Sportsman's Warehouse Holdings Inc (SPWH) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. This is Sportsman's Warehouse first-quarter earnings conference call. At the request of Sportsman's Warehouse today's conference call is being recorded. (Operator Instructions).

I would now like to turn the call over to Ms. Rachel Schacter of ICR. Please go ahead.

Thank you. Good afternoon, everyone. With me on the call is John Schaefer, President and Chief Executive Officer, and Kevan Talbot, Chief Financial Officer.

Before we get started, I would like to remind you of the Company's Safe Harbor language which I am sure you are all familiar with. The statements we make today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which includes statements regarding our expectations about our future results of operations, demand for our products and growth of our industry.

Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the Company's IPO prospectus filed with the SEC on April 17, 2014, as well as in today's press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today.

We will also disclose non-GAAP financial measures during today's call. Reconciliations to the most directly comparable GAAP financial measures are provided as supplemental financial information in our press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today, which is also available on the Investor Relations section of our website at investors@sportsmanswarehouse.com.

Now I would like to turn the call over to John Schaefer, President and Chief Executive Officer of Sportsman's Warehouse.

Thank you, Rachel. Good afternoon, everyone, and thank you for joining us on our first earnings call as a public company.

Before I begin my overview of the quarter and our strategic growth initiatives, I want to take a moment to thank all of our team members for their passion and dedication to the brand and the business. It is their commitment that has driven our success to date and will drive our success going forward.

It is an exciting time at the Sportsman's Warehouse and we are focused and committed to delivering against the very attractive opportunities that we see ahead for our business.

We are pleased with our first-quarter results which came in better than our expectations. Net sales for the quarter were $132.4 million reflecting a 3% decrease from the prior year. Unit growth was 11.1% and same-store sales declined 18.1% versus the first quarter of the prior year, which was in line with our expectations. Performance in the first quarter of this year was principally a result of a decline in firearm and ammunition sales which continued to cycle against the surge in demand for those categories that began in late 2012 and continued into the first half of 2013.

Aside from the weather driven impact which I will speak to an a moment, we saw solid performance out of all our other product categories with the strongest growth coming from clothing and footwear. We are exceptionally pleased with the progress of our in-store initiatives in the clothing category that continues to gain traction.

As planned, we opened three stores during the first quarter. Hillsboro, Oregon; Carson City, Nevada; and East Wenatchee, Washington. These openings reflect our dual strategy of entering into smaller markets where we believe we can be the main destination outdoor sportings good retailer as well as larger markets where we are the conveniently located and attractively priced local store for our customers.

We are very pleased both with the timely and efficient execution of our team on opening the stores as well as the initial performance we are seeing out of these locations. These three stores were opened within an eight-week period, a testament to our ability to open multiple stores successfully in a short period of time.

During the quarter we also reached an important milestone with the opening of our 50th store, and we ended the quarter with 50 stores in 18 states. Looking at the remainder of the year, we are on track to complete five additional store openings of which two opened early in our second quarter for a total of eight new store openings in fiscal 2014.

As Kevan will explain in more detail when he discusses our guidance, we expect firearm and ammunition demand to begin to normalize in the second half of the year as we anniversary the spike in demand that began in 2012 and continued into 2013. Of particular note, however, we are pleased to see double-digit same-store sales increase in our clothing department as a direct result of the in-store soft goods initiative that we launched last year.

Most importantly, last fall we initiated our store within a store program in 16 stores and now have implemented this program in 20 stores as of the end of the quarter. This change added an average of 2700 selling square feet in the clothing department in each of the 28 remodeled locations.

In these locations, clothing performed 28% better than in the non-expanded stores. Clearly, our emphasis on merchandising strategy and value proposition and complementary products and categories to supplement our core hunting and fishing offerings continue to resonate with our customers.

Weather is important to our business and our customers, given the nature of our merchandise so it is clearly something we track closely. While extended cold and wet weather across many of our locations had a modestly unfavorable impact on our fishing, camping, and to a certain extent cutlery and electronics categories, much of this impact on our overall sales was mitigated as a result of our strong performance and soft goods categories.

The fact that our clothing initiatives and continued growth in footwear helped alleviate what would otherwise have been a more significant weather impact demonstrates that our customers want a broader selection from us, and are providing us the opportunity to gain more share of their wallet.

