Sportsman's Warehouse Holdings Inc (SPWH) 2016 Q3 法說會逐字稿

Greetings and welcome to the Sportsman's Warehouse third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Rachel Schacter of ICR.

Thank you, Rachel. 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. 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, 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 the most directly 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 www.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 reviewing the highlights of our third-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're pleased with our third-quarter results that finished within our guidance range on sales, same-store sales, and earnings per share. We believe our unique localization strategy, efficient business model, and disciplined execution allowed us to continue to outperform our peers in the third quarter and strengthen our position as the high-growth retailer in the outdoor sporting goods segment of the retail marketplace.

In Q3, we once again demonstrated the consistency of our financial performance, as we met each of our financial targets for the quarter while maintaining, and in some cases improving, category-level gross margins. This was against an industry backdrop that remained very promotional at both the national and the local level.

The fact that we yet again successfully maintained a disciplined promotional calendar with no sales or traffic degradation, despite the promotional stance of others in the industry, illustrates the inherent customer appeal of our differentiated concept with our focus on having the right product, in the right place, at the right time, and our everyday low price merchandising strategy. This, accompanied by our characteristic expense discipline, has consistently enabled us to meet our new-store ROIC objectives and overall earnings guidance.

Looking at our top-line drivers more closely, the most recent NICS data reflected the continued increased demand for firearms, especially in the states in which we operate. We were able to outperform this overall demand growth, building on our track record of market share gains, despite new competition impacting nine of our stores over the past 18 months. We are pleased to report that our new stores continue to outperform our expectations.

As a reminder, all of our new stores follow either our standard 30,000-plus square foot format primarily located in larger metropolitan markets. Or our smaller 15,000-plus square foot format models, generally in smaller metropolitan service areas that are more difficult for our larger national competitors to enter with their big box model. Or in markets where our national competitors have historically chosen to avoid.

We opened five new stores in the third quarter and have completed our plan to open 11 stores this fiscal year, which represents 17% annual unit growth. We accomplished our unit growth goals utilizing free cash flow from operations, while also meeting our twin objectives of delivering a 20% ROIC, including initial inventory costs on new stores, and generating excess free cash flow to pay down debt.

Net sales for the third quarter increased 13% to $217.2 million. Same-store sales increased 2.1% versus the prior-year period. As we have discussed previously, the negative effect from new competition generally impacts same-store sales in a particular market until approximately the 18-month mark. Therefore, we analyze our store base in three cohorts, one of which is new-store competition.

Given a known competitive opening that was expected to open in mid-Q4, moved up to Q3, the negative impact from competition in newly competitive markets was 180 basis points in the third quarter. We are very pleased with the performance of our stores facing new competition, especially when considering the significant increase in promotional activity and changes in pricing strategy from some of our competitors. Based on announced future competitive openings, we are now at a point where we believe this negative 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 have faced new competition reaching the 18-month mark when the competitive impact curve reaches an inflection point.

Looking more closely at our category sales performance for the quarter. Our firearm unit sales were up 21.1% versus the third quarter of last year and versus the NICS data for our states, reflecting only a 17% increase. We are very pleased with the overall growth in firearm sales, as we saw a nice increases in all sub categories of long rifles as well as in handguns. We believe we are the best-positioned retailer in our niche to continue to capture market share in the category.

We are particularly pleased that our clothing and footwear businesses have turned positive on a same-store basis with gains of 5.2% and 2.4%, respectively, in the third quarter versus the prior year. Given the performance of this category at other industry participants whose results we are able to track, it is illustrative of our market share gains in the clothing and footwear category as well. The negative weather impact in these categories, which began in Q3 of FY15, has now been annualized; and our product presentation continues to resonate with our customers.

Our sales performance in these and all other product categories point to continued share gains and traction in markets of all sizes. Whether as a complementary alternative to major competitors in our larger markets, or in lieu of mom and pops and the direct channel in our smaller markets. From a same-store sales composition standpoint, customer conversion and average order size continued to increase, as has been the case the past few quarters.

Now on to profitability. Gross profit increased 11.6%, with corresponding gross margin as a percentage of sales decreasing 40 basis points versus the same period last year. This rate decline was based entirely on a shift in sales mix, as growth in firearm and ammunition sales exceeded growth in clothing and footwear.

