(5) Accrued Expenses
Accrued expenses consisted of the following as of July 29, 2017 and January 28, 2017:
|
|
|
|
|
|
|
|
|
|
July 29,
|
|
January 28,
|
|
|
|
2017
|
|
2017
|
|
Book overdraft
|
|
$
|
15,460
|
|
$
|
5,355
|
|
Unearned revenue
|
|
|
17,413
|
|
|
18,019
|
|
Accrued payroll and related expenses
|
|
|
5,749
|
|
|
9,430
|
|
Sales and use tax payable
|
|
|
4,094
|
|
|
4,802
|
|
Accrued construction costs
|
|
|
2,101
|
|
|
3,138
|
|
Other
|
|
|
7,836
|
|
|
8,842
|
|
|
|
$
|
52,653
|
|
$
|
49,586
|
|
(6) Revolving Line of Credit
The Company has a senior secured revolving credit facility (“Revolving Line of Credit”) with Wells Fargo Bank, National Association (“Wells Fargo”). On July 24, 2017, the Company amended the credit agreement increasing the amount available to borrow under the Company’s senior secured revolving credit facility by $15.0 million to $150.0 million, subject to a borrowing base calculation.
As of July 29, 2017 and January 28, 2017, the Company had $110,904 and $67,110, respectively, in outstanding revolving loans under the Revolving Line of Credit. Amounts outstanding are offset on the condensed consolidated balance sheets by amounts in depository accounts under lock-box arrangements, which were $9,160 and $6,138 as of July 29, 2017 and January 28, 2017, respectively. As of July 29, 2017, the Company had stand-by commercial letters of credit of $1,200 under the terms of the Revolving Line of Credit.
The Revolving Line of Credit contains customary affirmative and negative covenants, including covenants that limit the Company’s ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. The Revolving Line of Credit also requires us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base, and in any event, not less than $5,000. The Revolving Line of Credit also contains customary events of default. The Revolving Line of Credit matures on
the earlier to occur of (x) the date that is 90 days prior to the maturity date of our senior secured term loan, which maturity date is currently December 3, 2020, unless the term loan has been repaid to the extent permitted under the credit agreement governing the Revolving Line of Credit or the term loan maturity has been extended to October 23, 2022 or later and (y) July 24, 2022
.
As of July 29, 2017 and January 28, 2017, the Revolving Line of Credit had $426 and $295, respectively in outstanding deferred financing fees. During the 13 weeks and 26 weeks ended July 29, 2017, the Company recognized $40 and $80, respectively, of non-cash interest expense with respect to the amortization of deferred financing fees. During the 13 weeks and 26 weeks ended July 30, 2016, the Company recognized $41 and $80, respectively, of non-cash interest expense with respect to the amortization of deferred financing fees.
(7) Long-Term Debt
Long-term debt consisted of the following as of July 29, 2017 and January 28, 2017:
|
|
|
|
|
|
|
|
|
|
July 29,
|
|
January 28,
|
|
|
|
2017
|
|
2017
|
|
Term loan
|
|
$
|
135,927
|
|
$
|
136,727
|
|
Less discount
|
|
|
(777)
|
|
|
(877)
|
|
Less debt issuance costs
|
|
|
(1,323)
|
|
|
(1,146)
|
|
|
|
|
133,827
|
|
|
134,704
|
|
Less current portion, net of discount and debt issuance costs
|
|
|
(896)
|
|
|
(983)
|
|
Long-term portion
|
|
$
|
132,931
|
|
$
|
133,721
|
|
Term Loan
The Company has a $160,000 senior secured term loan facility (“Term Loan”) with a financial institution. The Term Loan was issued at a price of 99% of the aggregate principal amount and has a maturity date of December 3, 2020.
On May 18, 2017, Sportsman’s Warehouse, Inc. entered into an amendment to its term loan. The amendment increased the maximum leverage ratio in each of the remaining quarters by amounts ranging from 0.2x to 1.3x, with an average quarterly increase of 0.75x. As a result of the amendment, the interest rate on the Company’s term loan increased 25 basis points to LIBOR plus 6.25% with a 1.25% LIBOR floor.
As of July 29, 2017 and January 28, 2017, the Term Loan had an outstanding balance of $135,927 and $136,727, respectively. The outstanding amounts as of July 29, 2017 and January 28, 2017 are offset on the condensed consolidated balance sheets by an unamortized discount of $777 and $877, respectively, and debt issuance costs of $1,323 and $1,146, respectively.
During the 13 and 26 weeks ended July 29, 2017, the Company recognized $58 and $100, respectively, of non-cash interest expense with respect to the amortization of the discount. During the 13 and 26 weeks ended July 29, 2017, the Company recognized $92 and $168, respectively, of non-cash interest expense with respect to the amortization of the debt issuance costs.
During the 13 and 26 weeks ended July 30, 2016, the Company recognized $67 and $295 of non-cash interest expense with respect to the amortization of the discount. During the 13 and 26 weeks ended July 30, 2016, the Company recognized $88 and $174, respectively, of non-cash interest expense with respect to the amortization of the debt issuance costs.
As part of the Term Loan agreement, there are a number of financial and non-financial debt covenants. The financial covenants include a net leverage ratio and an interest coverage ratio to be measured on a trailing twelve month basis.
During the 13 and 26 weeks ended July 29, 2017, the Company made the required quarterly payments on the Term Loan of $400 each quarter.
