Sportsman's Warehouse Holdings Inc (SPWH) 2014 Q2 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Sportsman's Warehouse second-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now I turn the conference over to your host, 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 include 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 risk and uncertainties including those described in the Company's 10-Q for the first fiscal quarter, filed with the SEC on June 11, 2014, as well as in today's press release, included as Exhibit 99.1 to the Form 8-K where 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 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 today. I will begin by discussing the highlights of our second quarter, current industry dynamics, and the progress we are making against our strategic growth initiatives. Kevan will then go over our financial results in more detail and review our outlook, after which we will open up the call to your questions.

Before I begin I would like to once again thank all our associates for the great job they do. As you know, we brag about our associates being passionate users of our products, and that translates to high customer service and satisfaction and a low overhead model. Their passion and dedication really make us the local resource for our customers, something that has now been validated by third parties as well.

Now to our results. We are pleased with our second-quarter results, which came in better than our expectations. Net sales for the quarter were $159.5 million, reflecting a 2.3% increase from the prior year. Unit growth was 17.4%, and same-store sales declined 6.1% versus the second quarter of the prior year, better than our guidance of down 7% to 8%.

We opened four stores during the second quarter: Chico, California; Vernal, Utah; Rancho Cordova, California; and Kelso, Washington. These openings reflect our dual strategy of entering into smaller markets, where we believe we can be the main destination outdoor sporting goods retailer, as well as larger markets, where we are the conveniently located and attractively priced local store for our customers.

We are very pleased with the initial performance we are seeing out of our class of 2014 stores. We opened up eighth and final store for 2014 in early August in Pocatello, Idaho; and work on our 2015 class is well underway.

Looking more closely at our comparable-store sales for the quarter, in the second quarter we continued to cycle the surge in demand for firearm and ammunition categories that began in late 2012 and continued into the first half of 2013. We saw solid performance out of all our other product categories, with the strongest growth coming from camping as well as clothing and footwear, which were up 4.5%, 4.3%, and 5.2%, respectively, versus last year.

We remain very pleased with the progress of all of our in-store initiatives. While traffic on a same-store basis -- or more specifically, customer frequency -- remain negative, conversion and average order size both improved year-over-year.

Now on to profitability. Our gross margin was down over the prior year by approximately 40 basis points. Approximately half of this decline was due to the continued success of our loyalty program that was launched last fall. We continue to see increase participation in this program, and we are excited for the benefits that it will bring.

The remaining difference was primarily driven by gross margin declines in our hunting, shooting, and related categories versus the prior year, as both price points and demand are returning to historical levels. Adjusted operating income for the quarter was $12.3 million, with adjusted earnings per share for the quarter of $0.12, ahead of our guidance of $0.09 to $0.10, and compared to adjusted earnings per share of $0.18 in the comparable period of the prior year.

Now I want to take a minute to discuss the current industry dynamics, starting with industry data. Although NICS experiences peaks and valleys, we believe that these peaks and valleys were somewhat exaggerated over the last several quarters. When you look at the data over a longer period of time, it shows an upward slope in trend line, or a CAGAR of 5.9% from 2005 to 2011, prior to the firearms surge.

We look specifically at NICS adjusted background checks, which is derived by the National Shooting Sports Foundation. This adjusted data strips out NICS permit checks used by several states for carrying a concealed weapon, as well as checks on active concealed weapon permit databases, among other things. While not a direct representation of firearm sales, we believe that the adjusted NICS data provides a more accurate picture of current market and demand conditions.

Though July's NICS adjusted background checks remain below year-ago levels at minus 4.5%, the pace of the year-over-year declines has moderated since January, which saw a minus 45.8% decline. We cannot predict exactly when firearms and ammunition demand will begin to normalize; however, we are encouraged by these recent trends.

We have posted a chart of the NICS adjusted background check data on our website under the Investor Relations section for your reference. We believe the long-term trend line illustrated on this chart helps support ours and others' hypothesis that our niche in the outdoor sporting goods sector should continue to grow at a healthy pace.

In addition to potentially stabilizing industry dynamics, we continue to view marketshare opportunities as significant. Given the fragmented nature of the industry, there remains substantial marketshare opportunity for national players like us. With over 60% of the $50 billion industry still comprised of mom-and-pop operators, there is ample room for all of the national competitors to coexist and grow, as the data shows us that the ultimate share donors end up being mom-and-pops.