We continue to maintain our discipline on promotions, while achieving our objectives of maintaining overall margin and being the everyday low-price leader in our category. This gross margin performance is particularly impressive, given it was delivered against an industry backdrop of deep discounting, including new promotional tag lines and resultant steep gross margin declines that we witnessed by a key industry participant.

We are especially pleased with our private label performance, which generally serves as one of our main product offerings in the good category, within our good/better/best merchandising strategy. While private label is still a small portion of our business at 3.6% of our net sales, during the third quarter we increased our private label penetration by greater than 7% from the third quarter last year. This continued growth in our private label sales, and the value that our customers see in these products and brands, as well as the higher accompanying gross margin, gives us confidence that we are on the right track with this strategy.

Operating income for the quarter was $20.5 million, a 7.2% improvement over the prior year, driven by our top-line performance and operating discipline. We are accomplishing our dual objectives of both investing in our future through smart unit growth, while ensuring we are operating as efficiently as possible on a day-to-day basis. Earnings per share was $0.25, towards the high-end of our third-quarter guidance range, and an improvement over the earnings per share of $0.23 in the prior-year period.

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

Given the user experience is critical to the purchase decision, we continue to believe that we have an advantage versus online-only retailers, as our customer prefers to come into our stores to touch and feel our products prior to purchasing. Additionally, our in-store pricing generally provides the customer with similar, if not better, prices than those online. As we've noted before, roughly 30% of our merchandise is either 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 of these initiatives, including progress made in the third quarter.

Number one, we remain focused on a methodical approach to the significant store growth opportunity we see in existing and new markets and plan for a continued annual square footage growth rate of greater than 10% annually for the next few years. With the opening of stores in Las Cruces, New Mexico, Gillette, Wyoming, Rock Springs, Wyoming, Avondale, Arizona, and Fairfield, California, in the third quarter, we have now opened 11 stores in FY16 In addition, today we have announced an additional three stores for our 2017 class. These store locations are in Yuma, Arizona; Eureka, California; and Henderson, Nevada.

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 planned pace of new store openings into FY17 and beyond.

Number two, we remain focused on maximizing the potential of our loyalty program, which continues to post strong gains. We now have over 1.1 million members, an increase of greater than 48% over the prior-year period. The transactions from our loyalty members continue to increase, representing more than 41% of our net sales in the third quarter.

Number three, while still a very small percentage of revenue, we continue to invest in our e-commerce platform, with a primary focus on increasing our digital presence to build brand awareness and drive customer interaction. Traffic on our website increased greater than 32% in the third quarter versus the prior-year period, as we continue to improve all aspects of our site. As we have noted before, driving traffic to our site is a key component of our e-commerce strategy, as we know customers use our site for product knowledge and availability as much as they do for pricing information.

In addition, we are pleased to now offer a gun assortment online, which is something that has been in the works for several months. Our customer now has the option to browse approximately 5,500 guns online. These firearms must still be purchased through one of our physical store locations. The opportunity for our customers to view and research our firearms offering in advance and see an expanded assortment of options has been a significant driver of site visits and has enhanced our in-store sales in the firearm category.

It is also important to note three critical benefits that we expect from selling firearms online as a brick-and-mortar retailer. First, given the firearm purchase must be purchased and picked up in person after filling out the appropriate federal firearms forms and passing a background check at the store, we expect more store visits and corresponding add-on sales to the original firearm purchase.

Second, our customers see a wider selection of firearms online that can then be sent from our DC, or our vendors, directly to the store. This expands each store's product offering and increases the ability to customize the offering to our customer's preferences. To date, over 27% of the firearms ordered online for in-store pickup have been these types of special orders.

Third, ordering online improves store conversion and reduces payroll, as these orders are already sold units when the customer comes into the store to finish the purchasing process. This allows the interaction between our sales associates and the customer to focus on ancillary items such as for the firearm such as ammunition, gun cases, cleaning supplies, targets, et cetera.

Overall, we believe we are well-positioned to build on the demonstrated market share gains that we have enjoyed. The macro and competitive backdrop, in combination with company specific drivers will fuel these gains.

