After announcing in Dec. 2020 a deal to merge with Great Outdoors Group, parent company of the Cabela's and Bass Pro brands, Sportsman's Warehouse (SPWH -1.50%) revealed one year later the deal is dead. Shares fell 20% the day following the announcement as investors digested the unfavorable news. However, there are at least three things working in the company's favor that offer a silver lining with a bit of luck and good execution.
The merger background
On Dec. 21, 2020, Great Outdoors Group shook hands with Sportsman's Warehouse on a deal to acquire the latter for $18 per share in cash. With Sportman's Warehouse stock trading at $12.65 per share immediately before the announcement, the deal price represented a substantial premium. Shares settled close to $18 for most of 2021.
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But in its filing announcing the termination of the merger agreement, the company summarized briefly summarized its motivation, stating the "decision to terminate the Merger Agreement follows feedback from the Federal Trade Commission ("FTC") that led the parties to believe that they would not have obtained FTC clearance to consummate the Merger." As a result of the failed deal, Great Outdoors Group will pay Sportsman's Warehouse $55 million in cash as a termination fee.
As it turns out, the FTC recently announced it will be taking aggressive action against business combinations. The National Law Review reports the FTC says it's ending a 1995 policy of taking a hands-off approach toward mergers and their potential threat to "fair market competition." Holly Vedova, director of the Bureau of Competition within the FTC, publicly remarked, "Restoring the long-standing prior approval policy forces acquisitive firms to think twice before going on a buying binge." In addition to the Sportsman's Warehouse deal, the FTC launched a lawsuit to block Nvidia's $40 billion acquisition of Arm Holdings.
Where Sportsman's Warehouse stands now
The steep sell-off has likely "priced out" the value of the acquisition already as shares trade at pre-deal levels. The next major driver of market sentiment will be the release of Sportsman's Warehouse's fiscal third-quarter results on Dec. 8.
The last report showed something of a slowdown from 2020. Fiscal second-quarter revenue fell 5% year over year to $361.8 million, while same-store sales slumped 9.9%. Adjusted net income fell 42%.
However, recall that 2020 was an exceptional year for the retailer. It described a high demand environment in its third-quarter earnings presentation last year, with people escaping to the great outdoors in record numbers as relief from COVID-19 lockdowns. Among the highlights, hunting increased 122% in Michigan, New York hunting classes were overbooked 3,500 students, and Georgia reported 47% more turkey hunters.
The company also noted subscriptions to its email database jumped 84%, and "visitation is now booming at Yellowstone and many other national parks," driving demand for outdoor clothing and camping supplies.
Looking at the two-year comparison with 2019, the company's year-to-date performance looks much more encouraging. Fiscal second-quarter revenue was up 70.8%, and first-half revenue climbed 78.5%. Adjusted net income also surged from $5.7 million to $32.0 million last quarter. Net debt has declined to just $17.6 million as of the latest period.
What does the future hold for Sportsman's Warehouse?
Moving forward as a stand-alone entity rather than another piece of Great Outdoors Group, Sportsman's Warehouse looks to be in fairly vigorous condition. Though some of its metrics are down from a historic 2020, the company is still growing -- with a much healthier balance sheet -- from pre-pandemic levels.
Strong ammunition sales reported by cartridge manufacturer Ammo Inc. as part of its recent earnings results could bode well for a strong hunting season. Sportsman's Warehouse can be a solid choice among sporting goods stocks, but management will need to lay out its vision for the future without Great Outdoors.