Regarding our current inventory position, I should elaborate on the implication from the recent dropoff in firearm sales. We have always been cognizant of the history of peaks and valleys in firearm purchases, so it is vital to both increase inventory purchases appropriately as consumer demand spikes, but also to shut off the buying faucet, if you will, before the sales drop begins.

We were successful in managing this planning effort and exited the quarter with a firearms inventory position that we are comfortable with, both from an aggregate level as well as a few composition standpoints especially in the MSR type firearms which are most prone to these peaks and valleys.

Now on to profitability. As expected, our gross margin was down over the prior year. With the unseasonably long and cold winter weather, we delayed our spring steps which are typically rolled out in early March until late April so we could continue to meet our customers' demand for cold weather merchandise. The good news was that we had ample winter inventory to sell.

However, in line with our typical seasonal promotional cadence, we began discounting our winter products in January and continued into March, which was somewhat longer than in the recent past, resulting in overall product margins being lower than they would otherwise have been in typical seasonal weather patterns.

Adjusted operating income for the quarter was ahead of our expectations with an adjusted loss per share for the quarter of $0.05 compared to adjusted earnings per share of $0.11 from the prior year. Given the fragmented nature of the industry and the significant market share opportunities for national players, we are always monitoring competitor openings.

While our individual stores see a near-term impact upon the entry of a competitor into its market, experience has shown us that our business typically rebounds to free competition levels in approximately two to three years. In fact, we find that mom and pop retailers generally end up being the ultimate market care donor.

In the first quarter we faced new competition in five of our markets. This group is performing better than we expected which, again, bodes well for our brand and position in the market going forward. As a testament to this concept, I should remind everyone that we currently compete with much larger format stores in 13 of our locations, each of which has contended with at least one natural competitor for more than 18 months. Each of these 13 stores still generates double-digit four-wall EBITDA even after the impact of its larger competitors.

While we expect another five markets will be impacted with new competition prior to our fiscal year-end, which is fully factored into our outlook, we are confident that our format, merchandising and pricing strategy will continue to generate the four-wall profitability and return on invested capital we expect over the long term.

While the sub quarter over quarter firearm and ammunition sales comparisons that will persist until the second half of 2014 are a reality for us and the rest of the industry, there are very compelling medium- to long-term growth drivers for our business and we believe there are key attributes that differentiate us from our competition. So I would like to spend a few moments reviewing them.

We believe we are uniquely positioned in the growing outdoor sporting goods market that has an estimated size in excess of $50 billion. Increased focus on healthy and active lifestyles and rise in participation rates across many key demographics especially women and children represented [a free] tailwind.

In addition, the still fragmented nature of the industry of mom-and-pop operators representing approximately 2/3 of the market, the example [grew] for the larger players such as Sportsman's Warehouse to gain share.

We are the largest outdoor specialty retailer in the Western US, partially as a result of our flexible store format that allows us to profitably service both small metropolitan statistical areas for MSAs with a population of 50,000 as well as larger MSAs with population in excess of 1 million.

This smaller flexible store size, combined with our no-frills approach, allows for a lower capital investment per store and higher return on capital than many of our competitors. We offer a differentiated shopping experience for our customers that provides easy in, easy out access and has been inviting for the first time participant, the casual user are the outdoor enthusiast alike. We offer a comprehensive and locally relevant product assortment at everyday low prices, which is complemented by our highly knowledgeable sales associates who have a passion for our Company and the outdoor lifestyle and are true local experts.

As a result of this unique positioning and our base of 50 stores, we believe that we have significant growth opportunities ahead of us, including in the smaller MSA. So for example we just opened our 52nd store in Vernal, Utah, last weekend. As we move forward, we are focused on four key strategic areas.

The first is to capitalize on the significant new store growth opportunity we see within existing and new markets. We believe there is potential for 300 plus Sportsman's Warehouse stores nationally creating unit growth potential of at least 10% annually as we grow our store base by eight plus units per year for the next two years with our initial focus on openings in the western United States where we have dominant market position.

Our flexible store model is adaptable to a variety of real estate venues, those stores may be freestanding or located in power or lifestyle centers. As of today, we have already opened five of our eight planned new stores and work on our 2015 class is well underway.

Our low-cost high-return box format with replicable store economics affords us the opportunity to grow at this 10% new unit pace over the next several years. We have a rigorous and disciplined site collection process supported by analysis of market characteristics and economic viability in addition to information on the density of hunting and fishing license holders and the abundance of outdoor recreation areas among other things.