Let me spend a few minutes recapping some key performance metrics, and then discussing the environment. Since becoming a Public Company, we have delivered on bottom-line financial targets 11 out of 11 quarters and on our top-line goals 10 out of 11 quarters. Our commitment to maintaining a strategy of high unit and sales growth has not detracted from our ability to deliver consistent earnings growth. Over the past five years, we have increased our store count from 29 to 75 stores, an increase of 158% as we make progress toward our stated goal of 300 stores nationally.

We have increased our sales by 122% for a compound annual growth rate of 14.2%, and increased our adjusted EBITDA by 215.5%, or a compounded annual growth rate of 21.1%, which includes absorbing the increased costs of being a Public Company. We are very proud of this performance, and confident in our ability to continue to grow our Company profitably, as we march toward our 300-store target.

The best evidence of this commitment are the 28 stores that we have added since FY11 that have been open a full 12 months. These stores have had a combined average year-one ROIC, including initial inventory, of 30.0%. With the election uncertainty behind us now, we believe a Republican White House and Congress is a positive for both our Company and for the shooting sports industry, as gun legislation fears should be alleviated, setting the stage for continued steady growth in firearms.

We believe the recent changes to the competitive landscape, with potential consolidation of the two largest national players, provides significant opportunity for our business to continue to grow and outperform the rest of the industry for the following reasons. First, given the approximately 40% store overlap in a 50-mile radius that these companies have, we believe the near-term focus will be elimination or repurposing of owned real estate, which can be highly distracting and a significant impediment to new incremental store growth.

Second, this impediment, in combination with the resulting leverage of the combined entity of over 5 times EBITDA, we believe will curtail both their store growth plans as well as any excess of promotional behavior. Third, there is also potential integration-related disruption and loss of experienced personnel, given the significant strategic and cultural differences of the two companies that could add another obstacle to further growth.

Lastly, the resulting size of the combined entity, and its position as a highly leverage private company, we believe will cause caution in the vendor community and increase the appetite for vendors to expand merchandising efforts with other players, such as ourselves, to offset this increased risk.

We believe that each of these factors presents a favorable opportunity for Sportsman's to continue its store growth plan, maintain pricing integrity, reinforce our position as the low-cost provider in our industry, and compete effectively for additional market share.

Before I conclude, I once again, want to thank all of our team members for the great job that they do day in and day out. It is their commitment and dedication to Sportsman's Warehouse that has enabled the strong and consistent performance you have seen us deliver. With the favorable backdrop and our continued execution, we look forward to building on our track record of consistently delivering against our operational and financial goals.

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

Thanks, John.

Good afternoon, everyone. I'll begin my remarks with a review of our third-quarter results, and then discuss our outlook for the remainder of 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 third-quarter 2016 results. Net sales increased 13% to $217.2 million from $192.1 million in the third quarter of last year, with a 17.2% increase in the number of stores and a same-store sales increase of 2.1%. Our third-quarter revenue was driven by strong performance in four of our six major categories; namely, our hunting and shooting, clothing, footwear and fishing categories.

We continue to be excited about our opportunity to grow our store base, in both new and existing markets. During the third quarter, we opened the remaining 5 of our 11 planned store locations for our 2016 class of stores, and now 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 have now announced seven store locations in our 2017 class of stores, three of which we announced today, which John previously mentioned. 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 third quarter, excluding the nine stores in our comp base that were subject to new competitive openings, our same-store sales increased 3.9% compared to the third quarter of last year. Our 39 base stores saw same-store sales increases of 3.1% in the third quarter. In addition, our 16 new stores saw a same-store sales increase of 7.4% in the third quarter compared to the corresponding period of the prior year.

Finally, our nine stores that were subject to the new competitive openings, experienced the same-store sales decrease of 8.1%. The 180-basis-point headwind from new competition was higher than expected during the quarter, due to a competitive opening in the third quarter which had been originally planned for mid-fourth quarter and subsequently had more of an impact on this grouping than we initially had anticipated.