More specifically, we look at the adjusted NICS data by state, and we continue to see our marketshare growth in the states in which we operate. And, of course, in the states in which we open new stores are market share grows even further.

Regarding recent ammunition trends, we are seeing supply coming back to normal levels in all but the rimfire category. However, even in this category in which demand is still relatively strong, we are starting to see inventory availability increase somewhat; and that causes us to continue to believe that we should see ammunition demand normalize during Q4 and into 2015.

Getting back to the topic of marketshare, competitive openings are something we monitor closely. Though our individual stores see a near-term impact upon the entry of certain national competitors into a market, our experience has shown us that our business typically rebounds to pre-competition levels in approximately 2 to 3 years.

In the second quarter we faced new competition, which we define as a competitor entry within the last 18 months, in six of our markets, and this group is performing better than we expected, which is reflected in our comparable-sales store number for the quarter. Our Anchorage and Wasilla, Alaska, market and our Missoula, Montana, market are two examples of this, where both markets have performed significantly better than we expected, given competitive entrants.

In the Alaska market we had two major competitors totaling approximately 220,000 square feet open on top of our two stores totaling approximately 100,000 square feet. We expected the short-term impact be relatively severe, especially since these stores opened during busy tourist season. Yet we finished the quarter 34% ahead of our plan, which, as you know, is based on the historical performance that we have seen the 13 previous times we were faced with competition with a dramatically larger store size.

Missoula, Montana, is a great example on another level. As I have stated previously, most of our competitors open stores in our markets that are at a minimum twice our size, as was the case in Alaska. In Missoula the competitive opening was of a similar size to our store location.

For the quarter, our Missoula store finished over 60% ahead of plan and the historical average, and in fact was within 12% of the performance of our next-closest Montana store that is not subject to any major competition. Again, we think this goes a long way in illustrating that the major players are taking share from the mom-and-pops, and not from each other.

Finally, a third data point emphasizing our peaceful coexistence premise. Our stores with mature competition, which we defined as a major competitor in our market 3 years or more, only declined 2.5% in the quarter. That compares to a decline of 1.3% in our stores in which we have no major competition.

So you can see there is virtually no difference once the competitive dynamic in a given market reaches maturity. In our opinion, we believe this peaceful coexistence is a result of the key attributes that differentiate us from our competition.

We are the largest outdoor specialty retailer in the Western US, partially as result of our flexible store format that allows us to profitably service both small and large MSAs. Our low-cost, no-frill store concept represents a differentiated approach to servicing the outdoor sporting goods market.

We offer everyday low prices, a localized and broad merchandise assortment, and convenience for our customers. And, as I've mentioned previously, we have outstanding customer service by our passionate store associates.

So, while we expect an additional four markets will be impacted by 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 that we expect over the long term.

As we move forward, we remain focused on our strategic growth initiatives. I would like to spend a few moments reviewing these initiatives and the progress we have made.

Our first initiative is to capitalize on the significant whitespace opportunity we see within existing and new markets for our stores. We plan to continue to expand our store base at a unit growth of greater than 10% annually for the next few years, as we believe there is potential for Sportsman's Warehouse brand to grow nationally.

As important, we have the infrastructure and talent in place to support this rate of growth. Our focus on training and our specific programs to move associates up to department managers, and department managers up to store managers, in a very disciplined manner is working, as evidenced by the fact that 51 of our 55 store managers have been promoted to the position from within. But the remaining four stores for which we went outside the Company are being managed by seasoned retail professionals with decades of experience.

Another key initiative as we look to open more smaller-format stores is the implementation of a new fixturing strategy. The fixturing in our newest 30,000 square foot store enables it to hold approximately 70,000 SKUs, the same number as our 42,000-plus square foot stores. This development is exciting for us as it has the potential to increase our sales while maintaining the smaller flexible store format.

Our industry-leading new store economics support our long-term growth runway. As reminder, our new store underwriting market model targets average year-1 sales of $9.5 million or more and four-wall adjusted EBITDA margins of over 10%. We target ROIC of greater than 20%, including our upfront inventory investment, or greater than 50% excluding it.

Store classes since 2010 have surpassed these targets, with an average ROIC of 40.2% including inventory and a payback period of 2.5 years, or double the targeted ROIC level of our standard new store model. As we open more of these 30,000 square foot stores, we continue to see evidence that we can achieve our targeted returns at something less than $8 million in net sales per store.