Our typical new store model underwriting case include an initial investment per store of $4.4 million including a $2.4 million inventory investment. Year 1 sales of $9.5 million in four-wall adjusted EBITDA margins of over [10%] and ROIC which is greater than 20% if you include our upcoming inventory investments, or greater than 50% if you exclude it.

Our actual new store results in 2010 have exceeded the parameters of this model with an average ROIC of 41% including inventory, resulting in a payback period of 2.5 years or double the targeted ROC level of our standard new store model. We are very proud of these industry leading new store economics.

Notably, our existing infrastructure, including our distribution center, IT systems, loss prevention, employee training is scalable to support our growth up to an estimated 100 stores without significant incremental investment.

The second element of our growth strategy is to drive same-store sales growth through in-store initiatives. The first of these initiatives [to] the expansion of our clothing offerings by reallocating storage space to selling store footage from 35 existing stores by 2015. This reallocation of space helps increase productive square footage and facilitates our store open and store closing initiative.

Major brands like Under Armour and Columbia are important to our customers and we are able to better present these brands in a manner that makes them more visible and easier to shop. We have already seen the impact that this initiative as had on the 28 stores where we have modified the layout to reallocate an average of 2700 square feet of inventory and storage space toward the clothing category and look forward to similar results out of the remaining seven stores that will be remodeled by early 2015.

These stores where we had the increased square footage in the full quarter performed 28% better than the stores without this concept, demonstrating trading the impact that this initiative is having on our business.

We have other initiatives, including our loyalty card program that was launched in November 2013 in computerized kiosks that we have installed in certain stores to expand our in-store assortment and allow customers to order out of stock or not regularly stocked items from our e-commerce platform while in-store. In addition, the in-store pickup of e-commerce orders that has been in place since 2011 continues to drive incremental traffic to our stores.

The third primary component of our growth strategy is to continue to enhance operating margins through increased penetration of our private label products and higher margin clothing and footwear department as we roll out the remodels I just discussed as well as scale benefits associated with our planned expansion starting with private label which currently represents less than 2% of sales for us.

While we believe that third-party brands are and will remain important to our customer, we also believe there is an opportunity to gradually increase our private label penetration over time, particularly in categories where we see merchandise kept. Private label expansion combined with continuing marketing initiatives and our higher margin clothing and footwear department, will increase our mix for higher growth margin products.

Additionally, our planned expansion of our store base and growth in same-store sales will result in improved invested EBITDA margins as we take advantage of economies of scale and product [versing] and are more fully able to leverage our existing infrastructure, supply chain, corporate overhead and other fixed costs.

The fourth key element of our strategy is to grow awareness of the Sportsman's Warehouse brand. Our marketing is largely regionally local and includes inserts and billboards. We supplement these efforts with locally relevant in-store marketing initiatives such as the local fishing report and Braggin' Board where customers can post photos of their outdoor adventures.

As we grow, we will continue to focus on leveraging the most cost-effective advertising available for our customers, including grassroots efforts like ladies night, partnerships of local outdoor-focused organizations and wildlife federations and other community-oriented events and seminars to more broadly connect with our local communities, promote our brand and educate consumers. Our purposeful advertising strategy reinforces our mission to do the local store that has everything you need and is critical to how we grow our brand.

We believe that our flexible store format, white space opportunity, margin improvement initiatives and go-to-market strategies all support our longer term outlook for topline growth of greater than 10%, EBITDA growth in the mid-teens and net income growth of 25%. We are very excited about our business and the many opportunities we have to expand the brand and grow the Company.

For a more detailed review of our first-quarter results as well as our guidance for the remainder of the fiscal year, I will now turn the call over to Kevan Talbot, our Chief Financial Officer.

Thanks, John. Good afternoon, everyone. I will begin my remarks with a review of our first-quarter results and then discuss our outlook for fiscal 2014.

As John said, our topline results were better than our expectations. Net sales decreased in the first quarter by 3% to $132.4 million from the $136.5 million in the first quarter of last year. Same-store sales during the quarter decreased by 18.1% following a 20.8% increase in the corresponding quarter of 2013. This decline of 18.1% was a result of the 36.2% decline in the firearm and ammunition category as we cycled the surge in demand for those categories in the first half of 2013.

These categories had a combined same-store sales increase of 38.8% in the first quarter of 2013 for a two-year stack comp increase of 2.6%. We continue to expect the category to normalize in the second half of 2014. Excluding firearms and ammunition, our same-store sales decreased 1.6%.

