Shareholders of Sportsman's Warehouse would probably like to forget the past six months even happened. The stock dropped 44.3% and now trades at $1.51. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Sportsman's Warehouse, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Sportsman's Warehouse Will Underperform?

Even with the cheaper entry price, we're cautious about Sportsman's Warehouse. Here are three reasons there are better opportunities than SPWH and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Sportsman's Warehouse’s demand has been shrinking over the last two years as its same-store sales have averaged 3.1% annual declines.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Sportsman's Warehouse, its EPS declined by 35.9% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Sportsman's Warehouse’s $445.3 million of debt exceeds the $1.66 million of cash on its balance sheet. Furthermore, its 16× net-debt-to-EBITDA ratio (based on its EBITDA of $27.54 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Sportsman's Warehouse could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Sportsman's Warehouse can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Sportsman's Warehouse falls short of our quality standards. Following the recent decline, the stock trades at 16.6× forward EV-to-EBITDA (or $1.51 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

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