TEXT-S&P rates Sportman's Warehouse Inc

Tue Oct 16, 2012 12:44pm EDT

(The following statement was released by the rating agency)

Overview
     -- U.S. sporting goods retailer Sportsman's Warehouse Inc. is issuing a 
$145 million term loan B for about $123 million in dividends to equity holders 
and to refinance its existing debt.
     -- We are assigning our 'B' corporate credit rating to Sportsman's 
Warehouse Holdings Inc.
     -- We are also assigning a 'B' issue-level rating and '3' recovery rating 
to its secured first lien $145 million term loan B.
     -- The stable outlook reflects our expectations that operating results 
will improve over the next year due to continued positive sales trends, but 
that the company's financial risk profile will remain "highly leveraged".

Rating Action
On Oct. 16, 2012, Standard & Poor's Ratings Services assigned its 'B' 
corporate credit rating to Midvale, Utah-based Sportsman's Warehouse Inc. In 
addition, we also assigned a 'B' corporate credit rating to the holding 
company, Sportsman's Warehouse Holdings Inc. The outlook is stable.

Concurrently, we assigned a 'B' issue-level rating with a '3' recovery rating 
to the company's proposed $145 million term loan B. The '3' recovery rating 
indicates our expectation of meaningful (50% to 70%) recovery if a payment 
default occurs.

The company intends to use the term loan proceeds to partially repay its 
existing revolving credit facility borrowings down to about $20 million and 
issue a dividend of about $123 million to majority equity holder, Seidler 
Equity Partners, and management. 

Rationale
The ratings on outdoor sporting goods retailer Sportsman's Warehouse reflect 
Standard & Poor's view that the company has a "weak" business risk profile and 
"highly leveraged" financial risk profile. The business risk profile 
incorporates its relatively small, niche position in the highly competitive 
and fragmented sporting goods and outdoor recreation industry. Additional 
factors in our assessment of the company's business risk profile include new 
store execution and a weak macroeconomic environment. The company faces strong 
competition from other outdoor recreation retailers such as Bass Pro, 
Cabela's, discounters such as Wal-Mart, and more traditional sporting goods 
retailers.

Since the company emerged from bankruptcy in August 2009, operating 
performance has improved. This is partially due to a more stable economic 
environment coupled with management's more disciplined approach to inventory 
management, cost-controls, and store growth that has proven to be beneficial 
to the bottom line. We expect performance growth over the next year to come 
from a combination of same store sales and new store growth.

Other assumptions in our base case forecast for fiscal year-end 2014 include:
     -- Revenues to increase in the mid-double digits, as we anticipate most 
growth to stem from new stores combined with low single-digit same store sales.
     -- EBITDA margins to improve as the company gains sales leverage.
     -- Selling, general, and administrative expenses continue to grow in the 
low double digits as the company incurs additional expenses associated with 
new store growth.
     -- Capital spending to increase by about 23% to support new store growth 
plans, which include some infrastructure investments.
     -- No additional dividends.

Pro forma for the transaction, we estimate that debt-to-EBITDA is 5.6x for the 
trailing 12 months ended July 28, 2012, while EBITDA interest coverage is 
about 2.3x. Funds from operations (FFO) to debt is also about 10.5% during the 
same period. These measures are consistent with a highly leveraged financial 
risk profile. We anticipate performance gains to strengthen credit measures 
over the next 12 months, with leverage declining to about 4.9x, coverage 
increasing to 2.8x, and FFO to debt increasing to about 12%.

Liquidity
Liquidity is "adequate," indicating that the company's cash sources are likely 
to exceed uses over the next 12 to 18 months. Sources of liquidity include 
availability under its revolving credit facility and forecast positive FFO. 
Uses of cash are expected to be increases in capital spending to support new 
store growth, some investments to working capital, and debt amortization. 
Relevant aspects of the company's liquidity, based on our criteria, are as 
follows:
     -- We believe liquidity sources will exceed uses by at least 1.2x or more 
over the next 12 months. 
     -- We expect net liquidity sources to be positive, even if forecast 
EBITDA declines by 15%.
     -- Sufficient anticipated covenant headroom for forecast EBITDA to 
decline by 15% without the company breaching coverage tests.
     -- Manageable debt maturities over the near term, primarily consisting of 
amortization.

Sportsman's Warehouse is required to meet financial covenants under its new 
term facility, including a maximum leverage ratio and a minimum interest 
coverage ratio. We anticipate Sportsman's Warehouse will maintain adequate 
covenant headroom on its financial performance covenants over the next 12 
months.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report to 
be published on RatingsDirect following the release of this report.

Outlook
The stable outlook reflects our expectations that operating results will 
improve over the next year due to continued positive sales trends but that the 
company's credit protection measures will remain indicative of a "highly 
leveraged" financial risk profile. We expect the company to grow its store 
base at a rather fast growth rate over the next year, which should benefit 
performance if the company can manage it well. 

We would likely lower the rating if operating performance is 
weaker-than-expected, leading to EBITDA interest coverage declining to 1.7x.  
Under this scenario, margins would need to decline by about 150 bps and same 
store sales growth would need to decrease 4.8% below our current forecast 
levels. We could also consider a lower rating if liquidity becomes 
constrained, demonstrated by covenant cushion headroom declining below 10%. 

Alternatively, we could consider an upgrade if operating performance 
progresses at a faster rate than we expect, with debt leverage declining to 
about 4x, which could merit a change in how we assess the company's financial 
risk profile. For this to occur, margins would need to increase by 100 bps and 
same store sales would need to be in the mid-single digits. In addition, we 
would factor our view with regards to future debt-financed dividends into any 
positive rating action.  

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- Corporate Ratings Criteria 2008, April 15, 2008

Ratings List
New Ratings

Sportsman's Warehouse Inc.
Corp. credit rating         B/Stable/--
$145 million term loan B    B
  Recovery rating           3

Sportsman's Warehouse Holdings Inc.
Corp. credit rating         B/Stable/--

 (Caryn Trokie, New York Ratings Unit)
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