Sportsman's Warehouse Holdings Inc (SPWH) 2016 Q2 法說會逐字稿

This is Sportsman's Warehouse Inc. second-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.

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. The statements we made today will contain forward-looking statements in the meaning of 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, including those described in the Company's most recent 10-K filed with the SEC on March 24, 2016. We will also disclose non-GAAP financial measures during today's call.

Definitions of such non-GAAP measures, as well as reconciliations to 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 again by reviewing the highlights of our second quarter performance and then discuss our progress on our strategic initiatives and thoughts on the remainder of the fiscal year.

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. We are pleased with our second quarter results, which came in above our guidance on both sales and earnings per share.

We believe the unique characteristics of our business model and our disciplined execution allowed us to navigate the headwinds in the second quarter that affected soft goods in the broader retail market.

As we have demonstrated in the past, we met each of our financial performance objectives. We again focused on maintaining and where possible, enhancing gross margin, which has allowed us to continue to meet our ROIC objectives and earnings guidance.

Despite the continued deep discounting in many categories by some of our competitors at both the national and local levels, we were able to maintain our normal promotional calendar, driven by our continuous efforts on the right product, in the right place, at the right time, and our everyday low price merchandising strategy. Additionally, despite our pricing and promotional discipline in this environment of increased discounting, we were able to not just grow our same-store sales but it is noteworthy that the largest increase in same-store sales came from those stores where we faced mature competition.

This further illustrates the differentiating attributes of the Sportsman's Warehouse experience, offerings and value proposition that continued to resonate with our customers. With the increased demands for firearms, especially in the states in which we operate, NICS data strengthened and we were able to outperform this increase in NICS data, increasing our share in 19 of the 20 states in which we operate, despite new competition in six markets in these states.

Our new stores continue to outperform our expectations, with all the stores being either our standard format or smaller format models in metropolitan service areas that are, for the most part, very difficult for our larger national competitors to enter or in markets where our national competitors have historically chosen to avoid. Our results across the markets in which we operate continue to demonstrate that we are able to coexist with our national competitors in those markets where we compete as a neighborhood alternative and also, that we are continuing to take share from mom and pop retailers across markets, large and small.

We opened three stores in the second quarter and are on pace with our plan to open 11 stores this fiscal year, which represents 17% store growth, reflecting our continued focus on growing the Company while also meeting our twin objectives of delivering a 20% ROIC on new stores and generating free cash flow to pay down debt.

Net sales for the second quarter increased 13.7% to $189.8 million. Same-store sales increased 2.9% versus the prior-year period. As we have discussed many times, the effect of new competition impacts same-store sales until approximately the 18-month mark. As expected, in the second quarter, this impact from competition was 210 basis points.

We are very pleased with the performance of our stores facing new competition, especially when considering the significant increase in promotions among some of our competitors in the quarter. Based on announced competitive openings, we are now at a point where this impact will begin to diminish over the next few quarters, both as a result of fewer new competitive openings as well as many stores that face new competition reaching the 18-month mark, where the competitive impact starts to fade.

Looking more closely at our store sales performance for the quarter. Firearm unit sales were up 30.8% versus the second quarter of last year and versus the NICS data for our states being up 24.6%. Ammunition sales were also up over the prior year. Our assumption of a three-to-four month lag in ammunition growth following firearms growth that we discussed previously appears to, again, be irrelevant.

We are very pleased with the overall growth in firearms and ammunition and we believe we are the best-positioned brand in our niche to continue to capturing market share in the category. Our sales performance in the firearm and ammunition categories and ancillary businesses as well as the growth in our non-hunting categories all point to continued share gains and traction in markets of all sizes, as either complementary alternatives to major competitors in larger markets or at the expense of mom and pops and the direct channel in smaller markets.

From a comp composition standpoint, conversion and average order size continued to increase. Once again, as we move through the quarter, it became evident that our customers were focusing their dollars on the use categories within hunting, camping, and fishing versus the ancillary categories in these same areas and the clothing, footwear and electronic categories.

However, we are pleased that we continue to see sequential improvement in our clothing and footwear categories, as we continue to improve our product offering, merchandising presentation, and inventory position. And we saw this sequential improvement despite the significant promotional activity in these categories from some of our competitors.