Looking at our same-store sales from a store grouping perspective, there are essentially three store groups. One, base stores; two, new stores or acquired stores that have been in the comp base for two years or less; and three, stores that were subject to the competitive opening which we define as a new competitive entrant into a market within the past 18 months.

In the first quarter, excluding the five stores in our comp base that were subject to competitive opening, our same-store sales declined 16.1%. Our 23 base stores saw a same-store sales decline of 18.6%. Our 15 new stores saw a same-store sales decline of 7.5% and our five stores that were subject to competitive opening experienced the same-store sales decline of 31.5% which actually was better than planned.

Gross profit in the quarter was $40.1 million compared to $42.9 million in the first quarter of fiscal 2013. Gross margin as a percentage of net sales decreased 110 basis points to 30.3% from the 31.4% in the corresponding period from last year. The decrease in gross margin as a percentage of net sales was driven primarily by three factors. One, a return to a more normal promotional cadence; two, our loyalty program; and three, our product margin that included the impact of weather.

First. During the first quarter of 2014, we ran our normal marketing calendar as compared to the first quarter of 2013 when we did not run our regularly scheduled promotions because of the unprecedented firearm demand during that period which drove unusually high customer traffic without the promotion.

Given that we returned to our normal marketing calendar in the second quarter of 2013, we do not expect continued gross margin pressure as a result of this specific dynamic for the remainder of fiscal year 2014.

Second, we have experienced continued success in the adoption of our loyalty program that we launched in November of 2013. Participating in this program has exceeded our expectations and the awards from these transactions negatively impacted gross margin compared to the prior year when we did not have the loyalty program in place.

We expect that the adoption of our loyalty program will continue to grow across our customer base, generating more frequent customer visits and higher average tickets along with the associated benefits that come with these metrics.

Finally, as John mentioned, the prolonged winter also had an impact on our gross margin, particularly in our soft goods department. Given the longer winter we were not able to put out our spring goods at the normal time and, therefore, were not able to realize the margin lift that comes with the fresh product reset for as long as we normally do during the spring period.

SG&A expenses for the quarter were $40.3 million, increased from $32.3 million in the first quarter of fiscal 2013. As a percentage of sales, SG&A expenses increased to 30.4% from 23.6% in the corresponding quarter of 2013, primarily as the result of a one-time IPO bonus of $2.2 million paid in April as well as $1.7 million in stock-based compensation expense for equity awards granted to employees in the fourth quarter of fiscal year 2013.

In addition, the growth in a number of stores increased our fixed operating costs.

Income from operations for the quarter decreased to a loss of approximately $200,000 as compared to income of $10.6 million in the first quarter of fiscal 2013. Excluding the one-time IPO bonus of $2.2 million, adjusted income from operations was (technical difficulty) [$2 million] as compared to $10.6 million in the first quarter of 2013 with the year-over-year decline driven by lower revenue combined with the gross margin in SG&A factors I just described.

Our net interest expense in the first quarter of 2014 was $5.3 million compared to $3.2 million of interest expense in the first quarter of 2013. Our average borrowings in the first quarter of fiscal year 2014 increased over the first quarter of fiscal year 2013, primarily because of the $110 million in additional borrowings on our long-term loan facility caused by our August 2013 refinance of this facility.

Since we used the IPO and overallotment net proceeds of $73.3 million to pay down the balance of our term loan, our average borrowings and therefore our quarterly interest expense will decrease for the remainder of fiscal year 2014. We expect quarterly interest expense of approximately $4 million to $4.5 million for the remainder of the year.

Our expected tax rate for the quarter was 38.5% compared to 39.6% in the corresponding quarter last year. We anticipate our effective tax break for the remainder of the fiscal year to be approximately 38.5%. This reduction is a result of a decrease in our effective state tax rate as we open stores in states with no state income tax.

I will now discuss adjusted net income and adjusted earnings per share that excludes the one-time IPO related bonus of $2.2 million and is based on pro forma diluted weighted average shares for the quarter. The pro forma diluted weighted average shares outstanding assumes the IPO transaction took place at the beginning of the quarter in each respective period. A reconciliation of GAAP net income and earnings per share to meet adjusted numbers on a pro forma weighted share basis can be found in the financial state -- financial tables included in our earnings press release issued today.

