPWH’s proprietary merchandise over the leading brands, which could cause a margin expansion making SPWH a potential tariff beneficiary.

For the past two years, the economy has been K-shaped, where the very wealthy have been enjoying interest income from the higher interest rates, but the middle class has been squeezed by rising costs and stagnant wages. It is possible that under Trump there will be an explosion of consumer confidence and disposable income for the blue collar worker as they benefit from the psychological impact of their team having won the election, and perhaps rapidly rising wages from a reduction in immigrants that compete for blue collar work, combined with an increase in demand that could come from capital spending with a return of Trump’s accelerated depreciation tax policy.

The rising blue collar wages could be a ways off, I am often early, so I have learned the hard way to size positions small at first, but the Christmas season is upon us, and the psychological impacts of hope for the future might just be reverberating through the “Hold My Beer” part of the economy. For this Christmas season, SPWH is guiding toward enough cashflow from the seasonal inventory drawdown to repay about $20 million of their revolving debt.

Sportsman’s Warehouse has been suffering these four years under the consumer armageddon that has been felt across most retail. Comps are down since 2021, but this is not unique to SPWH, Big 5 Sporting Goods (BGFV) has an identical revenue decline, but Academy Sports and Outdoors (ASO) has held up better. Despite the decline in revenue, management has been proactive in cutting costs, and is projecting to be free cash flow positive for 2024. SPWH has little long term debt, and only about $150 million drawn on their revolver, with another $150 million left to draw if necessary. Growth capex was cut in order to weather this difficult period, with no stores opened in 2024, and only one store opening scheduled for 2025.

Again, I may be early, but the first quarters of positive year over year performance are possibly coming in 2025. For 2024, the number of transactions are up, but the amount per transaction is down, reflecting a growing brand with a financially struggling customer. When that customer has more confidence or more cash, SPWH should start to reflect growth again.

SPWH Revenue:

ASO might be significantly less risky than SPWH, as they are currently net income positive, and they are only trading at a price to earnings ratio of 9.26x, however, ASO has much less torque to the upside on a recovery of this sector. On a recovery, SPWH, in flipping back to net income positive, would benefit from a huge inflection. ASO is trading at a price to book of 2.0x, while SPWH is trading at 0.40x. BGFV is even cheaper, at a price to book of 0.26x, but, management has not grabbed this difficult environment by the horns and stopped the company from hemorrhaging cash. Also, SPWH’s management has incredible confidence in their situation, as insider buying has been very strong with purchases from the CEO, CFO, and four directors.

For the next four years, Sportsman’s Warehouse probably does not need to worry nearly as much about being targeted by anti-gun politicians, or potentially debanked by the financial system, who up until recently was trying to create a unique Merchant Category Code for firearms in a first step toward separating them from the financial system as was done to marijuana vendors.

https://www.reuters.com/business/finance/mastercard-pause-work-new-payments-code-firearms-sellers-2023-03-09/

I probably would not want to think of Sportsman’s Warehouse as a buy and hold forever stock, because someday Democrats will be in power again, and despite rising gun ownership among registered Democrats, the party has not deviated from their strong anti-gun position. But for the next four years, I believe SPWH could swing back to profitability, and enjoy the multiple expansion that comes from a return to growth, the alleviation of bankruptcy fears, and the return of their share buyback program. For the immediate future, all excess cashflow will go toward debt retirement for the $150 million drawn on their revolver, but beyond that, SPWH has demonstrated that share buybacks are their preferred way to return capital to shareholders, initiating a buyback program in 2022, and finally spending the last of the allocated funds in early 2024. Share count dropped 17% on the $67 million buyback program.

In summary, this is just about my ideal setup for a small cap value stock. Good management who is buying into the company, a track record of returning capital to shareholders, the cash flow is stable at breakeven, and there are huge macro tailwinds that should inflect the performance and drive a return to profitability. At a return to a price to sales ratio of 0.5x and a return of sales to $1.5 billion, Sportsman’s Warehouse at a $100 million market capitalization could easily be a 5x to 7x within a couple of years. But as I have said many times, I am often early, so I am not confident that $2.59 a share is the rock bottom price, but it is about half of where the company was trading prior to the Covid outdoor recreation boom despite a smaller share count.

One of the larger risks to that multibagger return would be an acquisition by Bass Pro Shops, who had attempted to acquire SPWH in 2021, but were blocked by the Biden FTC. With a more lenient antitrust attitude under Trump, this potential multibagger could always get ripped away at a measly 20% premium. I would only hope that directors who bought in at $4 a share would at least hold out for a better price than that, but there are no shareholders large enough to block a sale, and directors can always be compensated with a golden parachute.