Restricted Net Assets
The provisions of the Term Loan and the Revolving Line of Credit restrict all of the net assets of the Company’s consolidated subsidiaries, which constitute all of the net assets on the Company’s condensed consolidated balance sheet as of July 29, 2017, from being used to pay any dividends without prior written consent from the financial institutions party to the Company’s Term Loan and Revolving Line of Credit.
(8) Income Taxes
The Company recognized an income tax expense of $4,245 and $5,226 in the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The Company recognized an income tax expense of $1,835 and $3,683 in the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The Company’s effective tax rate for the 13 weeks ended July 29, 2017 and July 30, 2016 was 39.3% and 38.6%, respectively. The Company’s effective tax rate for the 26 weeks ended July 29, 2017 and July 30, 2016 was 47.3% and 29.9%, respectively. The change in the effective tax rate for the 26 weeks ended July 29, 2017, was primarily due to a discrete expense recognized in the period relating to the excess tax shortfall from
(11) Commitments and Contingencies
Operating Leases
The Company leases its retail store, office space and warehouse locations under non-cancelable operating leases. Rent expense under these leases totaled $11,993 and $10,885 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. Rent expense under these leases totaled $23,593 and $21,535 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively.
Legal Matters
The Company is involved in various legal matters generally incidental to its business. After discussion with legal counsel, management is not aware of any matters for which the likelihood of a loss is probable and reasonably estimable and which could have a material impact on its consolidated financial condition, liquidity, or results of operations.
On March 12, 2014, the Company was added as a defendant to a pending consolidated action filed in the United States District Court, Western District of Washington, captioned as Lacey Market Place Associates II, LLC, et al. v. United Farmers of Alberta Co-Operative Limited, et al., Case No. 2:13-cv-00383-JLR against United Farmers of Alberta Co-Operative Limited (the seller of Wholesale Sports), Wholesale Sports, Alamo Group, LLC and Donald F. Gaube and spouse. The amended complaint was filed by the landlords of two stores that the Company did not assume in the Company’s purchase of assets from Wholesale Sports. Such stores were formerly operated by Wholesale Sports in Skagit and Thurston Counties in Washington. The amended complaint alleged breach of lease, breach of collateral assignment, misrepresentation, intentional interference with contract, piercing the corporate veil and violation of Washington’s Fraudulent Transfer Act. The Company was named as a co-defendant with respect to the intentional interference with contract and fraudulent conveyance claims. The amended complaint sought against the Company and all defendants unspecified money damages, declaratory relief and attorneys’ fees and costs. On January 28, 2015, the court in the Lacey Marketplace action granted in part and denied in part the Company’s motion for summary judgment and dismissed the intentional interference claim against the Company, but declined to dismiss the fraudulent transfer claim.
Trial in the Lacey Marketplace action began March 2, 2015 and concluded March 6, 2015. On March 9, 2015, the jury in the trial assessed $11,887 against the defendants to the action, including the Company. The Company reviewed the decision and accrued $4,000 in its results for the fiscal year ended January 31, 2015 related to this matter. The Company strongly disagreed with the jury’s verdict and filed post-trial motions seeking to have the verdict set aside. On July 30, 2015, the court granted the Company’s motion for judgment as a matter of law. Both United Farmers of Alberta Co-Operative Limited, a co-defendant, and the plaintiff have appealed the court’s summary judgment ruling against the tortious interference claim, and the July 30, 2015 ruling setting aside the jury verdict, to the appellate court and the appeal is currently in process. Based on the court’s most recent judgment in favor of the Company, the Company determined that the likelihood of loss in this case is not probable, and, as such, the Company reversed the previous accrual of $4,000 in its results for the fiscal year ended January 30, 2016.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. Also see “Statement Regarding Forward-Looking Statements” preceding Part I in this 10-Q.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this 10-Q.
Overview
We are a high-growth outdoor sporting goods retailer focused on meeting the everyday needs of the seasoned outdoor veteran, the first-time participant and every enthusiast in between. Our mission is to provide a one-stop shopping experience that equips our customers with the right quality, brand name hunting, shooting, fishing and camping gear to maximize their enjoyment of the outdoors.
Our business was founded in 1986 as a single retail store in Midvale, Utah. Today, we operate 85 stores in 22 states, totaling approximately 3.4 million gross square feet. During fiscal year 2017 to date, we have increased our gross square footage by 9.8% through the opening of ten stores in the following locations:
|
·
|
|
Cedar City, Utah on February 16, 2017
|
|
·
|
|
Moses Lake, Washington on February 23, 2017
|
|
·
|
|
Wilmington, North Carolina on April 6, 2017
|
|
·
|
|
Morgantown, West Virginia on April 27, 2017
|
|
·
|
|
Yuma, Arizona on May 11, 2017
|
|
·
|
|
Henderson, Nevada on May 20, 2017
|
|
·
|
|
Everett, Washington on June 8, 2017
|
|
·
|
|
Eureka, California on June 22, 2017
|
|
·
|
|
Spokane Valley, Washington on August 3, 2017
|
|
·
|
|
Stockton, California on August 17, 2017
|
Individual stores are aggregated into one operating and reportable segment.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, same store sales, gross margin, selling, general, and administrative expenses, income from operations and Adjusted EBITDA.