Driving same-store sales growth through in-store initiatives is the second element of our growth strategy. In the second quarter, we completed the planned remodels of an additional three stores to expand our clothing offerings by reallocating an average of 2,700 square foot of storage space to selling square footage.

We have now remodeled 31 stores over the past 2 years. Given this reallocation of space, we continue to implement our store-within-a-store clothing initiative, which allows us to better present major brands like Under Armour and Colombia to our customers.

In the second quarter these 31 stores with increased square footage performed 10% better than the stores without this concept, which we find very encouraging. But more important, with our new fixture presentation we are now able to showcase the store-within-a-store concept not only in 100% of our 40,000 square foot and above stores, but also within our 30,000 square foot format stores.

We also remain focused on enhancing operating margins through increased penetration of our private label products, in addition to the work in clothing and footwear with major brands. As of the end of the second quarter, private label represented 2% of sales, representing a 40 basis point increase from the second quarter last year.

We continue to believe there is an opportunity to gradually increase our private label penetration over time. And of course, as we continue to grow we anticipate leveraging our fixed costs over a larger base of stores.

Touching on our longer-term outlook, we continue to believe that our flexible store format, whitespace opportunity, margin improvement initiatives, and go-to-market strategy all support our longer-term outlook for top-line growth of greater than 10%, EBITDA growth in the mid-teens, and net income growth of 25%. We remain excited about our business and the many opportunities that we have to expand the brand and grow the Company.

Now over to Kevan to discuss our financials.

Thanks, John. Good afternoon, everyone. I'll begin remarks this afternoon with a review of our second-quarter results and then discuss our outlook for fiscal 2014.

As John said, our top-line results were better than our expectation. Net sales increased in the second quarter by 2.3% to $159.5 million, up from $155.9 million in the second quarter of last year.

Same-store sales during the quarter decreased by 6.1%. Excluding sales of firearms and ammunition, our same-store sales decreased 1.4%. If firearms, ammunition, and all shooting-related categories including optics are excluded, our same-store sales increased 1.1% during the quarter.

Turning to our same-store sales by each of our three store groupings, which are: one, base stores; two, new stores or acquired stores that have been in the comp base for 2 years or less; and three, stores that were subject to competitive openings, which we define as a new competitive entrance into a market within the past 18 months. In the second quarter, excluding the six stores in our comp base that were subject to competitive openings, our same-store sales decreased 2.3%.

Our 23 base stores saw same-store sales declines of 4.3%; however, our 17 new stores saw same-store sales increases of 1.3%. Our six stores that were subject to competitive openings experienced a same-stores sales decline of 22.9% which, as John discussed, was substantially better than our plan.

Gross profit in the quarter was $52.8 million compared to $52.2 million in the second quarter of fiscal 2013. Gross margin as a percentage of net sales decreased 40 basis points to 33.1% from the 33.5% in the corresponding period from last year. The decrease in gross margin as a percentage of net sales was driven primarily by our loyalty program and lower gross margin in firearms, ammunition, and other related product categories as result of supply returning to historical levels in the second quarter of fiscal 2014 versus the surge-driven conditions of the prior-year period.

We continue to experience success in the adoption of our loyalty program that we launched in November of 2013. Participation 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 over time and higher average tickets, along with the associated benefits that come with these metrics.

SG&A expenses for the quarter of $40.5 million increased from $36.1 million in the second quarter of fiscal 2013. As a percentage of sales, SG&A expenses increased to 25.4% from 23.2% in the corresponding quarter of fiscal 2013, primarily as result of stock-based compensation expense and increased payroll, rent, and preopening expenses from our new store locations.

Income from operations for the quarter decreased to $12.3 million as compared to income from operations of $16.1 million in the second quarter of fiscal 2013. The year-over-year decline was driven by lower gross margin percentage and increased SG&A as a result of the factors I just described.

Our net interest expense in the second quarter of fiscal 2014 was $4.1 million compared to $3.4 million of interest expense in the second quarter of fiscal 2013. Our average borrowings increased over the prior-year period, primarily due to the $110 million in additional borrowings on our 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 on our term loan, our average borrowings and our quarterly interest expense decreased from the first quarter of fiscal 2014. We anticipate our quarterly interest expense will remain in the range of approximately $4 million to $4.5 million for the remainder of the fiscal year.