Now on to profitability. Gross profit increased 14.1%, with corresponding gross margin as a percentage of sales, increasing 20 basis points versus the same period last year despite the higher mix of lower-margin product lines. On an individual department and item basis, we continue to see steady to slightly increasing gross margins, as we continue to maintain our discipline on promotions, while achieving our objective of being the everyday, low price leader in our categories.

We are especially pleased with our private label performance, as one of our main product offerings in the good category of the good, better, best offering strategy. While private label is still a very small portion of our business at 3.4% of our net sales during the second quarter, we increased private label sales by 25% quarter over quarter.

This increase as well as the higher gross margins that comes with these sales has us very confident that we are on the right track with this strategy. Adjusting operating income for the quarter was $16.7 million, a 30.4% improvement over the prior year, driven by or top line performance, which was accompanied by gross margin strength and continued discipline with expense management.

We are accomplishing our dual objectives of both investing in our future while ensuring we are operating as efficiently as possible on a day-to-day basis. Earnings per share was $0.20, which was above our guidance and an improvement over the adjusted earnings per share of $0.14 in the prior-year period.

We believe our results continue to demonstrate that our customer base enjoys shopping in our stores, given our unique environment as well as our convenience as a neighborhood store in larger markets, or our big box appeal in smaller communities, where we provide a greater assortment than the mom and pop competition.

We also believe that we have an advantage versus online-only options by providing outdoor enthusiasts with the touch and feel of a product that they may not have been exposed to in a store setting before. Our pricing is similar to and in many cases, better than the prices that can be found online and as we've noted before, many key product lines are not available or very difficult to purchase via the direct channel. Looking ahead, we remain focused on our strategic growth initiatives and key priorities. Let me discuss a few, including progress we made in the second quarter.

Number one, we remain focused on the significant store growth opportunity we see and in and new markets that we expect will support an anticipated unit growth rate of greater than 10% annually for the next few years. With the opening of stores in Juneau, Alaska; Prescott, Arizona; and Roseburg, Oregon, in the second quarter, and stores in Las Cruces, New Mexico; and Gillette, Wyoming, already opened so far in the third quarter. We have now opened eight stores in FY16. Rock Springs, Wyoming; Avondale, Arizona; and Fairfield, California will be opened in the third quarter and will complete our previously announced 11 store openings for this fiscal year.

In addition, today we have announced the first four stores for our 2017 class. These store locations are in Cedar City, Utah; Moses Lake, Washington; Wilmington, North Carolina; and Morgantown, West Virginia. Of note, Gillette, Wyoming; Rock Springs, Wyoming; Cedar City, Utah; and Moses Lake, Washington, will all be our smaller format stores. Our operating discipline and prudent use of cash have continued to allow us to self-fund our store growth while also reducing our leverage. We expect to continue our pace of new store openings into FY17 and beyond.

Number two, we have received consistent performance out of our 45,000 square foot boxes and executed successful fixturing strategy, grounded in analytics around SKU productivity and customer preferences, among other things, that has enabled our success in standard format, or 30,000 square foot stores. As I discussed in previous quarters, our smaller format, or 15,000 square foot stores in Klamath Falls, Oregon, and Heber CIty, Utah, are performing as we expected and that has given us the confidence to continue to pursue this unique strategy going forward, as evidenced by the three smaller format stores in 2016 and the additional announced two smaller format stores so far for 2017.

Number three, we continue to focus on maximizing the potential of our loyalty program which continues to post strong gains. We now have over 1 million members, an increase of greater than 55% over the prior year and the transactions from our loyalty members continue to increase, representing more than 40% of our net sales in the second quarter.

Number four, while we are still a very small percentage of revenue, we continue to invest in our eCommerce, with the focus on increasing our digital presence to build our brand awareness and drive customer interaction. Traffic on our website increased greater than 30% in the second quarter versus the prior-year period, as we continued to improve all aspects of our site. As we have noted before, driving traffic to our site is a key component of our eCommerce strategy, as we know customers use our site for product knowledge and availability as much as they do for pricing information.

So in summary, we are pleased that we delivered Q2 results above our expectations and are encouraged by the progress we continue to make against all of our strategic growth priorities as well as the consistent performance of the vast majority of our store locations in what remains a choppy retail environment. As we look toward the remainder of 2016, as I mentioned earlier, we expect the impact of competitive openings to begin to decline.