Net Sales and Same Store Sales
Our net sales are primarily received from revenue generated in our stores and also include sales generated through our e-commerce platform. When measuring revenue generated from our stores, we review our same store sales as well as the performance of our stores that have not operated for a sufficient amount of time to be included in same store sales. We include net sales from a store in same store sales on the first day of the 13th full fiscal month following the store’s opening or acquisition by us. We exclude net sales from e-commerce from our calculation of same store sales.
Measuring the change in year-over-year same store sales allows us to evaluate how our retail store base is performing. Various factors affect same store sales, including:
|
·
|
|
changes or anticipated changes to regulations related to some of the products we sell;
|
|
·
|
|
consumer preferences, buying trends and overall economic trends;
|
|
·
|
|
our ability to identify and respond effectively to local and regional trends and customer preferences;
|
|
·
|
|
our ability to provide quality customer service that will increase our conversion of shoppers into paying customers;
|
|
·
|
|
competition in the regional market of a store;
|
|
·
|
|
changes in our product mix; and
|
|
·
|
|
changes in pricing and average ticket sales.
|
Opening new stores is also an important part of our growth strategy. As of the date of this filing we have opened ten new stores in fiscal year 2017. While our target remains to grow our square footage at a rate of greater than 10 percent annually, we expect we will grow our square footage between 3 percent and 7 percent for fiscal 2018 as we shift some of our cash use to reducing our debt balance.
For our new locations, we measure our investment by reviewing the new store’s four-wall Adjusted EBITDA margin and pre-tax return on invested capital (“ROIC”). We target a minimum 10% four-wall Adjusted EBITDA margin and a minimum ROIC of 50% excluding initial inventory costs (or 20% including initial inventory cost) for the first full twelve months of operations for a new store. The 32 new stores that we have opened since 2010 and that have been open for a full twelve months have achieved an average four-wall Adjusted EBITDA margin of 13.3% and an average ROIC of 79.3% excluding initial inventory cost (and 29.2% including initial inventory cost) during their first full twelve months of operations. Four-wall Adjusted EBITDA means, for any period, a particular store’s Adjusted EBITDA, excluding any allocations of corporate selling, general, and administrative expenses allocated to that store. Four-wall Adjusted EBITDA margin means, for any period, a store’s four-wall Adjusted EBITDA divided by that store’s net sales. For a definition of Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation of net income to Adjusted EBITDA, see “—Non-GAAP Measures.” ROIC means a store’s four-wall Adjusted EBITDA for a given period divided by our initial cash investment in the store. We calculate ROIC both including and excluding the initial inventory cost.
We also have been scaling our e-commerce platform and increasing sales through our website,
www.sportsmanswarehouse.com
.
We believe the key drivers to increasing our total net sales will be:
|
·
|
|
increasing our total gross square footage by opening new stores and improving the utilization of the existing selling square footage of our existing stores through various fixture strategies;
|
|
·
|
|
continuing to increase and improve same store sales in our existing markets;
|
|
·
|
|
increasing customer visits to our stores and improving our conversion rate through focused marketing efforts and continually high standards of customer service;
|
|
·
|
|
increasing the average ticket sale per customer; and
|
|
·
|
|
expanding our omni-channel capabilities.
|
Gross Margin
Gross profit is our net sales less cost of goods sold. Gross margin measures our gross profit as a percentage of net sales. Our cost of goods sold primarily consists of merchandise acquisition costs, including freight-in costs, shipping costs, payment term discounts received from the vendor and vendor allowances and rebates associated directly with merchandise and shipping costs related to e-commerce sales.
We believe the key drivers to improving our gross margin are increasing the product mix to higher margin products, particularly clothing and footwear, increasing foot traffic within our stores, improving buying opportunities with our vendor partners and coordinating pricing strategies among our stores and our merchandising department. Our ability to properly manage our inventory can also impact our gross margin. Successful inventory management ensures we have sufficient high margin products in stock at all times to meet customer demand, while overstocking of items
could lead to markdowns in order to help a product sell. We believe that the overall growth of our business will allow us to generally maintain or increase our gross margins, because increased merchandise volumes will enable us to maintain our strong relationships with our vendors.
We expect the industry inventory oversupply currently present to result in continued high levels of promotions and resulting margin pressure through the remainder of fiscal year 2017, which we expect will be partially offset by an improvement in our product mix to higher margin products.
Selling, General, and Administrative Expenses
We closely manage our selling, general, and administrative expenses. Our selling, general, and administrative expenses are comprised of payroll, rent and occupancy, depreciation and amortization, acquisition expenses, pre-opening expenses and other operating expenses, including share-based compensation expense and litigation accrual. Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.
Our selling, general, and administrative expenses are primarily influenced by the volume of net sales of our locations, except for our corporate payroll, rent and occupancy and depreciation and amortization, which are generally fixed in nature. We control our selling, general, and administrative expenses through a budgeting and reporting process that allows our personnel to adjust our expenses as trends in net sales activity are identified.
We expect that our selling, general, and administrative expenses will increase in future periods due to our continuing growth. Furthermore, 56 of our current stores are being impacted by minimum wage increases in fiscal year 2017 that will drive up our selling, general, and administrative costs during fiscal year 2017.
Income from Operations
Income from operations is gross profit less selling, general, and administrative expenses. We use income from operations as an indicator of the productivity of our business and our ability to manage selling, general, and administrative expenses.
Adjusted EBITDA
We define Adjusted EBITDA as net income plus interest expense, income tax expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, secondary offering expenses, professional fees, and other gains, losses and expenses that we do not believe are indicative of our ongoing expenses. In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as an additional measurement tool for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. See “—Non-GAAP Measures.”
