Dick's Sporting Goods (NYSE:DKS) keeps distancing itself from the firearms market, which suits Sportsman's Warehouse (NASDAQ:SPWH) just fine. The smaller sporting goods retailer is buying eight of Dick's Field & Stream stores, outlets that focus in good part on the hunting market, as it seeks to return to a program of expansion.

The timing just might be right, too. Although the firearms industry has been in a slump since late 2016, there are numerous indications the bottom has been reached, and it is starting to rise again. Sportsman's Warehouse could be perfectly positioning itself to capitalize on the recovery.

Hunter firing a shotgun

Image source: Getty Images.

A turnaround in the making

Sportsman's Warehouse is a much smaller rival to Dick's Sporting Goods and Bass Pro Shops. Where Dick's operates over 700 locations and Bass runs 171 stores between its namesake stores and Cabela's, Sportsman's Warehouse has just 95 stores -- 103 now with the addition of the Field & Stream locations.

It has struggled over the years and is only now able to begin turning it around. Sales grew 4% in the second quarter as comparable-store sales rose 1.7%, though year-to-date they're essentially flat and down 1.8%, respectively.

Sportsman's Warehouse has put behind a long period when its liabilities exceeded its assets. It spent the last two years engaged in debt reduction, and investing in omnichannel capabilities and technology. Now it sees the opportunity to begin growing again.

Everything the gun owner needs

The retailer focuses heavily on the hunting market and caters to gun owners and enthusiasts, which is also partly the reason it has had difficulty during the industry downturn. Yet it obviously saw there was an upturn coming, and it's making strategic bets that will carry it forward.

Earlier this year, for example, it added gunsmithing services at all of its stores, allowing customers to drop off a firearm for repair, service, or restoration. It's part of the value-added services the hunt shop is adding, which CEO Jon Barker told analysts "are driving customer acquisition and engagement."

Similarly, it launched a trade-in program to buy and sell used guns, available in five stores and online. The response so far has been exceptional as 70% of the used guns turn into a trade-up. Importantly, Sportsman's Warehouse says the margins on used guns are such that the program has been accretive to profits.

Now it is expanding its footprint with the acquisition of eight Field & Stream stores for $28 million, including inventory and assets. The timing is right. 

A rebound is on target

The FBI reported criminal background checks of gun buyers rose for the sixth consecutive month in September, up nearly 13% from the year-ago period. Although handgun purchases accounted for most of the checks, long guns -- rifles and shotguns -- saw a 7.5% increase as we head into prime hunting season. (The FBI's "other" category, which includes things like gun frames and receivers, jumped 35%, suggesting increased talk in Washington about banning AR-style rifles is causing gun buyers to be proactive.)

Presumably the Field & Stream stores will be rebranded Sportsman's Warehouse since Dick's still operates 20 or so of those locations.

As the gun industry improves and Sportsman's Warehouse's own financial position stabilizes, the retailer is ready to capture a larger share of the market. It's notable that as Dick's CEO Ed Stack was boasting the sporting goods store destroyed $5 million worth of modern sporting rifles by turning them into scrap, Sportsman's Warehouse was moving to ride the gun market's recovery by playing to its strengths. This is a retailer that ought to aim higher from here.