Adjusted net loss for the quarter was $2 million or $0.05 loss per share on $41.7 million adjusted diluted weighted average shares outstanding as compared to adjusted net income of $4.5 million or $0.11 earnings per share based on 41.5 million adjusted diluted weighted average shares outstanding in the first quarter of fiscal 2013. Adjusted EBITDA for the first quarter of fiscal 2014 was $6.8 million compared to adjusted EBITDA of $14.4 million in the prior year period.

As you are aware, our initial public offering transaction closed on April 23, 2014. Net proceeds to the Company after IPO-related costs were $70.3 million which were used to repay amounts outstanding on our term loan. Subsequent to the end of the quarter, our underwriters exercised a portion of the overallotment option and we received an additional $3 million in net proceeds which we also used to repay the amount outstanding on our term loan.

We ended the first quarter of fiscal 2014 with $1.8 million in cash and cash equivalents on our balance sheet, and $50 million in outstanding borrowings of $37.4 million in borrowing availability under our $105 million credit facility. We ended the quarter with $202.3 million in inventory as compared to $156.1 million in inventory as of the end of the first quarter of 2013.

On a per store basis, inventory was up 14.4%, reflecting a combination of a return to normal inventory levels in all categories, but primarily in the firearm and ammunition category as well as some early purchase opportunities that were made available to us by our vendors.

Now I would like to turn to our outlook. For our second quarter and full year, full fiscal year outlook, please refer to our press release available on the investor relations section of our website. Regarding our net income guidance for fiscal 2014, I want to mention that our guidance includes stock-based compensation expense for the restricted stock units that were granted to certain employees in the fourth quarter of fiscal year 2013.

We recognized approximately $1.7 million in non-cash stock-based compensation expense for these awards during the first quarter because of the accelerated vesting that was triggered by our initial public offering. We expect our normal stock-based compensation expense to be approximately $500,000 each quarter for the remainder of the year for a total expected stock-based compensation expense of approximately $3.2 million for fiscal year 2014.

This amounts compares against $400,000 of stock-based compensation expense and fiscal year 2013, all of which was recognized in the fourth quarter.

And of course, in fiscal year 2014, we will have all of the incremental costs including additional payroll and professional fees associated with being a public company representing roughly $1.5 million with approximately $400,000 of this total to be -- total expected to be incurred in each of the three remaining quarters of our fiscal year.

As it relates to capital expenditures, we expect to incur approximately $23.2 million of CapEx in fiscal 2014, of which we have already incurred approximately $8.8 million during the first quarter. The remaining $14.4 million will be spent on opening new stores, find improvements to our IT infrastructure, fully equipping our recently opened distribution center and the remodeling of the clothing department in the remaining three stores as planned.

Finally, with respect to our longer term financial goals, we are targeting per unit growth of greater than 10%, annual same-store sales increase of approximately 2% to 3%, revenue growth of greater than 10%, adjusted EBITDA growth of 15%, and net income growth of 25%.

And with that, I would like to turn the call back over to the operator as we open up the call to questions.

(Operator Instructions). Seth Sigman, Credit Suisse.

Nice job navigating a tough environment. I wanted to talk a little bit about the sales outlook and maybe you could walk us through and help us bridge the down 18 this past quarter with the guidance for 7 to 8 this coming quarter. What is driving the improvement there? And maybe, specifically, some of the seasonal categories that didn't fare as well in Q1, have you started to see that improve? And then maybe just a follow-up on that. Thanks.

Absolutely. As we look to the second quarter and for the remainder of the fiscal year, obviously, we expect the firearms and ammunition to subside with the primary driver there. John alluded to the fact that we have competitive impact that are going to be impacting our same-store sales as well for the remainder of the year. But we are comfortable with the guidance that we have provided there given the two dynamics as we anniversary those significant demand as well as the competitive impact.

Okay. And maybe you could talk a little bit about the current state of the firearms and ammo business. There has been some mixed commentary out there, but the industry data seems to show that it is improving sequentially, getting less bad. So there is a little bit of a disconnect out there. Can you maybe speak to the trends in that business and how you see it normalizing over the next couple of quarters?

Yes, Seth, I think there's a couple of things going on. Number one, I think the availability of firearms is back to normal levels. We are seeing inventory levels and all of our stores and at our competitors and at distributors and everything back to relatively normal levels.

