Sportsman's Warehouse has been treading water for the past six months, recording a small loss of 2.9% while holding steady at $1.17. The stock also fell short of the S&P 500’s 13.1% gain during that period.

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?

We’re cautious about Sportsman's Warehouse. Here are three reasons you should be careful with SPWH, plus one 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 1.2% annual declines.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Sportsman's Warehouse, its EPS declined by 41.4% 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 $504.4 million of debt exceeds the $2.05 million of cash on its balance sheet. Furthermore, its 18× net-debt-to-EBITDA ratio (based on its EBITDA of $28.37 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

We see the value of companies helping consumers, but in the case of Sportsman's Warehouse, we’re out. With its shares lagging the market recently, the stock trades at 16.9× forward EV-to-EBITDA (or $1.17 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.

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