Gross profit increased 11.6% in the quarter to $74.3 million, compared to $66.6 million in the third quarter of FY15. During the third quarter of FY16, gross profit as a percentage of net sales decreased 40 basis points to 34.2%, from 34.6% in the corresponding period last year, primarily as a result of a shift in the sales mix towards lower margin firearms and ammunition.

SG&A expenses, excluding the offering costs related to the Company's secondary offering in the third quarter of last year, were $53.7 million, compared to $46.7 million in the third quarter of last year, as we began to invest in personnel and resources to allow for continued growth in 2017 and beyond. As a percentage of net sales, SG&A expenses in the quarter remained roughly flat at 24.7%. Adjusted income from operations for the quarter increased to $20.5 million from $19.9 million in the third quarter of FY15. Our net interest expense in the third quarter of 2016 was $3.4 million, compared to $3.7 million of interest expense in the third quarter 2015, as a result of our continued efforts to reduce our debt and the related interest expense.

We recorded an income tax expense of $6.6 million for the 13 weeks ended October 29, 2016, compared to $6 million in the corresponding period of FY15. Net income for the quarter was $10.5 million, or $0.25 per share, based on a diluted weighted average share count of 42.6 million shares, as compared to adjusted net income of $10 million, or $0.24 per share, based on a diluted average weighted share count of 42.4 million shares last year. Adjusted EBITDA for the third quarter increased 8.3% to $26.1 million, compared to adjusted EBITDA of $24.1 million in the prior-year period.

As of October 29, 2016, the end of our fiscal third quarter, ending inventory was $304 million, as compared to $253.9 million as of the end of the third quarter of FY15. On a per-store basis, inventory increased by 2.2%. During the first nine months of FY16, we incurred approximately $28 million in capital expenditures.

Turning to our outlook, as we look toward the remainder of FY16, we have considered the following items in our guidance. First, we expect the demand for firearms to remain strong during the coming quarter. This trend will be tempered by the $5 million pull-forward in demand that occurred in Q4 of FY15.

Next, as we have discussed in previous conference calls, we were under-inventoried in our soft goods categories in the fourth quarter of last year, which curtailed our category sales performance but benefited gross margins in Q4 last year, as we did not have adequate inventory for our normal clearance activity. Given our more normalized soft goods inventory position this year, we expect to have more normalized Q4 clearance activity and resulting gross margin this year. Also, we have planned an additional advertising event for the fourth quarter of this year, compared to the fourth quarter of last year.

Taking these factors into account, our outlook for the fourth quarter is as follows. Revenue in the range of $230 million to $235 million. Same-store sales change in the range of down 1% to positive 1%, compared to the fourth quarter of last year, primarily as a result of the comparison of the $5 million pull-forward in the prior year. Earnings per diluted share of $0.27 to $0.30 on a diluted weighted average of approximately 42.6 million estimated common shares outstanding.

For FY16, we expect revenue of $789 million to $794 million; same-store sales change in the range of flat to 2% compared to FY15; and adjusted earnings per diluted share of $0.71 to $0.74 on a diluted weighted average of approximately 42.5 million estimated common shares outstanding. We ended the quarter with $85.3 million outstanding borrowings on our $135 million line of 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 that we've already opened, as well as work on our 2017 new stores.

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

Thank you.

(Operator Instructions)

Peter Benedict, Robert Baird.

Hey, guys, a couple of questions. First, if you're willing to, just a quick discussion around trends, maybe that you saw around the election? I mean, obviously, it's been a volatile couple of weeks here. But any kind of color on that?

And staying with the political side of things, any state legislation that has passed recently that we need to be aware of? We saw some stuff in California potentially, just want to make sure we're understanding that all correctly?

Sure. In the -- as we've said in the past, in previous election years, 2008, 2012, if there was going to be a surge in firearms, it came the day or two before the election. This year, we saw a modest increase in activity before the election, that started about a week before the election, and that has continued post election.

Now the thing to understand, I think is with a Republican-controlled Congress, and a Republican president, the thing that worried us before was, a Democratic president and a Democratic Senate, meaning that you would end up with a Democratic nominee for Supreme Court, and the potential for the Heller versus Washington, DC to be overturned. That's not going to happen. In fact, gun legislation is probably at a federal level going to go down. But really, the pass on the presidential elections have always been short-term hits. In 2012, we had some unfortunate events at Sandy Hook, which really prolonged the surge at that time, from not really the presidential election.

