Over the past six months, Sportsman's Warehouse’s shares (currently trading at $2.20) have posted a disappointing 8.7% loss, well below the S&P 500’s 4.2% gain. This might have investors contemplating their next move.

Is now the time to buy Sportsman's Warehouse, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Even though the stock has become cheaper, 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 is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Sportsman's Warehouse’s demand has been shrinking over the last two years as its same-store sales have averaged 12.5% 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 28.5% annually over the last five years while its revenue grew by 7.1%. This tells us the company became less profitable on a per-share basis as it expanded.

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 $532.4 million of debt exceeds the $2.67 million of cash on its balance sheet. Furthermore, its 26× net-debt-to-EBITDA ratio (based on its EBITDA of $20.31 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. After the recent drawdown, the stock trades at 2.6× forward EV-to-EBITDA (or $2.20 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at Cloudflare, one of our top software picks that could be a home run with edge computing.

Stocks We Would Buy Instead of Sportsman's Warehouse

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