Results of Operations
The following table summarizes key components of our results of operations as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Percentage of net sales:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100.00
|
%
|
100.00
|
%
|
100.00
|
%
|
100.00
|
%
|
Cost of goods sold
|
|
64.2
|
|
65.1
|
|
66.4
|
|
66.4
|
|
Gross profit
|
|
35.8
|
|
34.9
|
|
33.6
|
|
33.6
|
|
Selling, general, and administrative expenses
|
|
28.4
|
|
26.1
|
|
30.6
|
|
28.0
|
|
Income from operations
|
|
7.4
|
|
8.8
|
|
3.0
|
|
5.6
|
|
Interest expense
|
|
1.8
|
|
1.7
|
|
1.9
|
|
2.0
|
|
Income before income taxes
|
|
5.6
|
|
7.1
|
|
1.1
|
|
3.6
|
|
Income tax expense
|
|
2.2
|
|
2.8
|
|
0.5
|
|
1.1
|
|
Net income
|
|
3.4
|
|
4.3
|
|
0.6
|
|
2.5
|
|
Adjusted EBITDA
|
|
10.7%
|
|
11.7%
|
|
7.1%
|
|
8.7%
|
|
The following table shows our sales during the periods presented by department:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
Department
|
|
Product Offerings
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Camping
|
|
Backpacks, camp essentials, canoes and kayaks, coolers, outdoor cooking equipment, sleeping bags, tents and tools
|
|
20.6%
|
|
19.6%
|
|
16.9%
|
|
16.3%
|
Clothing
|
|
Camouflage, jackets, hats, outerwear, sportswear, technical gear and work wear
|
|
7.4%
|
|
6.4%
|
|
7.3%
|
|
6.3%
|
Fishing
|
|
Bait, electronics, fishing rods, flotation items, fly fishing, lines, lures, reels, tackle and small boats
|
|
16.7%
|
|
15.4%
|
|
14.2%
|
|
13.8%
|
Footwear
|
|
Hiking boots, socks, sport sandals, technical footwear, trail shoes, casual shoes, waders and work boots
|
|
7.5%
|
|
6.8%
|
|
7.3%
|
|
6.6%
|
Hunting and Shooting
|
|
Ammunition, archery items, ATV accessories, blinds and tree stands, decoys, firearms, reloading equipment and shooting gear
|
|
40.3%
|
|
44.6%
|
|
46.4%
|
|
49.6%
|
Optics, Electronics, and Accessories
|
|
Gift items, GPS devices, knives, lighting, optics (e.g. binoculars) and two-way radios
|
|
8.1%
|
|
7.8%
|
|
7.9%
|
|
7.6%
|
Other
|
|
License and BCI revenue, net of revenue discounts
|
|
(0.6%)
|
|
(0.6%)
|
|
(0.0%)
|
|
(0.2%)
|
Total
|
|
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
13 Weeks Ended July 29, 2017 Compared to 13 Weeks Ended July 30, 2016
Net Sales.
Net sales increased by $1.7 million, or 0.9%, to $191.5 million in the 13 weeks ended July 29, 2017 compared to $189.8 million in the corresponding period of fiscal year 2016. Net sales increased primarily due to sales from new store openings that have been open for less than 12 months and were, therefore, not included in same store sales. Stores that were opened in the 13 weeks ended July 29, 2017 contributed $4.4 million to this increase. Stores that were opened in fiscal year 2016 and that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed to $13.7 million of this increase. These increases were offset by a decrease in same store sales for the period of 9.0% compared to the corresponding period of fiscal year 2016.
All our departments, other than hunting and shooting, recognized an increase in net sales in the second quarter of fiscal year 2017 compared to the second quarter of fiscal year 2016 while our hunting and shooting department recognized a decrease in net sales during the second quarter of fiscal year 2017 compared to the same period in 2016. Specifically, our footwear, clothing, camping, fishing and optics, electronics and accessories departments increased $1.4 million, $2.0 million, $2.3 million, $2.7 million and $0.8 million, respectively, during the second quarter of fiscal year 2017 compared to the corresponding period of fiscal year 2016. Our hunting and shooting department decreased $7.5 million during the second quarter of fiscal year 2017 compared to the corresponding period of fiscal year 2016 due primarily to a decrease in demand for firearms and ammunition because less regulation is anticipated for restrictions on gun ownership as a result of the recent change in the U.S. Government administration.
With respect to same store sales, during the 13 weeks ended July 29, 2017, our clothing and footwear departments had increases of 5.9% and 2.0%, respectively while the hunting and shooting, fishing, camping and optics, electronics and accessories departments had decreases of 18.8%, 0.2%, 3.7% and 5.0%, respectively, compared to the corresponding period of fiscal year 2016. We had a better inventory position within our clothing and footwear departments during the 13 weeks ended July 29, 2017 compared to the corresponding prior year period which allowed us to capture increased revenue within these categories. Within hunting and shooting, firearms and ammunition decreased by 17.4% and 26.1%, respectively, during the 13 weeks ended July 29, 2017 compared to the corresponding period of fiscal year 2016. We experienced a decrease in demand for firearms and ammunition due in part to the change in the U.S. government administration and anticipated less regulation being put forward to tighten restrictions on gun ownership. As of July 29, 2017, we had 68 stores included in our same store sales calculation.