So really the stuff that's going on is, at the states as you're asking. And what we see going on in the states is really kind of happening in California. The biggest thing happening in California is the requirement to have ammunition purchased with a background check. That actually is a big benefit to us, as a brick-and-mortar retailer, as it virtually eliminates the purchasing of ammunition online by residents of the state of California. And as you know, we have a bunch of stores in California, and we're opening more stores in California. So I think that ends up being a net positive.

There really hasn't been a whole lot of other legislation that has any impact. A couple of states have passed legislation about private party transfers having to be done at a federal firearms licensed dealer, but those are not requirements of us to do that. And as we've talked in previous years, Colorado passed a similar law.

We're not required to service those private party transfers, and we've chosen not to. There are a bunch of risks associated with doing such. And in the states that passed that, it's basically the same as Colorado, so they really don't -- that really doesn't have much of an impact on us. So its really just the main ones, the ammunition in California.

Perfect. Thanks for that, John.

And just on the competitive headwinds, it sounds like -- it probably was that Dick's Field & Stream combo store I think that opened earlier. How do you guys think about the competitive headwind now for the fourth quarter? I think before, you were thinking it might have been less than 100 basis points, but given that this opened earlier, maybe that's going to be higher? And then, how you're thinking about it next year, maybe give us a sense of how you see this flowing?

No, you're exactly right, Peter. We do expect the competitive headwinds to be higher in the fourth quarter, as a result of this early opening. However, come next year in the fourth quarter, we expect to see the benefit of that, as that new store approaches the tail of that competitive curve.

So currently, our thoughts are, is that we're going to be somewhere in the 120 to 130 basis point competitive headwind in the fourth quarter. But that's -- it's higher than what we had hoped for, but ultimately next fourth-quarter, it will come back to benefit it.

And it starts to flow down, as we get into Q1 and Q2 of next year, as we hit more stores hit that 18-month mark.

Sure, absolutely. That make sense. Was the response in your store to Field & Stream store similar to what you see when you have a Cabela's or Bass Pro?

Actually not, it was more like what we see to a Cabela's Outpost.

Okay. Makes sense. Last question, oil and gas markets, I think you spoke to some impacts in the past on that. I didn't hear it in the remarks. Can you give us a sense for maybe what those markets did in the third quarter? Thanks.

The oil headwinds for the eight, or excuse me, the six competitive oil stores that were there in the second quarter decreased 80 basis points. So sequentially they came down from a headwind perspective. So we'll continue to monitor those oil headwinds, but for those apples-to-apples stores, they are coming down.

Okay. Thanks very much.

Seth Sigman, Credit Suisse.

Thanks. Good afternoon. Nice quarter, guys.

Thanks.

Just following up on one of the prior questions, John, in the past, you've talked about the normalized rate for firearm sales growth in the high single-digit range. Does the outcome of the election change that view it all?

No, it really hasn't. And one of the things I -- when I mentioned in the sub categories of long rifles, we're seeing some really strong performance in the bolt-action rifles, which really tells us that the interest in hunting is actually growing.

We're seeing -- we've seen for the past couple of years, the increase in shooting sports with handguns, and shooting ranges in metropolitan areas, and long-range target shooting. We've always said that 5% to 8% normalized growth, which is kind of like the five-year CAGR on that, we've been actually a little stronger than that post election.

So I think we're in a situation where the shooting sports are becoming very popular. Those, all those people that joined became first-time purchasers in 2012 and into 2013, it is clear that those people are really now buying their second, third and fourth firearm, as they get comfortable with techniques of shooting both a handgun and a long rifle, and become interested in the different types of calibers of rifles, the different types of make-ups of rifles, whether it be a bolt-action rifle or a modern sporting rifle. So they're starting to act like longer-term buyers in the shooting sports. And I think that bodes really well for the industry on a go-forward basis, just from an organic growth standpoint.

Okay. Thanks. And then on the competitive front, I'm just wondering have you seen any changes as a result of the announced merger just yet, maybe anything in terms of store plans? Or, maybe how is it changing your dialogue with vendors at this point?