In addition, our use categories of hunting, fishing, and camping have continued to see positive momentum in the past few months, which we feel very good about and indicates that our customers are continuing to take advantage of the activities available to them in the outdoors. We continue to see demand in excess supply in a few key camping categories and have made great progress with our key vendors in these categories to ensure supply will meet demand, as we approach the all-important Fall season.

In addition, while we expect the recent surge in firearms to moderate in Q3, we do continue to see demand exceeding supply in certain key firearm configurations. Before I end, I want to thank all of our team members for their hard work and commitment to Sportsman's Warehouse that has driven our success to date and will enable us to continue to build on our track record of consistently delivering against our operational and financial goals.

With that, I will turn the call over to Kevan to discuss our financials.

Thanks John. Good afternoon, everyone.

I will begin my remarks with the review of our second-quarter results and then discuss our outlook for the remainder for our FY16. My comments today will focus on adjusted results. We have provided these results as well as an explanation of each line item and a reconciliation to GAAP net income and earnings per share in our earnings press release, which was issued earlier today.

We are pleased with our second-quarter 2016 results. Net sales increased 13.7% to $189.8 million from $166.9 million in the second quarter of last year, with a 15% increase in stores and a same-store sales increase of 2.9%. Our second-quarter revenue was above our previously issued second-quarter guidance, driven by increased demand for firearms and ammunition.

We continue to be excited about our opportunity to grow our store base in both new and existing markets. During the second quarter, we opened three of our announced 11 planned store locations for our 2016 class of stores, bringing us to a total of six openings through the end of the second quarter. Since then, we have opened two stores in the third quarter to date, with an additional three stores scheduled to open later this quarter. By the end of FY16, we will operate 75 stores in 20 states. We remain committed to growing our store base and capitalizing on the significant whitespace opportunity we see available to us.

We are excited about the first four stores in our 2017 class of stores, which we announced this afternoon. As John mentioned, these stores are in the following locations: Cedar City, Utah; Moses Lake, Washington; Morgantown, West Virginia; and Wilmington, North Carolina. Work on our 2017 class of stores is well underway and we expect to announce additional 2017 store locations in the near future.

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 two years or less; and three, stores that were subject to competitive openings, which we define as a new competitive entrant into a market within the past 18 months.

In the second quarter, excluding the eight stores in our comp base that were subject to new competitive openings, our same-store sales increased 5% compared to the second quarter of last year. Our 39 base stores saw same-store sales increases of 4.6% in the second quarter. In addition, our 12 new stores saw same-store sale increase of 7.4% in the second quarter, compared to the corresponding period of the prior year. Finally, our eight stores that were subject to new competitive openings experienced the same-store sales decrease of 8.3% in the second quarter of this year.

Gross profit increased 14.1% in the quarter to $66.2 million, compared to $58 million in the second quarter of FY15. During the second quarter of FY16, gross profit as a percentage of net sales, increased 20 basis points to 34.9% from 34.7% in the corresponding period from last year. This gross margin increase was due to lower freight cost and increased vendor incentives that were offset by a decrease in our product gross margins, as a result of a sales mix shift to lower margin products, primarily firearms and ammunition.

SG&A expenses, excluding the reversal of a $4 million litigation accrual in the second quarter last year, were $49.5 million in the second quarter of this fiscal year compared to $45.2 million in the corresponding quarter of last year. Excluding the reversal, SG&A expenses as a percentage of net sales in the quarter decreased to 26.1% from 27.1% in the corresponding fiscal quarter of 2015, primarily due to our ability to leverage our fixed payroll, rent, and other operating expenses with the increase in sales.

Income from operations for the quarter increased to $16.7 million, from adjusted income from operations of $12.8 million in the second quarter of FY15. Our net interest expense in the second quarter of 2016 was $3.1 million, compared to $3.4 million of interest expense in the second quarter of 2015. We recorded an income tax expense of $5.2 million for the 13 weeks ended July 30, 2016, compared to $5.1 million for the corresponding period of FY15.

Net income for the quarter was $8.3 million, or $0.20 per share, based on diluted weighted average share count of 42.5 million, as compared to adjusted net income of $5.7 million, or $0.14 per share, based on a diluted weighted average share count of 42.3 million shares last year. Adjusted EBITDA for the second quarter increased 28.5% to $22.3 million compared to adjusted EBITDA of $17.3 million in the prior-year period.

