You've got to love the Internet.
Not only does it give us such wonders as Google Earth, instant messaging, and 24-hour, all-you-can-eat free spam -- it's also helped to turbocharge the profits of some of the really amazing little companies that we follow in Motley Fool Hidden Gems. The one I want to talk about today, Sportsman's Guide (NASDAQ:SGDE), was actually a recommendation of Hidden Gems' precursor, Motley Fool Select. But if the company keeps turning in results like the ones that came out after the close of trading on Wednesday, this Fool wouldn't be at all surprised to see it get a recommendation in our new newsletter, as well.
Over the first nine months of 2005, Sportsman's Guide achieved 34% top-line growth, 79% on the bottom line, and a 71% increase in diluted per-share profits against the first three quarters of fiscal 2004. None of these numbers would have been possible without the Internet -- the company noted that 60% of its sales came via Internet channels, the high margins of which enable outsized profits growth as compared with increases in sales. Fiscal Q3 2005 in particular saw Sportsman's Guide transform an 8% increase in sales (over the year-ago quarter) into a 57% increase in net profits, and a 53% increase in earnings per diluted share.
Now, before you look at those numbers and exclaim, "Hey, SG's growth is slowing down," remember that the first two quarters of this year enjoyed an artificial boost in their comparable numbers. The company didn't begin enjoying the additional sales and profits from its The Golf Warehouse purchase until Q3 2004, meaning that when those sales and profits were added into its first half 2005 results, they looked all the bigger in comparison to H1 2004's numbers minus The Golf Warehouse.
Because the Q3 results are so much more relevant for comparison purposes, let's focus on them as we pick out the few yellow flags contained in SG's release. First up is accounts receivable -- those increased 12%. Second up is inventories, which rose 15% against Q3 2004. In and of themselves, those numbers might not look scary. But when you notice that they grew, respectively, 50% and nearly 100% faster than did sales for the quarter, I do believe we have the potential for a problem here. Whenever A/R and inventories grow faster than do sales, Fools go on the lookout for possible channel stuffing, or simple bad inventory management.
Those, then, are two issues we'll want to keep an eye on in future quarters.
Read more about the reversal of Sportsman's Guide's fortunes in:
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Fool contributor Rich Smith does not own shares of The Sportsman's Guide, but he is a customer.