Our effective tax rate for the quarter was 38.5% compared to 39.6% in the corresponding quarter last year. We anticipate our effective tax rate for the remainder of the fiscal year to be approximately 38.5%. This reduction is 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 is based on pro forma diluted weighted average shares for the quarter. A reconciliation of GAAP net income and earnings per share to these adjusted numbers on a pro forma weighted share basis, as well as a reconciliation of the other non-GAAP measures we reference, can be found in the financial tables including in our earnings press release issued today.

Adjusted net income for the quarter was $5.1 million or $0.12 per share based on 42 million diluted weighted average shares outstanding, as compared to adjusted net income of $7.7 million or $0.18 per share based on 42 million adjusted diluted weighted average shares outstanding in the second quarter of fiscal 2013.

Adjusted EBITDA for the second quarter of fiscal 2014 was $16 million, compared to adjusted EBITDA of $17.9 million in the prior-year period. We ended the second quarter of fiscal 2014 with $1.7 million in cash and cash equivalents on our balance sheet and $62.9 million in outstanding borrowings, with $23 million in borrowing availability under our $105 million credit facility.

Ending inventory was $207.4 million, as compared to $177.8 million in inventory as of the end of the second quarter of fiscal 2013. However, on a per-store basis, inventory was flat when compared with the prior year, which we consider an important data point.

As we enter the third quarter, we are very pleased with the quantity and quality of our inventory, including firearms, specifically the MSR-type firearms. As we noted on our first-quarter call, we did not overbuy these categories during the surge and, therefore, we are not faced with excess inventory that we will have to sell outside of our normal and historical promotional patterns.

Turning to the outlook, we are reiterating our full-year sales and EPS guidance. For all of the details around our third-quarter and 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 remind you 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 2013. In the second quarter, our stock-based compensation expense was approximately $500,000, and we expect similar amounts of stock-based compensation expense in each of the third and fourth quarters for a full fiscal-year total of approximately $3.2 million. This amount compares against $400,000 of stock-based compensation expense in fiscal 2013, all of which was recognized in the fourth quarter.

As mentioned on our first-quarter earnings call, in fiscal 2014 we will incur 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 expected to be incurred in each of the remaining quarters of our fiscal year.

As it relates to capital expenditures, we continue to anticipate incurring approximately $23.2 million of CapEx in fiscal 2014, of which we have already incurred approximately $19.6 million during the first half of the year. The remaining $3.6 million will be spent on planned improvements to our IT infrastructure; the one additional store that was opened in the third quarter; and fully equipping our recently opened distribution center.

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.

Okay, thanks. Hey guys, how are you? I have a couple questions about the gross margin. It was nice to see the improvement this quarter, I guess, relative to last quarter.

One thing you pointed to was the normalizing of pricing and promotions within the guns and ammo category as, I guess, the supply-demand situation has started to normalize there. At what point is that no longer an issue? Like, at what point last year or in the last few quarters did that already start to normalize and maybe it becomes less of a drag going forward?

Seth, I think it is starting to normalize now. There is still some excess pricing going on in ammunition, but I think as we enter this second half of the fiscal year we are going to see what you saw in 2011 and 2012 in terms of price points and margin on both firearms and ammunition.

I think short-term you are going to see some mom-and-pops do a lot of promoting because they have an overallotment of mainly the MSR-type firearms. I think there is a backlog in the distribution channel, and that is a result of a huge backlog in the mom-and-pop channel.

But for the national players, including us, I don't think you will see any of that, and we won't need to promote that. So I don't think you're going to see any excess promotion impacting margin, but I do think you're going to see margins returning to 2011 levels, if you will, in those categories.

Okay. I guess just in general, as you think about the EPS guidance that you provided for the back half of the year, how would you think about margins? What is implied there, the combination of the promotional activity and also obviously the loyalty program having a little bit of an impact too? How do you think about merchandise margins in the back of this year?

I will let Kevan talk specifically, if he has any comments on the specific merchandising margins. But I think our overall guidance remains the same, and I don't see us doing anything outside of the norm in terms of a promotional environment. I think most of the national players are back to a normal scheduled promotional pattern, and that is where we are as well.

Yes, to go along with what John has said already, we don't expect significant pricing pressure from the national players. There is a little bit of pricing pressure that we see coming from the mom-and-pops, as they -- I don't want to say liquidate, but as they get rid of their excess inventory, as they overpurchased.