I think if you look at the mix data that's probably the best guidance anyone can get -- I mean we are still looking at the several months of mixed amounts being the second highest in history, but you can also see that they are coming down relatively significantly, which to us basically says that we are getting back to a normal cadence in terms of the firearms industry.

It went up way out of proportion as you know in Q4 of 2012 and Q1 of 2013. And then it began its process of getting back to a normalized cadence on a two-year basis. And I think we are starting to see the indications of that at least as we get to the second part of the second quarter. I think we are going to see more of that.

Okay and to add on that, anything else on the ammo piece of the business and how that is faring?

Sure. Most calibers of ammunition are getting back to normalized levels. What I mean by that when I say normalized levels, I mean that we can hold the ammunition and stock for about a month. Ammunition is one of these [by turn] categories. There's still a lot of pressure in the 22 ammo. The vendors are just not making that. So there is still a significant amount of increased demand oversupply in the [rimfire] categories.

We expect that to normalize probably later in the year. Once the manufacturers get their inventory levels and the higher-margin caliber up to where they want to be and, frankly, we are saying that happening right now at least from our perspective. We are getting as much ammo as we need in most of those categories. I think once the manufacturers get their inventories where they want them to be, they will start producing more of the 22 caliber and then we'll see the pressure on that caliber of product start to decline.

Okay. Thanks for that.

Mark Miller, William Blair.

Good afternoon, everyone. Could you elaborate on your commentary around the competitive impacts? I think you said when a competitor comes in historically you have seen a 20% to 30% decline initially. And so, trying to reconcile that with the delta between the base stores and the competitive openings which looks like it is around 13, is that due to the fact that they are further along in that time period in their coexistence? Or are you doing something that is different here to mitigate that impact?

I don't think we are doing anything different, Mark. The data we have is against their largest format stores. We are talking our 40,000 versus their 120,000 to 180,000 square foot stores and we base our curves on competitive openings based on what we know historically. And in virtually all the markets that we currently compete with we are competing against those much larger format stores.

The recent openings we are competing against there is next generation and smaller outpost type stores, and I think the fact that those are smaller is having -- the only thing I can think of as having that dealt that different we are doing absolutely nothing different. The stores that are opening as far as I am concerned are fabulous-looking stores. So I don't think they are doing anything different other than putting smaller stores in those markets.

Okay and then when we think about the aggregate impact on your 2014 comp store sales from competitive openings, can you help frame for us what that is in terms of a detriment to total 2014 comps? Thanks.

Yes. It is roughly 2% to 3% on an overall comp basis. We are -- as I described in my analysis, we defined that as an 18-month period of time and some of these stores are starting to get closer to that anniversary effect and we have the five new stores that are opening there as well. So on an overall blended basis, it is roughly a 2% to 3% impact on the total same-store sales number.

Great. And if I missed it, what was the impact just on the first quarter by comparison?

It was -- we were down 18.1% with all stores excluding the five competitive stores. We were down 16.1%. So there was a 2% delta in the first quarter.

Got it. Okay. Thanks.

Adam Engebretson, Piper Jaffray.

Good afternoon. Are you seeing anything changing on the competitive front outside of seeing new stores? And I guess I am thinking more -- are your competitors being rational with promotions and how would you expect that to play out for the rest of the year?

We certainly think our competitors know what they are doing and I think they are following probably the same type of promotional cadence that they have followed in prior years, now that things are returning to quote unquote normal, just as we are following the same promotional cadence that we have had in prior years. I think -- I don't think there is anything special going on. (inaudible) I think there was a couple of things going on by a couple of people early in the year, but that I haven't seen indications of that recently.

What I have seen is the things I expect to see. And what we are doing is the same things we have been doing 2011, 2000 -- early 2012 before the big spike.

Got it. That's helpful. Are you willing to share what your traffic and ticket trends were for Q1? And if you are, what that would have been in that year ago period?

On a same-store sales basis, traffic was down mid-teens as we would expect it to be. Overall traffic was up in the low single digits. Average order was down in the first quarter and I think that is because of the mix change where we didn't have as many firearms sales versus the prior year.

What we are seeing is we are seeing again as everything starts to return to a more normalized base, we are seeing the trends we expect traffic is following the same-store sales. And the average ticket is starting to normalize versus last year as we move through the second quarter.

Great. Thank you very much.

Andrew Burns, D.A. Davidson & Co.