As of July 30, 2016, the end of our second fiscal quarter, ending inventory was $265.7 million, as compared to $235.4 million as of the end of the second quarter of FY15. On a per store basis, inventory decreased by 1.6%. During the second quarter of FY16, we incurred approximately $15.4 million in capital expenditures.

Turning to our outlook, as John mentioned, we continue to expect the competitive headwinds to moderate in the second half of the year and remain encouraged by the positive trends that we have seen in the use categories of hunting, and shooting, and fishing, which we anticipate will continue. This momentum was balanced somewhat by our expectation that the Q2 strength in firearms will moderate in the back half of the year.

Taking these Factors into account, our outlook for the third quarter includes five new store openings, revenue to be in the range of $212 million to $217 million. Same-store sales increased in the range of 2% to 4% compared to the third quarter last year and earnings per diluted share of $0.23 to $0.26 on a weighted average of approximately 42.6 million estimated common shares outstanding.

For FY16, we expect revenue of $780 million to $790 million, same-store sales in the range of flat to up 2% compared to FY15, and adjusted earnings per diluted share of $0.70 to $0.76 on a weighted average of approximately 42.5 million estimated common shares outstanding. We continue to expect operating margins to be relatively flat year over year as we begin to invest in personnel and resources to allow for continued growth in 2017 and beyond.

We ended the quarter with $66.1 million in outstanding borrowings and $44.9 million in borrowing availability under our credit facility. As it relates to capital expenditures, we still anticipate incurring approximately $35 million to $40 million in capital expenditures in FY16, which includes the 11 stores in our 2016 class of stores, as well as work on our 2017 new stores.

With that, I'll now turn the call back over to the operator to open up the call for questions.

Thank you.

(Operator Instructions)

Seth Sigman from Credit Suisse.

Thanks guys. Good afternoon. Nice quarter. So as you think about how the quarter played out, clearly, it performed better than you expected. I guess, what surprised you, you pointed to strength in firearms but also improvements in camping and other categories. I think you even mentioned a sequential improvement in apparel. So just wondering if you can elaborate on some of those trends?

Sure. I think we all saw the improvement in firearm sales in the back half of the quarter and you could see in the NICS data. Our camping continues to show strong demand. We actually had a couple of categories where we ran out of product a little early, which I mentioned and we've had very good discussions with our vendors to make sure that we have adequate supply for the hunting season in the fourth quarter.

So I think we were pretty pleased with the pick-up in camping as a -- based both on a -- part of it's weather that's getting better. But we also had a pretty tough compare in that category because we were pretty strong in the second quarter last year in camping as well. It just continues to be an area of the store that people are understanding that we're very good at. We have the product they want and they continue to come in and shop for that product.

The clothing is a couple of things. One, is we're now getting the inventory in the right position, where last year, we kind of ran out. We didn't have anything to liquidate in the first couple of quarters this year. Our inventory position, I think on a go-forward basis is much better.

Plus, we're getting a lot of good traction with some of our private label products, especially in the camo area, which I think bodes well for not only the upcoming hunting season, but into the next year and beyond because our private label in that good category is really starting to show customers that we have a high-quality product that is very reasonably priced, which I think bodes well for us.

We were actually -- that was probably the area that I was most pleasantly surprised about, was just this -- while it's still a little bit negative, it was still the sequential improvement in clothing, I think was a real win for us in the second quarter.

Okay. And then, John, you noted that you've observed some deep discounting across the industry at some of your competitors. What do you think is actually driving that? And then your gross margins being up in the quarter, how are you able to navigate that from a merchandise margin perspective?

We've continued to maintain our promotional calendar and our strategy has always been to be the everyday low price and I think as we've talked before, when competitors, both national and local, begin to put items on sale, they come toward our pricing. And we've just been able to manage our business such that we don't have to do that.

I think probably there -- it certainly appeared there were some promotions going on to drive traffic within stores by certain competitors, both national and local. I think that's why the discounting went on. But when you start comparing the quality of the product and price versus price, we're still right there with them, without having to discount and I think that's the real key for us. Frankly, what it does, is it gets more people understanding that we truly are the everyday low price leader when we have pricing as good or better than promoted pricing without having to promote.