So we have some slight declines to what we had originally expected with respect to gross margin, but not significant. And that allows us to maintain our EPS guidance going forward.

Okay, thanks for the color.

Peter Benedict, Robert W. Baird.

Hey guys, a couple of questions. First, good to hear the competitive stores doing better than your plan. John, what -- I mean, anything different you are doing with those stores in response to these openings? What do you chalk this, the better performance, up to?

We are not doing anything different, in terms of we didn't promote or anything like that. I think we're just doing a better job of blocking and tackling, and that has come over time as the experience of our store managers has increased, as our training programs have kicked in, as our customers have realized that we are pretty good place to shop.

Sometimes it takes the competitor to enter into a market for people to appreciate how good you are at customer service. And I think all of those things as well as -- I mean, we are a growing company so I think we are known a little more, especially in the Western United States and especially in those markets in which face competition. So I think our brand is strong in those markets; and I think all of those factors really help us maintain where we're going to go and beat the historical averages we have seen.

In those stores where we have been impacted by competition, we have been in those markets for quite some years. We have been in the Alaska market for over 10 years now.

We have a very loyal customer base. And I think that is part of the factor as well, that we have been well established in a lot of these markets for a number of years.

Okay, that is definitely helpful. Then just on the new fixtures, how many stores is it in right now? And when do you expect -- what is the cadence in getting those into all your stores?

Well, it is only in one store now. The story we opened in Pocatello, Idaho, was the first store in which we gave it a shot, and we were incredibly pleased with our ability to get 70,000 SKUs in that store.

So every store going forward will have that fixturing strategy in place, and that really allows us to put as many SKUs in 30,000 square feet as we got in 42,000 square feet. Then what we'll probably do is do certain fixturing changes in our other stores to make sure we can do the store-within-a-store in all of our stores.

So we don't need to change our fixtures in the 31 stores in which we have expanded the clothing area, because we have plenty of room. But there are 15 or so stores that are above 30,000 square feet, below 40,000, 42,000 square feet, that we were not able to expand.

Those are the ones that we will put new fixtures in. It is our intent to get that done in the next year or maybe a little longer than the next year, based on the cadence of sales and new store openings.

Okay, that was very helpful. Thanks, John. All right. Thanks, guys.

Mark Miller, William Blair.

Hey guys, this is actually Mike Signore for Mark. Just had a question on the new store pipeline for next year. I guess you guys have announced several openings.

Wondering how the effect from competition from some of those or some of the existing stores is playing out as you see it right now, and if it is going to be more of an impact next year versus this year, or less of an impact, or vice versa.

Kevan can point to the exact stores that we know about that will be competitive openings next year. I don't have that number in front of me; Kevan does.

Our new store pipeline for next year is the same as always. It is a mix of opportunistic locations in larger markets and new store openings in smaller markets where, frankly, you really can't justify a store greater than 40,000 square feet.

We have a number of stores we have announced, too. We have probably several that we are getting very close to announcing, although I don't want to announce them on this call yet today; and our pipeline for the back half of 2015 and 2016 is relatively robust. So we have plenty of stores to choose from when we decide to move forward.

With respect to your question on competition, as John mentioned in his remarks during the script, there currently are six stores that are in that new competitive category. There are four more that we anticipate before the end of our fiscal year; and as of right now, we are aware of an additional five stores that will be impacted by competition in 2015.

So if you take the 10 stores from 2014 to the five stores from 2015, we actually expect less of a competitive impact next fiscal year than we do this fiscal year.

Okay, great. Then just a quick question on the comp outlook for the remainder of the year. Obviously the sequential trends are getting a lot better, and it looks like, if you hit the low end of your Q3 guidance and you come in at the low end for the full year, that the comps can actually be positive in the fiscal fourth quarter.

Is that right? And how realistic is that versus the other way, I guess?

I am not going to provide guidance of that specific nature. I think we are reiterating our full-year guidance.

I think if you look at the trend, fiscal Q1 for us was down 18.1%. Calendar Q2, which I think is an important data point, was down 8.9%; and fiscal Q2 was down 6.1%. So you can see the trend and react accordingly.

Again, referring to the NICS data, the NICS data also shows sequential improvement as well. So those are good data points from a historical basis; and again, we are reiterating our full-year guidance with respect to that outlook.