Net sales from our e-commerce business increased by $0.1 million, or 6.9%, to $2.0 million in the 13 weeks ended July 29, 2017 compared to $1.9 million in the corresponding period of fiscal year 2016.
Gross Profit.
Gross profit increased by $2.4 million, or 3.7%, to $68.6 million for the 13 weeks ended July 29, 2017 from $66.2 million for the corresponding period of fiscal year 2016. As a percentage of net sales, gross profit increased by 90 basis points to 35.8% for the 13 weeks ended July 29, 2017 from 34.9% in the corresponding period of fiscal year 2016. The increase in gross profit as a percentage of new sales was due to a sales mix change compared to last year from our lower margin product categories (hunting and shooting) to our higher margin product categories (clothing, footwear, and camping), partially offset by increasing margin pressures in each of our departments due to industry oversupply and continued high levels of promotions.
Selling, General, and Administrative Expenses.
Selling, general, and administrative expenses increased by $4.9 million, or 9.8%, to $54.4 million for the 13 weeks ended July 29, 2017 from $49.5 million for the corresponding period of fiscal year 2016. As a percentage of net sales, selling, general, and administrative expenses increased to 28.4% of net sales in the second quarter of fiscal year 2017 compared to 26.1% of net sales in the second quarter of fiscal year 2016. Selling, general, and administrative expenses increased due to increased advertising expenses and due to the increase in the number of stores in operation over the corresponding period of the prior year. Specifically, we incurred additional payroll, rent, depreciation, other operating expenses and pre-opening expenses of $1.3 million, $1.1 million, $1.1 million, $1.4 million, and $0.1 million, respectively.
Interest Expense.
Interest expense increased by $0.3 million, or 9.4%, to $3.4 million in the 13 weeks ended July 29, 2017 from $3.1 million for the corresponding period of fiscal year 2016. Interest expense increased primarily as a result of higher interest rates incurred during the quarter due to increased interest rates and increased borrowings under our revolving credit facility.
Income Taxes.
We recognized income tax expense of $4.2 million and $5.2 million in the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. Our effective tax rate for the 13 weeks ended July 29, 2017 and July 30, 2016 was 39.3% and 38.6%, respectively. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 35%, due to state taxes, permanent items, and discrete items.
26 Weeks Ended July 29, 2017 Compared to 26 Weeks Ended July 30, 2016
Net Sales.
Net sales increased by $7.0 million, or 2.0%, to $348.4 million in the 26 weeks ended July 29, 2017 compared to $341.4 million in the corresponding period of fiscal year 2016. Net sales increased primarily due to sales from new store openings that have been open for less than 12 months and were, therefore, not included in same store sales. Stores that were opened in the 26 weeks ended July 29, 2017 contributed $12.7 million to this increase. Stores that were opened in fiscal year 2016 and that have been open for less than 12 months and were, therefore, not included in our same store sales, contributed to $20.5 million of this increase. These increases were offset by a decrease in same store sales for the period of 8.0% compared to the corresponding period of fiscal year 2016.
All of our departments, other than hunting and shooting, recognized an increase in net sales in the first half of fiscal year 2017 compared to the first half of fiscal year 2016 while our hunting and shooting department recognized a decrease in net sales during the first half of fiscal year 2017 compared to the same period in 2016. Specifically, our footwear, clothing, camping, fishing and optics, electronics and accessories departments increased $3.1 million, $4.0 million, $3.2 million, $2.4 million and $1.5 million, respectively, during the first two quarters of fiscal year 2017 compared to the corresponding period of fiscal year 2016. Our hunting and shooting department decreased $7.7 million during the first half of fiscal year 2017 compared to the corresponding period of fiscal year 2016 due primarily to a decrease in demand for firearms and ammunition because less regulation is anticipated for restrictions on gun ownership as a result of the recent change in the U.S. Government administration.
With respect to same store sales, during the 26 weeks ended July 29, 2017, our clothing and footwear departments had increases of 7.8% and 4.8%, respectively while the hunting and shooting, fishing, camping and optics, electronics and accessories departments had decreases of 14.7%, 4.2%, 4.3% and 4.9%, respectively, compared to the corresponding period of fiscal year 2016. We had a better inventory position within our clothing and footwear departments during the 26 weeks ended July 29, 2017 compared to the corresponding prior year period which allowed us to capture increased revenue within these categories. Within hunting and shooting, firearms and ammunition decreased by 12.9% and 21.1%, respectively, during the 26 weeks ended July 29, 2017 compared to the corresponding period of fiscal year 2016. We
experienced a decrease in demand for firearms and ammunition due in part to the change in the U.S. government administration and anticipated less regulation being put forward to tighten restrictions on gun ownership. As of July 29, 2017, we had 68 stores included in our same store sales calculation.
Net sales from our e-commerce business increased by $0.5 million, or 15.9%, to $3.8 million in the 26 weeks ended July 29, 2017 compared to $3.3 million in the corresponding period of fiscal year 2016.
Gross Profit.
Gross profit increased by $2.6 million, or 2.2%, to $117.2 million for the 26 weeks ended July 29, 2017 from $114.7 million for the corresponding period of fiscal year 2016. As a percentage of net sales, gross profit remained flat at 33.6% for the 26 weeks ended July 29, 2017 from 33.6% in the corresponding period of fiscal year 2016.
Selling, General, and Administrative Expenses.