Okay. Thanks a lot. Nice quarter.

Stephen Tanal, Goldman Sachs.

Good afternoon, guys. Thanks for taking my question. So just one thing on apparel, just following up on some of the comments there. It sounds like you guys are pretty lean at this moment. You're probably are buying for the hunting season, and I guess you're going to get a nice, good, fresh assortment there. What are you seeing from the vendors? Is there a lot of newness out there? Is there product that you're excited about? How are you looking at that?

There's not a lot of newness out there. I think, from our standpoint, we have a better read on the women and kids category than I think we had last year. All the stuff has been bought. I think we -- we've talked before about -- we overbought in 2014 so we underbought in 2015. I think we have the right amount coming in.

In terms of newness, there really isn't a lot of great stuff coming online. That does that mean it's not going to look new in our store as we add color waves on things. The newness, I think, that we're getting and maybe one of the reasons we're getting some traction is, I think our private label camo patterns are a little bit unique and are gaining some traction. That I think is the thing I'm most pleased about with our apparel going forward.

Awesome. That's helpful. And then you talked a little about your competitors and some of the promotions that are out there. I know some of what we've heard is really permanent price reductions, or at least that's the message. Is that what you're seeing? Is that -- is there any ongoing impact from any of the stuff or do you feel it was more cut through the quarter?

I don't know if the pricing is permanent. If it is, it's -- we're still priced very competitively with it, as shown by our performance. I don't know that I can really comment on whether it's permanent or temporary. It certainly seems to have been going on for quite awhile now.

I mean, if you recall, this stuff started going on at the end of the third quarter of last year. We thought it was going to subside in the first half of this year, and it really kind of never did, so maybe, in fact, it is permanent. But it just -- to me and I think to our customers, it reinforces the fact that we are indeed the everyday low price leader in all categories. I think that serves to help us.

Awesome. And then just lastly, for me, it sounds like there's still little bit of cautiousness or conservatism, however you want to think about it in the back-half outlook on the consumer maybe buying -- still buying closer to need. I know oil markets were part of that outlook. Is there anything you see in there? I know you cycled some probably easier compares on that front. Any color there would be helpful. Thanks.

Well, I think as it relates to the oil markets, we're going to start getting better comps in the third quarter. Where it really started to hit hard last year. We didn't see a whole lot of that in the second quarter. The moderation in -- firearms are moderating back to what we would consider a normal level. The unknown is how fast is the hunting season going to grow; it's an unknown every year.

So we're always a little bit conservative as we go into the all-important hunting season which is two weeks from now until to really, six weeks from now. Weather will play a determination in terms of whether people are buying the heavier camo and the higher price point gear if the weather turns bad.

So there's always that little bit of unknown to deal with, so I don't know that we're being any more conservative than we ever have been. I think we're just basically saying, listen, we had certain expectations for the third and fourth quarter when we began the year. I don't know that there's anything that we've seen in our crystal ball that would tell us that those expectations should be different.

Awesome. Thanks a lot.

Peter Benedict, Robert W. Baird.

Guys, thanks for taking the question. A couple here. First, just on the third-quarter outlook with respect to gross margin. Obviously, the margin has been very good. It would seem that maybe that's implied to have gross margins down. Is that right? And is that just because of the mix of firearms that you're expecting in 3Q?

Mix definitely is playing a role in that outlook. You are correct with your assessment there. It's flat to down slightly in the third quarter. Part of that has to do with the fact that we're -- the mix shift is really the biggest piece there. Soft goods plays a little bit into it but not much. But really, it's driven by the mix.

Okay. Thanks, Kevan. Then the Eastern expansion -- North Carolina, West Virginia. How are you guys thinking about that? Just can you take you through the thought process? And why now? And which -- should we be expecting even more markets in 2017 as the new markets get announced?

I think we've talked before that we see a big opportunity and a lot of similarities, both starting on that I-10 corridor quarter through the south of Louisiana, Mississippi, Alabama, Georgia, and then up the Atlantic Seaboard. It's just really a matter of us -- I mean, we spent -- it's going almost three years looking at places in these areas. We've had some success with Slidell and Southhaven. We like the area.