Well, our dialogue with vendors has always been excellent. So I don't know that it's really changing a whole lot, although we'll see how that moves, as we go into parts of next year where you would normally have more dialogue with vendors. I mean, the SHOT Show is in January, so there's not a lot of talk going on now with vendors.

We've seen the two companies that are planning to merge continue to operate independently, and you can see that -- all you have to do is set a -- one of their advertising inserts, one right next to the other, and you will see the vast difference in how they're strategically approaching the Christmas season, both in terms of where they put product. One company is putting the firearms not until page 20. How they are handling ammunition, one has it at $11.99, the other has it $6.99.

They're acting pretty much as independent companies, which I think is probably a prudent thing to do, until they get this process completed. From a competitive openings standpoint, we certainly haven't heard of anything new. We have heard rumblings, although I wouldn't say they've -- we've been able to verify all of them. But we've heard rumblings from the real estate community about delays, and certain things like that. But that's not a lot different than you hear all the time.

Okay. And then, just on current trends, it sounds like you're pleased with where the business is now. But I look at the guidance, the comp's down 1% to up 1%. If you strip out, I guess, the pull-forward from a year ago, the $5 million, it would still point to comps in the 2.5% range in the fourth quarter. So pretty much in line with where you been tracking the last couple quarters. Just wanted to clarify, that you're not really seeing any major change in underlying trends?

I think were pretty happy with the way, the entire year has gone. It's been pretty steady. It's been pretty much as we expected.

We're now lapping the weather. The weather is not great, but it wasn't great in the fourth quarter last year. So I don't think that there's -- I think the steady pace of what we've been seeing, the last few quarters, we have no reason to see that it will change in any material way going forward.

Okay, great. Thanks very much.

Sure.

Daniel Hofkin, William Blair.

Good afternoon, guys. Just maybe a little bit of clarification. I may have missed this earlier, but within the quarterly results, obviously kind of lower end of the comp plan. Can you discuss any areas that might have been a little softer than you expected, and then conversely any thing that might of been stronger, just within the different categories? And then, I have a follow-up.

John called out on his remarks obviously, we're very pleased in our soft goods categories, both clothing and footwear. We were cautiously optimistic that they would turn positive, and we did. Although the third quarter was warmer, we did have a few spots of weather that were right prior to the hunts, that really helped us in the use categories, as we've referred to in the past.

One of the disappointing categories for us was in the optics and electronics department. We're seeing a lot of price cuts, in that we're selling I think, roughly the same number of units, if not a little bit down, and particularly with respect to electronics. There's just not been a lot of innovation there, and the prices are coming down as is natural in a product evolution cycle. So that's hurting us from a optics, electronics and accessories department. That really has been the one underperforming department.

Our camping department, which was also negative, was just slightly negative. Again on a two-year stack basis, is a very strong category for us. So we're not disappointed there, although we had hoped that would turn positive in the third quarter. Those were the two primary factors there, kind of weighing down the comp from that perspective.

Okay. And then, with regard to the kind of components of the comp, were transactions -- I know, kind of distinguishing between traffic, foot traffic and transactions, were transactions themselves positive, or was it all average ticket?

I don't have that data right front of me. So I'll have to -- I'll have to follow-up with you on that one, Dan.

Okay. And then, I guess, just thinking beyond the fourth quarter, by the same token, the first quarter of next year, the comparison eases for the same reason that it's tough in the fourth quarter. Is there anything else, just from kind of a flow into next year, that we should be aware of? Or would your comment before, about the comp, underlying comp outlook being pretty steady, but is anything else from a comparison standpoint moving through the year that we ought to be aware of?

We'll address those specific events, as we provide our 2017 guidance on our next earnings call. So as of right now, we're not prepared to talk about those items. But we will do so at the appropriate time.

Okay. Thanks very much.

Andrew Burns, D.A. Davidson.

Thanks, and congrats on the solid year-to-date performance. During the prepared remarks, you mentioned the marketing initiative in the fourth quarter. I didn't know if there's just a shift in timing of an annual promotion, or if it was incremental spend, because we saw an opportunity in the marketplace?