Selling, general, and administrative expenses increased by $11.1 million, or 11.6%, to $106.8 million for the 26 weeks ended July 29, 2017 from $95.6 million for the corresponding period of fiscal year 2016. As a percentage of net sales, selling, general, and administrative expenses increased to 30.6% of net sales in the first half of fiscal year 2017 compared to 28.0% of net sales in the first half of fiscal year 2016.
A large portion of the increase resulted from $1.7 million of professional fees incurred in connection with our bid for certain inventory and other assets of Gander Mountain Company. Gander Mountain filed for Chapter 11 bankruptcy protection and we participated in a bankruptcy auction for the assets, but we ultimately chose not to continue in the auction.
Selling, general, and administrative expenses also increased due to increased advertising expenses and due to the increase in the number of stores in operation over the corresponding period of the prior year. Specifically, we incurred additional payroll, rent, depreciation, other operating expenses
(excluding professional fees discussed above)
and pre-opening expenses of $2.9 million, $2.1 million, $1.9 million, $2.1 million, and $0.5 million, respectively.
Interest Expense.
Interest expense decreased by $0.1 million, or 2.1%, to $6.6 million in the 26 weeks ended July 29, 2017 from $6.7 million for the corresponding period of fiscal year 2016.
Income Taxes.
We recognized income tax expense of $1.8 million and $3.7 million in the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. Our effective tax rate for the 26 weeks ended July 29, 2017 and July 30, 2016 was 47.3% and 29.9%, respectively. The change in the effective tax rate for the 26 weeks ended July 29, 2017, was primarily due to a discrete expense recognized in the period relating to the tax shortfall recorded on the vesting of restricted stock units. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 35%, due to state taxes, permanent items, and discrete items.
Seasonality
Due to holiday buying patterns and the openings of hunting season across the country, net sales are typically higher in the third and fourth fiscal quarters than in the first and second fiscal quarters. We also incur additional expenses in the third and fourth fiscal quarters due to higher volume and increased staffing in our stores. We anticipate our net sales will continue to reflect this seasonal pattern.
The timing of our new retail store openings also may have an impact on our quarterly results. First, we incur certain one-time expenses related to opening each new retail store, all of which are expensed as they are incurred. Second, most store expenses generally vary proportionately with net sales, but there is also a fixed cost component, which includes occupancy costs. These fixed costs typically result in lower store profitability during the initial period after a new retail store opens. Due to both of these factors, new retail store openings may result in a temporary decline in operating profit, in dollars and/or as a percentage of net sales.
Weather conditions affect outdoor activities and the demand for related clothing and equipment. Customers’ demand for our products, and, therefore, our net sales, can be significantly impacted by weather patterns on a local, regional and national basis.
Liquidity and Capital Resources
Our primary capital requirements are for seasonal working capital needs and capital expenditures related to opening new stores. Our sources of liquidity to meet these needs have primarily been borrowings under our revolving credit facility, operating cash flows and short and long-term debt financings from banks and financial institutions. We
believe that our cash on hand, cash generated by operating activities and funds available under our revolving credit facility will be sufficient to finance our operating activities for at least the next twelve months.
For the 26 weeks ended July 29, 2017, we incurred approximately $31.9 million in capital expenditures. We expect total capital expenditures between $34.0 million and $38.0 million for fiscal year 2017. We also received $0.5 million from deemed sale-leaseback transactions and landlord incentives for the 26 weeks ended July 29, 2017. We expect to receive between $16.0 million and $18.0 million in deemed sale-leaseback transactions and landlord incentives for fiscal year 2017. We intend to fund these initiatives with our operating cash flows and funds available under our revolving credit facility. Other investment opportunities, such as potential strategic acquisitions or store expansion rates in excess of those presently planned, may require additional funding.
Cash flows from operating, investing and financing activities are shown in the following table:
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Twenty-Six Weeks Ended
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July 29,
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July 30,
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2017
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2016
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(in thousands)
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Cash flows (used in) provided by operating activities
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$
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(18,123)
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$
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399
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Cash flows (used in) investing activities
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(31,347)
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(23,395)
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Cash flows from financing activities
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49,380
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23,465
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Cash and cash equivalents at end of period
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1,821
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2,578
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Net cash used in operating activities was $18.1 million for the 26 weeks ended July 29, 2017, compared to cash provided by operations of $0.4 million for the corresponding period of fiscal year 2016, a change of approximately $18.5 million. Our cash flows used in operating activities increased primarily due to build up of inventory for the upcoming holiday season, and decrease in accrued expenses, partially offset by an increase in accounts payable.
Net cash used in investing activities was $31.3 million for the 26 weeks ended July 29, 2017 compared to $23.4 million for the corresponding period of fiscal year 2016. The change in our cash flows from investing activities is primarily a result of opening two additional stores during the first half of fiscal year 2017 compared to the number of stores opened during the first half of fiscal year 2016 and a decrease in amounts received in the current period for deemed sale-leaseback transactions.
Net cash provided by financing activities was $49.4 million for the 26 weeks ended July 29, 2017, compared to $23.5 million for the corresponding period of fiscal year 2016. The increase in net cash provided by financing activities when compared to 2016 was primarily due to the $20 million payment made on the term loan in the 26 weeks ended July 30, 2016 that was not present in 2017.
Our outstanding debt consists of our senior secured revolving line of credit and our senior secured term loan.
Senior Secured Revolving Credit Facility.