Good afternoon. Would you expand some on the soft goods, the shop in shop initiative in terms of how many stores ultimately can be refitted to get this extra 2700 square feet? What kind of brands are you showcasing? And with the extra square footage is there opportunity to expand women's? You mentioned participation growth there or is it an avenue for greater private label? Looking for some greater color there.

I think, Andrew, the answer is all of the above. First of all, we have 35 of a base of 41 stores that are being expanded with the 2700 square feet. The six that are not being expanded, they are just smaller stores. And if we do anything we will have to do it with [fixed stream]. Every new store we have opened in the 30,000 square foot and above and every new store we plan on opening will have the store within a store concept. And that is because we have changed our fixed stream rather dramatically in those stores going forward to allow us to do the store within a store concept.

Secondly, from a product standpoint, we are featuring both the significant brand for us which clearly are -- our biggest ones are Under Armour, Columbia, Carhart, (inaudible) and King from the last two being on the camo area. As well as our [Rustic Ridge] private label offering is now store within a store in these stores, as well. And I think that bodes well for our private label business and also from a price point standpoint as we round out our merchandise mix from a pricing standpoint for our customers.

The third concept I think you are also right on top of is we have been able to significantly expand our women's and youth clothing area. And that really has some big benefits because it is easier to find. It has better colors. The colors in the women's offering are usually much more vibrant than you find in the men's offerings. So it is very attractive to our customers. And we have also with some of the new [fixtures grade] been able to increase the density in our fixtures to allow added SKUs.

So, for example, for Under Armour we are adding significantly more activewear for our product offering. And that really bodes well from a total clothing, merchandise offering aspect to our customers. And I think our customers are responding positively in all those areas.

Thanks. And a follow-up in terms of private label. Do you have any three-year or five-year targets of where you think private label could be as a percent of the mix? And should we think about growth for private label as fairly linear or is there a particular season that you could call out where we might see some meaningful change in the stores? Thanks.

Well, I believe -- I think our private label growth year over year is 40%. But clearly I think we are onto something and we expect it is still around 2% of our sales. I think it can be 5% or 10% of our sales. I don't know that we will ever get to 20% or 25%. I don't think we want to get to there.

But I think is certainly has a lot of leg left to it and I think we can get there in a relatively decent period of time over the next two or three years.

In terms of where we are going I think our customers are demanding that they had a product offering and a price point offering in the camo gear and Rustic Ridge label is doing exactly that in the camo area. And then I think in the activewear area and the women's area we have a lot of runway ahead of us in terms of finding those price points that were normally taken up by third tier vendors that we can take and use for the Rustic Ridge label.

Good. Thanks and good luck.

Matthew Fassler, Goldman Sachs.

This is Steve Cannell on for Matt Fassler. On the loyalty program, it sounds like that is coming in a bit ahead of expectations. Can you give us some metrics around where that was in the first quarter and potentially what that might mean for gross margin this year relative to initial plan?

Absolutely. With respect to our initial plan we had planned it to be roughly 15% to our gross margin for the quarter. We were roughly at 20 basis points. So, versus the 50 basis points we had planned it was ahead of our expectations, but that is a good thing.

Our number of participants increased over the end of the first quarter by 170%. The number of transactions per card was up.

Unfortunately, we only have six months worth of data on this. This data will become more meaningful as we get and they are able to compare year-over-year. And then we can see what levers we need to do with respect to promotions within our loyalty program to help us drive the results that we see here.

So we are very pleased with the results. It is roughly 25% of our dollar, it's about 13% of our transactions right now and we expect those numbers to continue to be solid.

Got it. That's very helpful. Thanks a lot.

Peter Benedict, Robert W. Baird.

Following up on that question, just within the gross margin line, you gave us the impact of the loyalty program. How about that marketing shift year over year? It seems pretty material obviously. So what portion of 100 plus basis points decline do you think you could attribute to that? Recognizing that that is kind of a one-time event here that is not going to continue.

As we tried to put together our estimates, we estimated roughly 50 basis points of that 110 point decline was a result of the promotions that we ran this year that we did not run last year. So you are correct. It was a significant portion of that decline because we were promoting again this year that we did not have to do last year.

Okay, that's helpful. Thanks, Kevan. And as you think about going forward that is going to go away, do you envision gross margins starting to hook up as they move through the balance of the year particularly in the second half given some of the mix of things that you have going on? Is that still the view?

