Sportsman's Warehouse’s stock price has taken a beating over the past six months, shedding 39.5% of its value and falling to $2.11 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Even with the cheaper entry price, we're swiping left on Sportsman's Warehouse for now. Here are three reasons why we avoid SPWH and a stock we'd rather own.

Why Do We Think Sportsman's Warehouse Will Underperform?

A go-to destination for individuals passionate about hunting, fishing, camping, hiking, shooting sports, and more, Sportsman's Warehouse (NASDAQ:SPWH) is an American specialty retailer offering a diverse range of active gear, equipment, and apparel.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Sportsman's Warehouse’s demand has been shrinking over the last two years as its same-store sales have averaged 13.6% 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 29% annually over the last five years while its revenue grew by 7.9%. This tells us the company became less profitable on a per-share basis as it expanded.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Sportsman's Warehouse’s $523.2 million of debt exceeds the $2.56 million of cash on its balance sheet. Furthermore, its 26x net-debt-to-EBITDA ratio (based on its EBITDA of $20.16 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. Following the recent decline, the stock trades at 1.6x forward EV-to-EBITDA (or $2.11 per share). While this valuation is optically cheap, the potential downside is still huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.

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