People are receptive to what we're bringing to the table. Now it's a matter of just finding the right locations and getting the right doors open. It's always -- I think we've said before, it's been a strategy of ours and I think you're seeing the first indication of that strategy coming to fruition.

That makes sense. Last question. Just back to the firearms. The complexion of the buyer, is that still kind of an existing owner who's just adding to their assortment or are you seeing some new buyers come in and just what's the trend in average ticket that you're seeing, John, in terms of firearm sales? Thanks so much.

Well, we're seeing the -- if you look at all of the surges and mini-surges over the last few years, there have been five or six of them. We have done a lot of analysis to try to figure out if there's any similarities between them and what it means, both in terms of how long, how big the peak will be, how long it will last, if there will be a valley or if it will moderate, what the percentage of new people coming in versus existing buyers.

I think the thing that we've found with this most recent surge is it's placed somewhere in between the election of 2012, Sandy Hook, where we had about 20% of the sales were new customers, and the San Bernardino in January, which was virtually all existing customers.

It's not all existing customers like San Bernardino but it's not 20% like the election in Sandy Hook. It's somewhere kind of in between. I wish I could be more definitive to that. But it's -- we're still in that process and -- but it's moderating -- but it's moderating back to normal levels. So we haven't -- it's really kind of tough to tell.

That makes sense. And then anything on the average price or really the average ring when you're getting off the firearms sales.

As John mentioned, our average ticket went up clearly with firearms and our hunting and shooting category being 50% of our business; that's driven by firearms that is there. Yes, with respect to that, we are seeing an increase in our average ticket as a result of the increase in firearms.

Okay. Thanks, guys.

Thank you. Our next question comes from Daniel Hofkin from William Blair.

Good afternoon. Nice results. Just to follow-up a little bit on the third-quarter guidance just with the 2% to 4% comp expectation. I heard your comments about gross margin and mix. Is there anything from an SG&A standpoint or anything else that keeps in checks your earnings guidance for the quarter on a year-over-year basis? And then, just one or two follow-ups.

As we've provided guidance for the year, all along, we spoke to an investment in personnel and resources in the back half of the year. We remain committed to that investment. So what you're seeing now is an increase in those personnel and that is we anticipate bringing on some additional people and some resources, particularly in the third and the fourth quarter here of the year.

So from an operating margin perspective, we're going to be relatively flat there. With respect to that, we've had some good gains here in the first half of the year but we've planned all along and we've spoken to those investments and we intend to continue to prepare for our growth and be properly prepared for the future, which we feel like we're doing.

Okay, great. And then just in terms of back to the inventory question. You've talked at times about some increased inventory planning and allocation opportunities with some systems. Can you just update us on where that stands?

We've talked and -- spoken in the past -- terrible english there, my apologies. We've spoken in the past with respect to doing -- trying to do a better job of planning. We, clearly, through a knee-jerk reaction of our overbuy in 2013, and underbought in 2014. We've made some tweaks within our systems to help us better in our planing and forecasting so that we can dial-in those amounts that we need to buy a little bit better.

We feel like we've accomplished those changes within our systems. It was no major system overhauls; just better utilization of the existing systems, maybe a few additional reports here or there. It's given us the information and given us comfort that we feel like we're going to be rightsized on our soft goods inventory, in particular, here going into the Fall.

Okay. And then lastly, just to clarify in terms of the firearms. You're already seeing some moderation, back to normal growth trends, that's not just your expectation going forward?

That is correct.

All right. Great. Thanks very much.

Peter Keith, Piper Jaffray.

Thanks, guys. Good quarter. I was wondering on the new store performance, or I guess your stores that are in years two and three, the gap of that performance picked up. It was the best we've seen over a year and I guess was there some dynamic that's beginning to emerge on that maturity curve that maybe sustainable here?

As I drill down into that detail and looking specifically at the phenomenon, two of our oil stores that were in the new store tailwind grouping in the first quarter, they hit their two-year mark and rolled out. So the oil stores, as we have addressed, has been significantly impacted there and they have been weighing down that new store tailwind performance.

Those two stores rolled out in the second quarter and so they are no longer in that store grouping. This -- the gap between the base stores and the new store tailwind is getting closer to where our expectations are with respect to on a go-forward basis. It really -- primarily was a unique phenomenon. I think there's 12 stores in our new store tailwind, and two of the 12 were oil stores.