We like the shift that we are experiencing in the clothing and soft goods area. So we expect to lift from our soft goods mix. We are starting to see some early indications of some pricing pressure as people have other promotions, particularly the mom-and-pop where we are competing with mom-and-pop. So we are starting to see a little bit of that. I think from a going forward perspective, we kind of expect those two to offset from a gross margin perspective.

I think one of the things that is baked into our outlook is a return to normal pricing parameters in the ammunition categories. And one thing you have to understand is the vendors took price increases during the run-up. And we followed those price increases.

Some people increased them, increased their selling prices significantly more than the price increase from the vendors. We did not. But when you have inventory at a lower cost per unit when you are going into a price increase, it has an obvious marketing benefit. We saw that in late 2013.

And then, when you have -- we are now getting to the point where the vendors are just beginning and I think this will have an impact later in the year, they are just beginning to reduce their prices on ammunition. And, therefore, the selling price is going to come down and you are going to see the reverse of that, of that effect going forward. I don't know that it is going to be significant, but it is a reality and we have baked it into our model. And I think that offset some of the mix change as well.

That is very helpful. Thanks, John. And, John, one more for you then. You said probably five markets over the balance of the year are going to see some competitive openings. Remind us how many Sportsman stores you think are in those markets. And then, what is your latest view on 2015? Do you have any updated view on how many competitive openings may come about next year? Thank you.

I think those five remaining stores impact seven of our market and in terms of 2015, we are aware of three that are coming in 2015. The � what we have seen and heard from the competitors so far has been that their latest update on new store openings are in markets where we are not. But I think it is still probably 3 in 2015.

Okay, great. Thanks very much.

Matt Nemer, Wells Fargo.

Good afternoon. I wanted to just follow up on the firearm and ammo trend. Clearly the next data is showing a pretty material improvement in firearms but the ammo data that we see shows that that business is getting worse and I wanted to -- I think part of that is due to the comparison from last year where it had a longer tail. But I just wanted to say if -- as we sit here today, do you think that ammo is playing out in line with expectations or a little bit worse as we get into the spring and summer?

Well, I think they are in line with our expectation. Again, last year, during the first and second quarter, there was a significant demand oversupply issue going on. I think we are going to see the return to historical levels of ammunition purchases and ammunition rated against firearms purchases.

We correlate that. And I think we will start to see the normal correlations between firearms sales and ammunition sales.

One thing I do think, as we get into the latter half of the third quarter and fourth quarter, where I think some people may be a little nervous or where they think it is going to rebound. Last year there was very little supply of the core hunting caliber. A lot of the production was in the Q2 3 caliber ammunition mainly because of the high demands for the MSR firearm.

And as a result there wasn't a lot of hunting ammunition when duck hunting season occurred last year. I think that is going to reverse this year. And I think we will see adequate supply of hunting ammunition as we enter the hunting season which I think bodes well from a sales standpoint.

Okay, that is helpful. Then in terms of the competitor impact that you reported. Obviously that came out better than expected and I am curious how uniform that 13% spread is. Is it a fairly tight group or do you have some markets like Anchorage where you have really had sort of an untested franchise getting hit harder than others?

I am a little nervous about giving you that type of specific data, Matt. But they are -- all of our markets that are having competitors are reasonably close to each other and maybe we'll talk about it off-line a little more if you would like.

Okay. That is very fair. Then, lastly, in the inventory discussion, Kevan, I think you mentioned early purchase opportunities. If you are comfortable, I would be curious what categories those are in and should we expect that to help the gross margin? Should that be a positive gross margin factor over the balance of the next couple of quarters? Thanks.

There was approximately $7.5 million of early purchase opportunity. It was across ammunition and [optic] category. A lot of those opportunities came with extended dating terms. So as we evaluated them, these were inventory dollars that we would eventually purchase anyway and where we didn't have to pay for them until after the time that we would have sold them we decided to proceed forward. There were some other specific purchases where we did resave purchase price discounts where there will be a margin uplift to the extent that that $7.5 million has on the gross margin -- I don't know necessarily that I can say I expect a significant uplift as a result of this, but individually, as we evaluated these purchases, it made sense to proceed forward with them and to take the inventory early versus when we normally had scheduled to take that inventory.

Okay, best of luck over the balance of the year. Thanks.

Thank you. I would now like to turn the floor back to management for any closing comments.

Well, the only comment I have is thanking everybody for joining us today and we look forward to speaking with all of you when we report our second-quarter results. Thanks very much for your time and good luck.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.