Okay, great. Thanks a lot.

Matt Nemer, Wells Fargo.

Thanks so much. Afternoon, guys. I just wanted to follow up on that last question. If we look at the NICS data, what is your sense for when that data could be positive, if you have any thoughts on that?

And then same for ammo. Seems like ammo was very strong through the end of last year. So just wanted to get your thoughts on when both of those could turn positive.

I don't know that we can sit here and tell you when we think they are going to turn positive. I mean the NICS data, historical data from the National Shooting Sports Foundation is on our website.

I think there is a huge spike that has to be made up somewhere. I think if you look at the trends, the trends are growing at 5.9% or better. So I think that is positive for our entire industry, and I think those trend lines overall will continue.

What we are looking at specifically -- and I think this might be only us -- is we believe that the valleys will be maintained where they are, which is not bad from a historical perspective, but the peaks might be a little bit shorter going forward. What that translates to is I think it translates to an up-and-down comparison on a month-to-month basis, on a quarter-to-quarter basis; but overall I think you will see an increasing line.

So because I think the peaks will be a little smaller, I really can't have -- don't have an opinion on when a turn will occur to the positive. But I certainly think over time you will see the return to the positive. And if you look at the historical numbers, clearly this is a growth industry over time; and I think we will see that happen.

As it relates to ammunition, the one caveat I will talk about in terms of ammunition is there has been a huge spike in ammunition sales and ammunition demand last year. And what you would have thought this year, based on that purchase of that much ammunition, is you would've thought that you would've had more shooting going on.

Now, while targets and cleaning supplies are only two categories, we look at those categories in relation to firearm sales to really see what the usage of ammunition is. And what we are seeing is we are seeing that those categories have increased; but they frankly should have increased a little more.

So what we're seeing is we are seeing that there is probably some hoarding going on in ammunition. And while that does not cause us to pause, it does cause us to not really be able to tell you at what point will people start feeling they don't -- they no longer need to hoard the ammunition and they can start increasing their shooting.

The positive of this is that there is still demand that is in excess of supply in the rimfire category, and the rimfire category is where all the new shooters come in. I think we and others have spoken of the 20% of people buying firearms are new users. This really gives us hope that the supply will start normalizing with demand in the rimfire category, and there will be plenty of rimfire over the next -- into 2015 and beyond to support the increase in new users.

I think that gives us the positive side of this hoarding that I think we are seeing in a short-term basis.

That is very helpful. Then secondly, it sounds like the new fixtures open up an opportunity to do a lot more remodels. I'm wondering if you can just give us an update. I may have missed this if you provided it, but how are those clothing remodels doing?

I do not know if there is a way to look at that set of stores or maybe just that department. Give us a sense for what happens when you add that in.

Yes, on the stores in which we have done the store-within-a-store and expanded the area to do store-within-a-store, those stores have performed 10% better than the stores that did not have a store-within-a-store concept. So while we had to put money into expanding the stores previously, we now do not have to do that.

We just have to put the money into new fixturing, because the fixturing is -- you know, we lost a whole lot of cubic space with the plywood fixtures and things we have. And the new fixturing makes a lot better use of the cubic space of the store.

As result, there's 15 or so stores that, at this time 3 months ago we were saying just can't have store-within-a-store, and the ability to do store-within-a-store in a 30,000 square foot format was a little bit iffy. Now I can clearly say that we can do store-within-a-store all of our stores.

I think that is a huge organic growth opportunity for us going forward, and we really are really excited about getting that thing going.

Great. Then just one last one if I could. Just love to get your take on what you're seeing currently in terms of getting close to hunting season, people prepping for hunting season. Any update on demand or traffic or what you're seeing in the market right now would be helpful.

Well, I think we will say the same thing I think others have said: that the retail environment is tough right now. I mean, we don't have the benefit of a back-to-school season, so we can't really gauge what the need demand will be and, frankly, as we go into third quarter there is not a lot of need.

The fall hunting season really starts late September, early October. We are encouraged by what we are seeing in the last several days, as we approach that time. But I don't know that I can give you a definitive response overall on what is going on, other than what we said before, which is: we believe that with the availability of hunting ammunition this year that was not available last year, with the increase in new shooters into the market, and with the surge in demand moderating now, along with, I think, the ability of our customers to replenish their wallet, which we saw going on for the last couple of quarters, where we really saw that they were not spending a whole lot except when they really needed to spend the money -- I think all those signs point to a pretty decent and encouraging hunting season for us going forward.