It was a slight incremental spend. I mean, we promote constantly from Thanksgiving through Christmas, everybody does. We had a insert last year, that we wanted to last for 10 days, and 10 days is just too long for an insert, at this time of year. So we added another insert in that time period.

So we're promoting through the same length of time. We've just added a little bit more freshness, to keep the newness and the freshness out there, and a little more attractive. And hopefully, it'll -- obviously, you do that to spur some incremental sales, as these inserts go through their normal evolution.

Thanks. And weather was clearly not a benefit in the quarter, that there was easy comparisons relative to last season. Did this season's weather have a negative impact on hunting category performance, and do we need to see a big improvement in weather for you to be able to clear out soft goods, as we move through the fourth quarter?

No, I don't think we need to -- I think our inventory level in clothing and footwear, especially in the hunting categories is solid. We've seen some good growth in hunting as we noted, with the bolt-action rifles doing well in the firearms category. There are plenty of participants.

It's a little -- there's some things where -- we could use a couple of weeks of cold weather. I mean, it's a little hard to sell pack boots, when it's 80 degrees. But people are -- I don't think we're going to be over inventoried. Remember, last year in the fourth quarter, we ran out of product mid December.

We didn't over buy this year, assuming that we had to make up for that, and for a cold winter. As I said back in the first quarter, when we were talking about the rest of the year, I said that we are buying for the fourth quarter based on really no weather change. But making sure we have enough inventory to go through a normal selling cycle, that includes both the Christmas selling season, the after Christmas selling season, and then the clearance sales that you normally have as a retailer in January. We bought to that, and I think that's where we're sitting right now. So I don't see any issues with it.

Thanks, and good luck.

Thanks.

Stephen Tanal, Goldman Sachs.

Hey, good afternoon, guys. Thanks for the question.

I guess, as you think a little bit longer term about how this series is evolving? Certainly, appreciate the choppiness of the category kind of quarter to quarter, but what is in your mind at this time sort of a fair assumption for kind of a normal, annual, same-store sales growth rate that is achievable here going forward?

We've always believed that, again as you've indicated, stripping out the choppiness, we believe we can achieve a long-term steady-state same-store sales on a store basis of 2% to 3% at maturity. We typically see a 1.5%, 1% to 1.5% price increase from our vendors that are passed along to us each year. And then that, combined with other things that we do inside the store, other new products, as well as re-merchandising or other things that we make to improve the experience for our customers, we believe that we can achieve that other amount to get us to that 2% to 3% level.

Awesome. That's helpful.

And thinking about SG&A, I know you had kind of given us the heads up, that there'd be a little bit of investment activity in the back half, I think on a per square foot basis or per store, kind of normalized on that basis, it still looked a little -- more than we modeled. Is there another acceleration here in 4Q, or was this the pick up, and this is kind of the trend rate that we carry going forward?

As we looked at the investment that we've been talking to all year long, that really is, the plan is for that to be the third and the fourth quarter. So we're continuing on with our plans with these investments, and that will be through the fourth quarter. As we talked about before, we do expect to leverage these expenses in 2017, but we'll talk specifically about that again, as we provide our annual guidance at the next earnings release.

Got it. Just to be clear, like a similar trend rate, 3Q to 4Q, there's no incremental pick up per se?

No, no, that would be correct.

Got it. And then just lastly for me, inventory it looked maybe a little bit elevated. I know your competitor had mentioned potentially stocking up on firearms in advance of any sort of a spike, or generally better demand around the election. Is that a similar dynamic, or can you comment on what the inventory is? I guess, you were also cycling a pretty lean period on apparel, but any color there would be helpful? And that's it for me.

Well, we increased the inventory in the firearms category. It wasn't specifically because of a potential surge or anything, but we saw continued strength as we went through the year. We had some opportunities to buy ahead, which we took advantage of.

And now we're going through the normal sell-through process that's about as we expected, with these firearms. So we, at least, we anticipated an increased inventory going into Q4, which will result in the normal sell-through we see going through Q4, and into next year. So it wasn't any type of special stocking up, although we were certainly prepared with backup orders to stock up, had there been a dramatic surge pre-or post election.

Okay. Thanks a lot.