We have a senior secured revolving credit facility with Wells Fargo Bank, National Association. On July 24, 2017, we amended the credit agreement governing the revolving credit facility to increase the amount available to borrow under the Company’s senior secured revolving credit facility by $15.0 million to $150.0 million, subject to a borrowing base calculation. As of July 29, 2017, $22.9 million was available for borrowing and $101.7 million was outstanding under the revolving credit facility. The revolving credit facility matures on
the earlier to occur of (x) the date that is 90 days prior to the maturity date of our senior secured term loan, which maturity date is currently December 3, 2020, unless the term loan has been repaid to the extent permitted under the credit agreement or the term loan maturity has been extended to October 23, 2022 or later and (y) July 24, 2022
.
Each of the subsidiaries of Holdings is a borrower under the revolving credit facility, and all obligations under the revolving credit facility are guaranteed by Holdings. All of our obligations under the revolving credit facility are secured by a lien on substantially all of Holdings’ tangible and intangible assets and the tangible and intangible assets of all of our subsidiaries, including a pledge of all capital stock of each of our subsidiaries. The lien securing the obligations under the revolving credit facility is a first priority lien as to certain liquid assets, including cash, accounts receivable, deposit accounts and inventory. In addition, the credit agreement contains provisions that enable Wells Fargo to require us to maintain a lock-box for the collection of all receipts.
Borrowings under the revolving credit facility bear interest based on either, at our option, the base rate or LIBOR, in each case plus an applicable margin. The base rate is the higher of (1) Wells Fargo’s prime rate, (2) the federal funds rate (as defined in the credit agreement) plus 0.50% and (3) the one-month LIBOR (as defined in the credit agreement) plus 1.00%. The applicable margin for loans under the revolving credit facility, which varies based on the average daily availability, ranges from 0.25% to 0.75% per year for base rate loans and from 1.25% to 1.75% per year for LIBOR loans. The weighted average interest rate on the amount outstanding under the revolving credit facility as of July 29, 2017 was 3.03%.
Interest on base rate loans is payable monthly in arrears and interest on LIBOR loans is payable based on the LIBOR interest period selected by us, which can be 30, 60 or 90 days. All amounts that are not paid when due under our revolving credit facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full.
We may be required to make mandatory prepayments under the revolving credit facility in the event of a disposition of certain property or assets, in the event of receipt of certain insurance or condemnation proceeds, upon the issuance of certain debt or equity securities, upon the incurrence of certain indebtedness for borrowed money or upon the receipt of certain payments not received in the ordinary course of business.
The revolving credit facility contains customary affirmative and negative covenants, including covenants that limit our ability to incur, create or assume certain indebtedness, to create, incur or assume certain liens, to make certain investments, to make sales, transfers and dispositions of certain property and to undergo certain fundamental changes, including certain mergers, liquidations and consolidations. The revolving credit facility also requires us to maintain a minimum availability at all times of not less than 10% of the gross borrowing base, and in any event, not less than $5.0 million. The revolving credit facility also contains customary events of default. As of July 29, 2017, we were in compliance with all covenants under the revolving credit facility.
Senior Secured Term Loan
. We have a $160.0 million senior secured term loan facility with a financial institution. The term loan was issued at a price of 99% of the aggregate principal amount and has a maturity date of December 3, 2020. The term loan requires quarterly principal payments of $0.4 million payable on the last business day of each fiscal quarter continuing up to and including October 30, 2020. A final installment payment consisting of the remaining unpaid balance is due on December 3, 2020. As of July 29, 2017, there was $135.9 million outstanding under the term loan.
All of Sportsman’s Warehouse, Inc.’s obligations under the term loan are guaranteed by Holdings, Minnesota Merchandising Corporation, a wholly owned subsidiary of Holdings, and each of Sportsman’s Warehouse, Inc.’s subsidiaries.
The term loan is secured by a lien on substantially all of the tangible and intangible assets of Sportsman’s Warehouse, Inc. The lien securing the obligations under the term loan is a first priority lien as to certain non-liquid assets, including equipment, intellectual property, proceeds of assets sales and other personal property.
Sportsman’s Warehouse, Inc. may be required to make mandatory prepayments on the term loan in the event of, among other things, certain asset sales, the receipt of payment in respect of certain insurance claims or upon the issuance or incurrence of certain indebtedness. Sportsman’s Warehouse, Inc. may also be required to make mandatory prepayments based on any excess cash flows as defined in the term loan agreement.
As of July 29, 2017, the term loan bore interest at a rate per annum equal to the one-, two-, three-, or six-month LIBOR (or, the nine- or 12-month LIBOR), as defined in the term loan agreement, at our election, which could not be less than 1.25%, plus an applicable margin of 6.25%.
The term loan contains customary affirmative and negative covenants, including covenants that limit our ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The term loan also requires us to comply with specified financial covenants, including a minimum interest coverage ratio and a maximum total net leverage ratio. The term loan also contains customary events of default. As of July 29, 2017, we were in compliance with all covenants under the term loan.
On May 18, 2017, Sportsman’s Warehouse, Inc. entered into an amendment to its term loan. The amendment increased the maximum leverage ratio in each of the remaining quarters by amounts rangining from 0.2x to 1.3x, with an average quarterly increase of 0.75x. As a result of the amendment, the interest rate on the term loan increased 25 basis points to LIBOR plus 6.25% with a 1.25% LIBOR floor.
