Does the good business news ever stop for The Sportsman's Guide
Shares climbed as much as 6% to top $18.00 this morning before settling down. The stock has rocketed from $13.00 on Sept. 30 after a marketing deal with Amazon
A clothing and leisure equipment retailer with any third-quarter EPS is news. Most of these companies earn their entire year's profits from holiday shopping in Q4. Yet here not only does the little Minnesota-based-company-that-could pre-announce Q3 earnings, but at 2.4x -- 140% -- of last year's $0.05 per share. (By the way, what is it about Minnesota that produces retailing successes like Best Buy
Sportsman's Guide's news comes with a cherry on top: revenues of about $41.0 million, or 11% above last year's $36.9 million (which the company for some unexplained reason calls $36.7 million in its press release). This caps four quarters of year-over-year revenue growth of 7.3%, 5.5%, and 9.3%. Wow.
The key growth driver for the company is increasing Internet e-commerce, over 36% of sales last quarter and Q3, according to management, up from 30% for the same period a year ago. With presumed higher margins -- the company doesn't break out cost of goods sold for its Web sales versus catalog and retail -- increasing Web sales drive greater profits. The Sportsman's Guide began breaking out the two categories of sales in Q1, giving us two quarters of year-over-year comparisons:
Web Sales % Y-O-Y Total Y-O-YQuarter (mils.) of Total Change Revs. ChangeQ3 03 $13.9 36.5% 33.0% $38.0 9.3% Q3 02 $10.4 30.0% -- $34.8 -- Q2 03 $14.9 34.0% 32.8% $43.7 5.5%Q2 02 $11.2 27.0% -- $41.5 --
I own shares of the company and in June laid out a valuation and buy-sell plan. I gave the stock an intrinsic value range of $11.74 to $16.55, but Q2 numbers later led me to raise that to $13.19 to $20.87. Today's announcement is positive but in line with the assumptions for that range.
One central valuation variable is net annual dilution from stock option grants (grants minus cancellations/forfeitures). My model uses 3% to 5%, when the company's current annual net dilution runs about 5%. This means I'm already baking in some improvement, which is not as conservative as I'd like to be. And will the grants decline? Options may have been necessary to keep people around when the company was gasping and the stock below $1.00, so they may slow down. On the other hand, once you get people drunk on them, it's hard to pull away.
The stock is now selling for an enterprise value of 10.4x trailing-12-months free cash flow, against annual revenue growth (that we hope will become free cash flow growth) of 5%-6% -- though that assumes a Q4 flat with last year. And the free cash flow numbers are pretty helpful for this retailer, because the company isn't spending and doesn't need to deploy cash for a store buildout or catalog expansion.
As the price rises and makes shareholders happy, the margin of safety is declining. When a stock I've bought rises rapidly towards my high range estimate of intrinsic value, and all else remains equal (which it never does), I look to sell some shares. That's in the absence of any change in valuation. Sometimes the valuation thesis can move to one of high growth, too. It does happen, but often you'll notice that's something of a tautology, because then you adjust your estimates of growth in your valuation model.
So, for what it's worth, at current prices and in the absence of a better place for my money, I'll likely wait for Q4 results and see how much, if any, the company's revenues rise after the Amazon deal. Meanwhile, please pull up a plush chair to join happy Sportsman's Guide investors on our discussion board!
Find more by Senior Analyst Tom Jacobs in his handy archive. If you'd like to know whenever he writes a column, send him an email at TomJ@Fool.com with "ping me Tom!" (or some such) in the subject line. Find all Motley Fool staff writers through our convenient center main page menu. Collect all Motley Fool writer trading cards today. Tom owns shares of The Sportsman's Guide.