Okay. That's helpful, then. I think each quarter you've given the drag from oil market but I apologize if I missed it. Would you be able to give that to me?

Yes, it was approximately the same as it was last quarter. We were hoping for a little bit better of a sequential improvement as far as the drag goes, but it was just a little bit higher than it was in the first quarter.

The first quarter was about 90 basis points. We were up over, a little bit over 1% this quarter. Sequentially, the oil stores actually saw a lower decline than they -- than the other stores so they improved but they just didn't improve as much as our base stores did, given the less disposable income and the consumers in those markets.

Okay. Great. One last one for me here. It still might be a couple months early, Kevan, but on the overtime rule change. I'm wondering if you guys have come to any conclusions on how you -- make adjustments or what, if any, impact there would be on expenses once that kicks in, in December.

We have -- we've made some assessments. We've made some plans. We're doing some testing. Once we know the results of this testing, we will be able to speak further with respect to specific guidance there to what, if any, changes are going to occur with respect to our cost structure. So as of today, we don't have any definitive answers to give there, other than we're testing some changes. Once we see the results of this, we will be able to speak better towards those changes that occur later in the fourth quarter.

Okay. Sounds good. Thank you very much.

Patrick McKeever, MKM Partners.

Thanks very much. Just a couple questions. First, on just the unit growth outlook, the 10% longer term. As you open more of the smaller stores, the 15,000 square foot stores, does that change your thoughts around unit growth? I mean, are you thinking more square footage growth with that new format in place and doing well?

And then the second question is just on, if I recall correctly, the shotgun business was soft in the third quarter of last year, with waterfowl hunting, I think, affected by the dry conditions in many of your markets. So just an update on where things stand with the lakes and the outlook for that particular business in the third quarter?

Sure. I will answer the weather question first. We had -- the spring had some nice rains. A lot of the fisheries opened. The summer has been a little drier than we had hoped. It has been a little warmer than we had hoped.

The 90-day outlook is both drier and warmer and -- in the Western United States and into Alaska. That said, I think the overall condition for those types of hunts is better this year than it was last year. I wouldn't categorize it as great; I would simply categorize it as better than it was. I don't know that we have a whole lot more to -- that you can really add to that.

On your first question about the unit growth, I think we want 10% unit growth. I think we look at opportunities in the 30%s and 15%s and to that extent we have to have 12% or 13% unit growth to get 10% square footage growth, we can certainly manage that. Whether we choose to do that or not, I think is going to be based on the locations and the timing of the openings, other various considerations.

It's -- we're very close to the point where we're going to start talking about square footage growth with a 10% square footage objective as opposed to unit growth once we've probably, in another year, as we get enough of the 30,000 and 15,000 square foot stores on a pace where it's -- we know what the percentage of new stores are going to be 30% and percentage of new stores are going to be 15% going forward.

So we're playing it a little bit both ways, as we sit here right now. I wouldn't be -- it's not going to bother me if you talk about 10% square footage growth any more than it bothers me if you talk about 10% or 11% unit growth.

Okay. Then just on the -- I guess this question has been asked in different ways but on the guidance, the flat 2%, up 2% for the year, that's unchanged from before but the second quarter was better than expected. The third quarter outlook, I think, is a little above where most of us are modeling so that implies a softer fourth quarter. Is that largely conservatism around the strong firearm sales that you had in last year's fourth quarter and some of the pulling forward of demand into that quarter that you talked about?

My perspective is that we're sticking to our guns in the third and fourth quarter. As I look at our guidance, we brought up the lower end of our guidance because we're more comfortable moving to the middle of the higher end of that.

There's still that uncertain retail environment going on. We still have the biggest -- the big seasons of hunting and the holiday season in front of us in the fourth quarter. As you know, we had that San Bernardino surge which we haven't modeled in any surge for presidential election, or any type of event, if you will, of that nature.

So I think -- I don't think we're necessarily saying we're more conservative on Q4. I think we're basically saying we're comfortable with the year and here's how we see Q3 coming out as we sit here in August.

Okay. Thanks very much.

Thank you. At this time, we have no further questions. I will turn the call back over to management for closing remarks.

I appreciate everybody on the call today. Thanks for your -- for listening in and for your questions, and we'll talk to you again. Thanks.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.