Great, very helpful. Thanks and good luck.

Andrew Burns, D.A. Davidson & Company.

Good afternoon and congratulations on a strong execution in the quarter. From your commentary and what we have heard from your competitors and firearm manufacturers, it sounds like the weakest area of the firearm market is clearly the MSR space. I was hoping that you could perhaps quantify that as a percent of the mix, or give us any sort of data to help us better understand where that category peaked out at, what it has shrunk to in relation to your overall revenue. Thank you.

I do not have those numbers off the top of my head. I can tell you that, as a percentage of the firearm mix, we are back to a more normal level as to where we were before this big surge occurred. I don't recall off the top of my head, so I don't want to quote an incorrect number here with respect to that. But it has returned back to normal levels.

But one thing that we are -- with respect to the MSRs, and I pointed this out in my comments, is that from an inventory perspective we feel very comfortable both with the quantity and the quality of the SKUs that we have in that MSR category. For a while there it was quite crazy, the demand in that, and that caused a little bit of growth in the number of SKUs count.

We have pared that back to those SKUs that we feel very comfortable with that we can sell at normal price points without having to liquidate things. And we are very comfortable with the quantity that we have on hand of those items.

Okay, thanks. Then I believe I heard that the clothing comp was positive 4.2%. I believe it was double digits last quarter.

Is there anything to call out there? Or was it how it performed relative to your expectations?

With respect to the clothing last year, after we acquired the 10 stores we did a significant liquidation at the end of the second quarter, into the beginning of the third quarter. So I think last year's sales were a little bit artificially inflated.

We also have just barely been putting out the fall categories, which is the fresh reset that is going on during the third quarter. So we are still very pleased with respect to the results of our clothing. The number did decline a little bit; but as I indicated, last year's sales were a little bit inflated as we liquidated some of the inventory from the 10 stores that we acquired.

That is helpful. Thanks.

Matthew Fassler, Goldman Sachs.

Thanks a lot. Good afternoon, guys. This is Steve Tanal on for Matt. I wanted to just focus on one comment.

I think you guys said that you may be sort of focusing on markets that generally can't support larger stores. I'm wondering if that is a bigger focus now, or a bigger part of the strategy than it had been; or if that marks any sort of a change at all in your thinking.

I don't think it marks any sort of change in our thinking. I mean, we have numerous sites that we are looking at. I think what you will find is you will find that this thing will ebb and flow.

Clearly with all of the national players growing, the capacity for certain larger markets to handle numerous entrants is declining. I think we have a significant competitive advantage in those smaller markets where we can go. So probably over time we will be looking at smaller markets, but we have not purposefully changed our strategy at all.

Time will tell, and the numbers will tell us where to go.

Got it. Okay. Then on the same-store sales guidance for third quarter, is there still a ramp here as we get through the quarter?

I think if I look at NICS, it looks like maybe the August compare was tougher than September, October, and then you normalize. But I am wondering if you are tracking to guidance or there is some ramp that we should see through the quarter here.

We haven't talked specifically about months. I can tell you that we are comfortable with the guidance that we have provided with respect to the same-store sales guidance there.

So we haven't talked specifically to the months, so I don't know exactly how to answer that question but providing information that we are not going to provide.

Okay, fair enough. Then just lastly, if you have any thoughts of the relative strength of handguns versus rifles or long guns lately, any reason in your minds why we're seeing that?

The strength of handguns versus long guns is what you're asking?

Yes, the trend in handguns have been very, very healthy even year-on-year while (multiple speakers)

Yes, I think that there is a couple of reasons. Home security I think is a reason. I think clearly new entrants into the market are looking at shooting as much as people are looking at hunting, and that lends itself to stronger handgun sales.

And I think women entering the market are generally -- and I have anecdotal evidence on this; I don't have factual evidence. But I think most people in our niche of the market would agree that most of the women entrants into the shooting sports are into the handgun shooting sports first.

That doesn't mean they won't go to long guns. We see transitions of women going to long guns all over the place. But I think their entrance, their point of entrance is a handgun.

Understood. Okay, thanks a lot.

Thank you. I would now like to turn it back to management for closing comments.

Great, thank you for joining us today. We look forward to speaking with you when we report third quarter. Have a nice day everybody. Thanks.

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