This Sporting Goods Retailer Is an Attractive Growth Stock


Source: Sportman's Warehouse

In today's mature retail environment, it is difficult to find good retailers with exciting growth prospects. Sportsman's Warehouse (NASDAQ: SPWH  ) , an outdoor sporting-goods retailer, is one such outlier, having grown its revenue and operating income by 2011-2013 compound annual growth rates of 30.2% and 50.7%, respectively.

It opened an average of four new stores annually in the past three years and currently boasts a footprint of 49 stores across 18 states in the U.S. Expansion isn't the only sales driver, with Sportsman's Warehouse also achieving positive same-store sales growth in 15 of the past 16 consecutive quarters.

Sportsman's Warehouse also shares similarities with other successful companies such as small town sporting-goods retailer Hibbett Sports (NASDAQ: HIBB  ) and teenage-focused retailer Tilly's (NYSE: TLYS  ) . This makes it more likely that Sportsman's Warehouse will be able to continue on its growth trajectory.

Same-store sales growth
In the past 16 quarters, Sportsman's Warehouse delivered positive same-store sales growth in excess of 10% in 13 of them. This is attributable to two key factors.  

Firstly, although Sportsman's Warehouse has a presence in both small markets with populations of less than 75,000 and major metropolitan areas with populations exceeding a million, it is noteworthy that it claims to be the only nationally recognized outdoor specialty retailer in 55% of its markets. Given the lack of meaningful competition in these markets, it has greater pricing power and is less at risk of losing market share to competitors.

Similarly, Hibbett Sports, a sporting-goods retailer with approximately 900 stores across the Southeast, Southwest, Mid-Atlantic, and lower Midwestern regions of the U.S., is typically the only dominant player in the markets it operates in.

This is because Hibbett Sports' target markets are small towns with populations in the 25,000 to 75,000 range, where larger competitors such as national sporting-goods retailers and big-box retailers have no interest and small mom and pop shops are in no position to compete effectively. As a result, Hibbett Sports becomes the default choice for residents in these small towns looking to purchase branded sportswear.

Both Sportsman's Warehouse and Hibbett Sports boast significant economies of scale in marketing, distribution, and rental costs because of the dominance of their respective local markets.

Secondly, Sportsman's Warehouse tailors its product assortment to suit local tastes and local conditions. While Sportsman's Warehouse boasts about 130,000 stock-keeping units, or SKUs, in total, it only stocks about 70,000 SKUs per store that are customized to local needs.

Sportsman's Warehouse makes sure that it adjusts its product offerings to local demographics, weather conditions, and other seasonality factors. As an illustration, Sportsman's Warehouse puts up more ice fishing products during the winter season.

Similarly, Hibbett Sports localizes its apparel and footwear offerings in tandem with local sports events. For example, when the University of Alabama emerged victorious in the national football championship in January 2013, Hibbett Sports' Birmingham, AL stores made championship t-shirts and other Alabama apparel available to meet demand.

Looking ahead, growing same-store sales isn't a challenge for Sportsman's Warehouse given its leadership in more than half of its markets and its SKU customization strategy.


Source: Sportman's Warehouse

New store sales growth
Sportsman's Warehouse has set an ambitious target of opening eight to 13 stores annually, significantly up from its historical average of four new stores openings per year from 2011 to 2013. However, this target is achievable, taking into account Sportsman's Warehouse's current store footprint and its flexible real estate strategy.

Based on the results of a study conducted by Buxton Company, an independent consumer research and analytics firm, Sportsman's Warehouse believes it has the potential to eventually increase its U.S. store network by sixfold to 300.

Also, the availability of suitable real estate space tends to be the bottleneck for many retailers with huge expansion plans. But Sportsman's Warehouse's flexible real estate strategy means that this is less of an issue for three reasons.

Firstly, Sportsman's Warehouse's stores vary in terms of square footage from 30,000 to 65,000 gross square feet, so size isn't an obstacle to securing suitable space. Secondly, it has had positive experiences with both constructing new build-to-suit sites and leasing existing sites. Thirdly, Sportsman's Warehouse is equally comfortable with both operating as a stand-alone retail outfit and leveraging off other anchor tenants in malls.

It is possible to draw parallels with teen retailer Tilly's here. Similar to Sportsman's Warehouse, Tilly's has about 200 stores in a range of locations from malls to non-mall locations, such as power centers. More significantly, although Tilly's prides itself on its 'West Coast inspired' apparel, it has a presence on on both the East and West coasts of the country.

The difference between Tilly's and Sportsman's Warehouse lies in their average store size. Tilly's typically has stores averaging in excess of 7,000 square feet, which is large for a fashion retailer. Its flexibility with respect to store location, makes finding the right store locations an easier task.

Foolish final thoughts
Success doesn't come by chance. Having the right strategies in place to drive both same-store sales growth and new store sales growth, Sportsman's Warehouse is well positioned to grow its revenue and operating income at high double-digit rates in the foreseeable future.

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