Peter Keith, Piper Jaffray.

Hey, thank you, and good afternoon, everyone. A little bit nuanced on the guidance, but I hope you could give us some color, just on how the full-year was adjusted? It looks like the bottom end was taken up by a penny, and the top end was taken down by two pennies. Was there anything that transpired in Q3, or coming up in Q4, that's changed your outlook, maybe a little bit for the worst?

No, there hasn't. Really that's just a narrowing of the range, as the result of our activity there. As I drilled into that activity, I think there might be a penny of rounding from the fourth quarter there, but really it's the same, it's the same exact guidance that we had planned on for the fourth quarter, when we provided annual guidance last quarter.

Okay. That's great to hear.

And sort of beating a dead horse here, but on the firearms dynamic. So look at the stock market has determined that your business, some of the manufacturers would see a slowing of sales here post election. But I guess, what you're saying, is that you're not seeing anything thus far, and looking out, you would anticipate maybe in the long-term, it's actually the better? Just want to, maybe, put those words in your mouth. But is that correct?

Well, yes, as I said, we saw a small surge a little bit before the election, nothing like 2012. And post election, as we said in our prepared remarks, firearms sales continue strong. There is a growing number -- the thing that is absolutely evident to us, is there are a whole lot of people that are participating in the shooting sports. A whole lot more people than there were before.

Can we quantify it? No. But we do know that 20% of the surge in 2012 and 2013 was first-time buyers, and we are now seeing those people joining our loyalty program. We are seeing those people coming in and buying their first long gun, as well as their second handgun.

So I think the strength of the industry is here to stay. I think the CAGR of 5% to 8% is certainly achievable, going forward. And I think what you have, is you have a federal government with laws that are really a non-factor. And frankly, the party of the president really has never been a long-term factor in the firearms industry.

And as you noted in the San Bernardino effect of last year, it was simply a pull-forward. And it was only a pull forward, because President Obama came out with a bunch of executive orders, which scared a lot of people, until they actually read them, and realize that they didn't really mean much. So what you're really trying to look at when it comes to firearms, is what's the new steady-state? And I think the new steady-state is a pretty darn good number, and we're seeing that strength, as we go into the fourth quarter.

Okay. That's good feedback. Appreciate that John.

Two other questions for Kevan then, first on gross margin. So there was a bit of a directional change from Q2, just checked my notes, you guys had some freight and vendor incentive benefits. What's a more realistic trend of gross margin, is Q2 where you see maybe see some increase, or Q3 where maybe there's constant mix headwinds going forward?

A lot of it depends. As we discussed last quarter, the freight and vendor incentives, we weren't planning for the freight benefits to continue, and we didn't see those materialize in the third quarter. And the vendor incentives, we really started to see that in Q3 of 2015. So while the vendor incentives have continued, on an incremental basis year over year, we did not see a lift as a percentage -- as an impact to our gross margin.

So, we do continue to expect our vendor incentives to continue. Our vendors are good partners with us, and they continue to offer us incentives with their products, that we take advantage of. Those plans are for them to continue, but incrementally there's not any lift over the prior year, because those programs were in place a year ago.

Okay. And the mix dynamic in the quarter, was that similar Q3 to Q2, or was there an increased mix headwind?

No, the 40 basis point drop, I think as my calculations showed, 35% of it was product mix, which was primarily the sales mix shift to the firearms, the strength in the firearms and ammunition.

Okay. Thanks.

Lastly for me then, my favorite question every quarter, the overtime rule with the DOL kicking in December 1, do you guys have a determination on adjustments, and how that might impact the expense structure, if at all?

Well, we made the adjustments this quarter. We've been very pleased with how they've been working. We did see some additional overtime, but it was not significant enough to call out. So as a result, we don't expect any additional significant pressures that -- as a result of that change.

Okay. Sounds good. Nice quarter, and good luck in the fourth quarter.

Thank you.

There are no further questions at this time. I'll turn the call back over to management for any closing remarks.

Thank you for your time everyone, and we'll talk to you next quarter.

Thank you. And this does conclude our teleconference for today. We thank you for your time and participation, ladies and gentlemen, and you may disconnect your lines at this time. Enjoy the rest of your day.