Critical Accounting Policies
Our financial statements are prepared in accordance with GAAP. In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
There have been no significant changes to our critical accounting policies as described in our Fiscal 2016 Form 10-K.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments for long-term debt, operating lease obligations, letters of credit or other purchase obligations. As a result of the regularly scheduled principal and interest payments on our term loan made on July 29, 2017 the total payments to be made with respect to our long-term debt obligations was reduced from $136.7 million as of January 28, 2017 to $135.9 million as of July 29, 2017, of which approximately $0.8 million is payable during the remainder of fiscal year 2017. We also have increased the amount borrowed under our revolving credit facility from $61.0 million as of January 28, 2017 to $101.7 million as of July 29, 2017. The revolving credit facility matures on the earlier to occur of
(x) the date that is 90 days prior to the maturity date of our senior secured term loan, which maturity date is currently December 3, 2020, unless the term loan has been repaid to the extent permitted under the credit agreement governing the revolving credit facility or the term loan maturity has been extended to October 23, 2022 or later and (y) July 24, 2022
. All other changes to our contractual obligations during the 26 weeks weeks ended July 29, 2017 were completed in the normal course of business and are not considered material.
Non-GAAP Measures
In evaluating our business, we use Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our operating performance. We define Adjusted EBITDA as net income plus interest expense, income tax expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, secondary offering expenses, professional fees, and other gains, losses and expenses that we do not believe are indicative of our ongoing expenses. In addition, Adjusted EBITDA excludes pre-opening expenses because we do not believe these expenses are indicative of the underlying operating performance of our stores. The amount and timing of pre-opening expenses are dependent on, among other things, the size of new stores opened and the number of new stores opened during any given period. Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. We consider Adjusted EBITDA and Adjusted EBITDA margin important supplemental measures of our operating performance and believe they are frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Other companies in our industry, however, may calculate Adjusted EBITDA and Adjusted EBITDA margin differently than we do. Management also uses Adjusted EBITDA and Adjusted EBITDA margin as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures.
Management believes Adjusted EBITDA and Adjusted EBITDA margin allow investors to evaluate the company’s operating performance and compare our results of operations
from period to period on a consistent basis by excluding items that management does not believe are indicative of the company’s core operating performance.
Adjusted EBITDA is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net income or other condensed consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to:
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Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
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·
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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
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·
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Adjusted EBITDA may be defined differently by other companies, and, therefore, it may not be directly comparable to the results of other companies in our industry;
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·
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Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
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·
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Adjusted EBITDA does not reflect income taxes or the cash requirements for any tax payments.
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The following table presents a reconciliation of net income, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA for the 13 weeks ended July 29, 2017 and July 30, 2016.
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Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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July 29,
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July 30,
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July 29,
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July 30,
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2017
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2016
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2017
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2016
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(dollars in thousands)
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Net income
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$
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6,554
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$
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8,304
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$
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2,046
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$
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8,615
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Interest expense
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3,436
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3,141
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6,586
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6,729
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Income tax expense
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4,245
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5,226
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1,835
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3,683
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Depreciation and amortization
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4,393
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|
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3,334
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8,334
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|
|
6,466
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Stock-based compensation expense (1)
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399
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933
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1,052
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1,558
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Pre-opening expenses (2)
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1,395
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1,335
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3,023
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2,524
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Secondary offering expenses (3)
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—
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—
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—
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143
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Professional fees (4)
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—
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—
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1,744
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—
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Adjusted EBITDA
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$
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20,422
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$
|
22,273
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$
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24,620
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$
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29,718
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Adjusted EBITDA margin
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10.7%
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11.7%
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7.1%
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8.7%
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(1)
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Stock-based compensation expense represents non-cash expenses related to equity instruments granted to employees under our 2013 Performance Incentive Plan and Employee Stock Purchase Plan.
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(2)
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Pre-opening expenses include expenses incurred in the preparation and opening of a new store location, such as payroll, travel and supplies, but do not include the cost of the initial inventory or capital expenditures required to open a location.
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(3)
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Expenses paid by us in connection with a secondary offering of our common stock by affiliates of Seidler Equity Partners III, L.P.
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(4)
Professional and other fees incurred in connection with the evaluation of a strategic acquisition.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 to our condensed consolidated financial statements in this 10-Q. Under the Jumpstart Our Business Startup Act, “emerging growth companies” (“EGCs”), we can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not EGCs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to changes in interest rates. Our revolving credit facility and term loan carry floating interest rates that are tied to LIBOR, the federal funds rate and the prime rate, and, therefore, our income and cash flows will be exposed to changes in interest rates to the extent that we do not have effective hedging arrangements in place. We historically have not used interest rate swap agreements to hedge the variable cash flows associated with the interest on our credit facilities. At July 29, 2017, the weighted average interest rate on our borrowings under our revolving credit facility was 3.03%. Based on a sensitivity analysis at July 29, 2017, assuming the amount outstanding under our revolving credit facility would be outstanding for a full year, a 100 basis point increase in interest rates would increase our annual interest expense by approximately $1.0 million. As long as LIBOR is less than 1.25%, the interest rates on our $160.0 million term loan will be fixed at 7.50%. Since we entered into the term loan facility on December 3, 2014, LIBOR has not exceeded 1.25%. We do not use derivative financial instruments for speculative or trading purposes. However, this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon and as of the date of the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of July 29, 2017 to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the 13 weeks ended July 29, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.